In the dynamic landscape of Africa’s burgeoning economies, the significance of insurance cannot be overstated. As the continent navigates the complexities of growth and development, insurance emerges as a linchpin for stability, resilience, and inclusive progress.
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This article delves into the pivotal role insurance plays in Africa, exploring its multifaceted impact on individuals, businesses, and the overall economic landscape, thereby propelling Africa into a future marked by financial security and robust economic resilience. The article further delves into the potential of the prevailing trends of Africa’s insurance industry, influential drivers, existing opportunities, and recommended strategies for success.
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The African insurance market is far from saturated and profitability is likely to continue increasing in the coming decades due primarily to rising demand from African households and governments. In a survey of African insurers conducted by Ernst and Young (2016), rising income levels associated with sustained growth was the top factor cited by respondents (41%) as contributing to rising insurance premiums in Africa. Before the COVID-19 pandemic started, sectorial analysts and insurance executives alike expected that the impressive rates of economic growth witnessed over the past decade would continue into the near future.
Although the COVID-19 pandemic has undermined these positive predictions in the short run, especially affecting pre-existing weaknesses that many African countries face in the insurance industry and making it even more challenging for weak companies to grow, the post-COVID recovery continues to offer numerous opportunities for accelerated development in the coming decade.
Key Drivers
At present, there is an abundance of remaining market capacity in Africa’s insurance sector. At 3% of GDP, African insurance premiums per capita are lower than those of other emerging markets, such as India and Thailand. In addition to Africa’s economies, its population has been growing and urbanizing at an extraordinary rate since the turn of the century—faster than any other world region at any other time in history. This pattern is also projected to continue and is likely to surpass that of India and China in the next 10 years.
These economic and demographic growth patterns are combining to create a rapidly expanding urban middle class in Africa—a group that is increasingly aware of the value of insurance in supporting their households and small- and medium-sized businesses. Thus, from a demand perspective, the growth of Africa’s insurance market will be driven by the rapid increase in the level of disposable income and tax revenues on the continent, which translates to more spending— both private and public—on insurance products like pensions, property, and health insurance.
Meanwhile, cost efficiencies for insurance investors are likely to improve dramatically due to improvements in the regulatory climate, linkages with other financial subsectors, and technological innovation. First, increasing regional and sub-regional integration in Africa is helping to coordinate financial regulatory frameworks, promote cross-border exchanges, and broaden market size beyond national borders.
Despite the challenges faced during the COVID-19 pandemic with selective restriction measures to protect citizens[1], it is unlikely that future policy reforms that are relevant to the insurance sector will be protectionist in nature, since insurance is one of the economic sectors in which African governments and development organizations recognize the need for the technical expertise and accumulated capital of foreign firmsSecond, enhanced distribution and diversification of insurance products is occurring firstly through partnerships and cross-collaboration with other markets, such as banks and telecoms companies—a driver of growth cited by 75% of survey respondents.
Over the past fifteen years, insurers and banks are increasingly collaborating for mutual benefit. This synergistic relationship is a vital foundation for a robust financial system, as creditors and insurers work together to reduce the risk of lending and investment and to generate economies of scale and higher revenues in both sectors. Bancassurance partnerships formed between banks and insurance companies are already common in the developed world and have begun to emerge in countries like Nigeria.
Moreover, insurance services are becoming increasingly disaggregated and specialized. The nascent stage of the insurance sector means that African countries will have the potential to capture specific submarkets—such as marketing, claim settlement, accounting, or fund management—depending on a country’s unique endowments, comparative advantage, and policy incentives.
Across the world, the insurance services market is changing rapidly due to digitization and technological progress, which produce gains in cost, time, and information. Cost efficiency is improving due to the more rapid underwriting, purchase and payments, and claims processing to online and mobile platforms. The COVID-19 pandemic has created near-term urgency for digitization and as a result, accelerated digitization trends as insurance companies suddenly had to adopt remote work.
In light of the challenge of analyzing and quantifying risk in a region where the majority of the population has had very limited exposure to formal financial services, insurance companies working in Africa view innovations in digital underwriting algorithms and premium quotations as particularly promising.
Meanwhile, in the developed world, nanotechnologies like embedded devices and sensors are being developed to anticipate and mitigate risk associated with real-time events—environmental, behavioral, technological, or geopolitical—that impact insured individuals or property. Within the next ten years, more data will be generated by sensors and digital devices than is currently collected from all sources, and this will increasingly be complemented by informal data sources, such as from social media, real-time videos, or live blogs.
Although gaps in technical infrastructure remain a challenge, Africa has already demonstrated its capacity to ‘leapfrog’ latent technologies in a rapid and context-specific process of modernization, as demonstrated by the spread of mobile banking and money transfers. In twenty years, the insurance industry will look nothing like it does today—as technologies become more affordable and Internet and mobile phone penetration continue to spread, the potential for increasing cost efficiencies and profit margins in Africa’s insurance sector is enormous. Progressive insurance companies will capitalize on opportunities to roll out new products and technologies and expand their presence in Africa’s rapidly growing insurance sector.
