Microinsurance is slowly but surely becoming more popular in Africa. Low-income Africans are purchasing microinsurance to manage their financial risks while mainstream insurance companies see it as a way of establishing a foothold on the continent. Jaco Maritz reports
Informal microinsurance has been available in Africa for decades but commercial insurers only started entering the sector in the mid-1990s, offering specialised microinsurance products. A 2009 study by the International Labour Organisation's (ILO) Microinsurance Innovation Facility and the MicroInsurance Centre, in collaboration with a number of other organisations, identified 14.7 million people in 32 African countries (about 2.6% of the population) who are living under US$2 a day and are covered by microinsurance products. It should be noted that 8.2 million (nearly 56%) of this group live in South Africa, where even the poorest have funeral insurance.
What is microinsurance?
The Microinsurance Network defines microinsurance as insurance products offered to low-income people to protect them against specific risks in exchange for regular monetary payments (premiums) proportionate to the likelihood and cost of the risk involved. Risk pooling under microinsurance attempts to allow many individuals or groups to pool risks and redistribute the costs of the risky events within the pool.
Microinsurance has also been described as "an insurance product accessible either by price or delivery channel to people earning approximately US$2 per day".
Microinsurance is generally based on the same principles as traditional insurance, such as actuarial pricing, reinsurance and claims handling. A report by Lloyd's and the MicroInsurance Centre states that microinsurance policies are however "not simply downsized off-the shelf" traditional products.
Policies are normally written in simple language and have very few, if any, exclusions. Where insurance companies in developed markets normally collect premiums on a monthly or yearly basis through debit orders, microinsurance involves irregular payments because of the volatile cash flow of clients. Claims handling also entails simple and fast procedures for small sums, as opposed to the complicated processes of traditional insurance.
Who are the major players?
Microinsurance in Africa is offered by a mix of commercial insurers, community-based and mutual organisations, microfinance institutions (MFIs), non-governmental organisations (NGOs) and hospitals. Over the past years, various big-name insurers such as AIG, Zurich, Allianz and Swiss Re have extended their reach to African markets through microinsurance.
Germany-based Allianz has recently partnered with the non-governmental organisation PlaNet Finance to provide microinsurance in a number of African countries. The most advanced project is underway in Egypt, where Allianz, PlaNet Finance, and European reinsurers have begun offering credit life and disability insurance to over 30,000 low-income customers. For most customers, this is the first time they will be covered by this kind - or any kind - of insurance. Allianz Africa can potentially offer microinsurance in ten countries where it has subsidiaries.
The major issue foreign companies face is getting their products to Africa's rural population and understanding local customs and traditions. Most of them therefore team-up with established MFIs, NGOs and other organisations already operating in the local communities.
When insurance firm Zurich launched its cross-regional microinsurance initiative, it partnered with the Swiss Agency for Development and Cooperation (SDC). Zurich said in a statement that it decided to partner with the SDC in order to "gain technical expertise and a profound knowledge of the local communities".
Patrick Mommeja from Allianz Africa says the firm "is working together with microfinance institutions and local mutuals [that] are in contact with remote populations".
In order to make insurance products easily accessible and to cut down on administrative fees, South African insurer Metropolitan, through its Cover2go division, has also launched an innovative product, called the Cashback Funeral Policy, that offers funeral insurance to low-income clients. Consumers can literally buy the starter pack at Shoprite supermarkets, and register and pay the first premium in-store. Monthly premiums can also be paid at Shoprite outlets.
"Paperwork is kept to a minimum in that all of the policy documentation is contained in a product pack which is provided as part of the purchasing process," explains Gillian Samuels, head of operations at Cover2go. "Our activation and payment processes utilise technology that is already part of the customers' world – cell phones, informal prepaid airtime/electricity terminals and [other] technology that is already widely used.
Although there aren't any current plans to roll-out similar products in the rest of Africa, Samuels says that the company's business model can certainly be tailored for any African financial services setting in terms of products, processes and cash payments.
Types of insurance
Microinsurance products in Africa come in various shapes and sizes. Life insurance policies are the most widely patronised. The ILO study found that 9.1 million Africans have life cover, with funeral and personal accident insurance the predominant life policies.
The most popular specific microinsurance product in Africa is, however, credit life insurance with over seven million customers. The reason for this is because it is often a required purchase with microcredit and other borrowing. “It is indeed the simplest product to offer, it is easy to require borrowers to purchase it, and it can be very profitable, especially since borrowers are often not aware that they have purchased insurance with their loan,” says Michael J McCord, president of the MicroInsurance Centre.
Other products such as agriculture insurance, property cover and health policies are also offered in Africa.
“The major products offered by Allianz Africa are life insurance products, mainly credit life insurance but also death and disability,” says Mommeja. “Crop and health insurance are the next issues to come in 2010.”
Thomas Michael Schwarz, client manager for Swiss Re's insurance and speciality division says: “Huge potential is projected for the African continent. Life, health and agriculture insurance can be considered as the products for which the biggest need exists, and thus would offer the most promising growth opportunities.”
Can microinsurance be profitable?
The big question is, however, with such low premiums, how can companies actually make money from microinsurance?
According to Lloyd's and the MicroInsurance Centre's report, insurance firms typically launch microinsurance products in emerging economies to give them a foothold in these markets. Companies also see today's microinsurance clients as tomorrow’s middle class clients. The thinking is that clients will remain with their microinsurance provider as they move into the middle class and start using traditional insurance.
In an company article, Allianz states it doesn’t expect to make a large or quick profit in Africa but it will enable the company to learn more about these growing markets. "It allows Allianz to start building relationships with customers whose wealth may grow in the coming decades."
Schwarz from Swiss Re, however, says that microinsurance is still in a nascent stage and that it is too early to identify trends in terms of a more sophisticated buying behaviour of microinsurance clients.
Looking ahead
The future of Africa's microinsurance segment looks bright and companies such as Allianz are equally enthusiastic. "Allianz Africa is very optimistic about microinsurance in Africa," says Mommeja. "The informal sector in Africa represents 90% of the population. Microfinance and microinsurance are the only ways to reach [these people]. New technologies like mobile banking will also be a good [way] to give access to our products."
According to McCord, in order for microinsurance in Africa to grow, the industry will need to: Reduce administrative costs for all parties; educate low-income populations so they understand the value of insurance; build capacity among stakeholders to develop, sell and manage better products; and expand and enhance the effectiveness of a broad array of delivery channels and risk carriers.
Sources:
i Allianz Microinsurance in Egypt: Low Costs, Big Rewards http://knowledge.allianz.com/en/globalissues/microfinance/microinsurance/laffont_agf_egypt.html
ii Making Microinsurance Work in Africa http://knowledge.allianz.com/en/globalissues/microfinance/microinsurance/microinsurance_egypt_agf.html
iii CGAP Microfinance Gateway http://www.microfinancegateway.org/p/site/m/template.rc/1.11.48248/
iv The Landscape of Microinsurance in Africa (Briefing Note) http://www.microinsurancecentre.org/UploadDocuments/Web-BIT-Micro-briefingNote1-GB.pdf
v Insurance in Developing Countries: Exploring Opportunities in Microinsurance http://www.microinsurancecentre.org/UploadDocuments/360%20Risk%20Insight%20report%20-%20Insurance%20in%20developing%20countries%20(2).pdf
