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The Actuary The magazine of the Institute & Faculty of Actuaries

Growth potential for African insurance 

Insurers need to become catalysts for innovation in order to drive growth across Africa, writes Tavaziva Madzinga


In 2012 Africa had seven of the 10 fastest-growing economies in the world ©iStock
Tavaziva Madzinga

African insurance has plenty of opportunities to grow and innovate across the entire spectrum of insurance business. Increasing numbers of insurers are finding viable business models, the regulatory environment is evolving and adding clarity to the operating environment, and there is a strong spirit of innovation and growth within the market. There are challenges, though: business requires a long-term view; companies must tighten corporate governance and communicate their value; and there is an urgent need to develop a strong and diverse talent pipeline.

Dealing with volatility

For some time, it seemed that African insurance growth would naturally follow the stellar GDP growth rates. In 2012, for example, Africa had seven of the 10 fastest-growing economies in the world. 

It was assumed that many sub-Saharan African economies were at a tipping point on the so-called S-curve of economic and insurance growth (Figure 1), and that, as economies expanded and disposable income improved, there would be more economic activity to insure and a higher motivation to purchase insurance. This hypothesis had held true in other regions – especially emerging Asia – and it was only logical to assume that Nigeria was the next Indonesia, Ivory Coast or Vietnam. However, growth across Africa’s diverse and intricate network of economies has not been smooth. Commodity-driven markets, for example, have suffered from fluctuation in commodity prices and demand, whereas countries with diversified economies have remained resilient and continued to grow. 

The end result is that insurers have not been able to hitch a free ride on the GDP/S-curve bandwagon. Rather, we’ve had to work harder to build markets. For reinsurers, this has meant getting our heads around deeper issues than just capacity provision. We have needed to become catalysts for innovation, and to forge new partnerships to help our insurance clients grow. 

Stat Africa
Figure 1: The S-curve for insurance growth: as people get wealthier, they tend to spend more on insurance ©iStock

Getting closer to the people who need us

There is massive growth potential across all African markets at the consumer level. However, addressing the large protection gaps revolves around the same three key consumer factors seen in other markets: awareness, affordability and access. 

When addressing these issues, it is important to realise that people are not waiting for insurance to solve their problems. Most already have ways to deal with loss, even if they are not insured. People will sell their possessions, borrow money or lend their support to peers to pay for burials and healthcare, or to rebuild after disasters. This means we cannot assume that a lack of insurance will translate into demand for insurance. Instead, we need to think about how insurance fits within the consumers’ own ecosystem. This is why topics such as microinsurance, Takaful and alternative distribution are so important – they provide ways for people to become part of the ecosystem.  

Takaful, as a Sharia-compliant form of financial protection, has huge potential to service the continent’s Islamic communities. Its power is in its principle of providing a protection model that is in harmony with the community’s underlying social and ethical beliefs. This is a basic principle that can be extended beyond Islamic communities. 

Microinsurance has long been discussed as a way to close the protection gaps in sub-Saharan Africa. Admittedly, there are concerns about the sustainability of microinsurance programmes, which rely heavily on subsidies or donor programmes – but the success stories that have emerged continue to make a compelling case, when microinsurance is done well. The 2017 payouts that the insurance industry made to Kenyan pastoralists under the Kenyan Livestock Insurance Programme are a proof point for an innovative microinsurance programme. The programme applies satellite-based techniques to determine when there is enough grass to feed the pastoralists’ livestock; in effect, we are insuring the grass so that cows don’t die when there is drought.

The same techniques and approaches that have made microinsurance successful can be developed to serve other consumer segments. Vast numbers of small businesses and middle-income earners could afford insurance, but are not being served by products targeting higher income levels. In this sector, the partnership model that is so critical to microinsurance has enormous potential. Affinity groups, cooperatives and telecom companies, for example, can offer insurance distribution to expand their value proposition to customers or members. ‘Freemium’ models, where the consumer gets insurance as part of a membership or a subscription,  have been successful in expanding awareness and uptake of insurance – but also in supporting key sales and retention targets for the distributors.  

The informal sector, which forms a large part of African economies, is not always captured in traditional GDP figures. However, there are innovative models to tap into this market and encourage education about financial services. A commitment to financial inclusion is, therefore, of utmost importance when spreading the insurance safety net. 

How big is the opportunity to expand microinsurance to the world's 2.6 billion emerging consumers?

Talent is the key

Possibly the most important ingredient in the African story is developing talent – the next generation of insurance leaders and innovators. There is an urgent need for our industry to develop local expertise, and to back institutions that can deliver a work-ready, highly skilled and motivated workforce. This year, the African Leadership University will establish a specialised School of Insurance, based in Rwanda. Its approach is to offer both technical training and preparation for actuarial accreditation, while also providing work experience and general leadership training. 

We will also need to develop diversity across race, culture and gender. This means breaking the mould and shedding expectations about what an insurance company looks like, how people work, and who occupies which position. It will involve rethinking operational structures and introducing flexible work environments. Allowing people to work part of the day from home, for example, avoids them spending the most productive time of their day sitting in traffic jams on the way to the office. 

The case for profitable growth across African insurance markets is strong. The companies that will be successful are those that can innovate, adapt to market nuances and volatility, and take the long-term view. We need talent, technology, partnerships and a solid understanding of the consumer. 

Tavaziva Madzinga is market executive for Middle East and Africa at Swiss Re