Key Players
Over the past few decades, the global insurance services market has been transformed by interrelated processes of liberalization and consolidation. In Africa, the spread of neoliberal norms and economic liberalization stemmed from a series of structural adjustment reforms imposed by international financial institutions (IFIs) as conditions for receiving aid and debt relief. These reforms were necessary in overcoming the systemic financial crisis that plagued almost every country on the continent in the 1980s. The subsequent process of privatization and market deregulation led to new competition, followed by a series of mergers and acquisitions. This ultimately resulted in increased consolidation and stability of the financial market, including banking and insurance, leaving fewer, more efficient, capital-rich companies.
As these processes have stabilized, and given the large amount of space for growth, analysts expect that foreign insurance investors will continue growing and increasing their market share in Africa’s insurance sector. AXA, one of France’s largest insurance companies, made plans to invest approximately $87.27 million in Africa Internet Group to become the largest provider of insurance products offered through online services like Jumia and other AIG platforms. This increases the awareness of insurance providers and the means of attaining the best services. Other firms, such as Old Mutual and Sanlam, are expanding up from South Africa and gaining footholds in almost every country on the continent.
There is a substantial market for reinsurance in Africa, as in other developing countries. Of the largest reinsurance companies working in the region, the top performers in recent years have been RGA Re and General Re, which reported 8% and 7% return on investments, respectively, in 2015. Due to their high capital adequacy ratios (CAR)—4.6 and 5.9, respectively—these companies have been successful at diversifying investment portfolios.
Other reinsurance companies working in Africa reported investment returns between 4% and 6%, including cash and equivalents, which is markedly low compared to the average 10-year government bond yield of 9.77%. Returns on reinsurance do appear to be increasing, though with substantial variation across companies caused by differences in investment strategy and risk. According to the latest survey data, the most profitable lines of reinsurance business are Marine Insurance, Engineering Insurance, and Liability Insurance because these segments have fewer, highly specialized players and low numbers of insurance claims per year.
The least profitable lines of business are Motor Insurance, Health Insurance, and Energy Insurance and these also tend to experience the slowest growth rate in premiums[2]. Although it was the top performer in 2014, Africa Re reported a 43% decrease in investment income in 2015; this is not surprising, as the strategy of investing 20% in equity instruments is likely to result in short-term volatility. In contrast, Scor reported a 93% increase in investment income the same year, and the overall average for the sector was a 2% increase in returns from the previous year.
Opportunities
Considering the increasing demand for insurance and the relatively low levels of market penetration in Africa, opportunities for investment in the sector are abundant The life insurance market in Africa is particularly ripe for growth. Most Sub-Saharan African markets are dominated by non-life insurance—premium income from non-life insurance accounts for 88% in Tanzania and Uganda, 70% in Zambia, and 65% in Kenya. In 2014, income from non-life insurance premiums accounted for 71% of the total, on average (excluding South Africa).
To date, the unique challenges of working in the region demands specialized risk management capacities and heavy investment in security and information-gathering, which has led the sector to have significant foreign investment[3]. A number of recent developments and insurance product innovations present new opportunities for investment in Africa that have potential to benefit first-movers, whether global and domestic insurers.
Even though the COVID-19 pandemic undermines these new opportunities in the near-term, the pandemic also creates opportunities to solve some challenges within the African which can positively impact its insurance market in the future[1]. Still, only 6% of Ghanaians have insurance of any kind, excluding health insurance sector. One such possibility is solving the problem of fragmentation.
The pandemic offers the opportunity for consolidation of the fragmented insurance sector by forcing unsustainable and inefficient players out of business. If regulators take initiative in monitoring and assisting insolvent insurers with shutdown processes and implementing regulations to protect customers during this crisis, then the instability and disruption caused by small-player shutdowns will be minimized. In the long run, the resulting consolidation of the insurance sector will be beneficial in terms of facilitating innovation, healthy competition, and better coverages.
A few Africa countries, including Botswana and Mauritius, have established offshore financial centers to attract investment by offering tax incentives, high quality infrastructure, and a liberalized and well-regulated business environment. Following the Irish model, the number of offshore operations increased worldwide by nearly 40% in 2003-4, and though they have traditionally been effective at attracting banking and credit institutions, insurance companies are increasingly recognizing the benefits of this model as well.
Despite the fact that micro-credit has become an extremely common financial service in Africa over the past fifteen years, the concept of micro-insurance is only starting to emerge. These small-scale, low-cost, and low-risk products are ideal for accessing Africa’s rising middle class. One success story is the micro-finance venture MicroEnsure, which has partnered with telecommunications providers to offer basic health and life insurance coverage as a free add-on to mobile phone service. In doing so, the company has been more effective at identifying customers for more comprehensive services and at creating a client base by increasing brand familiarity and awareness about insurance services more generally. In its first year, more than one million Ghanaians signed up for the service, and it now serves more than eight million people across the region.
This strategy of partnering with telecommunications companies while providing inexpensive and simply-packaged products has proven to be an effective one for companies working in Africa, regardless of sector. In a micro-insurance partnership between Kenya’s Safaricom, Britam, and Changamka, a program called Linda Jamii provides yearly health coverage through the M-Pesa mobile payment system.
In agriculture, the largest and most productive sector in most African economies and the primary source of income for the majority of African households, there is enormous potential for insurance products that help to protect farmers against loss caused by environmental or other shocks.
In Kenya, APA provides livestock insurance coverage based on whether each animal has access to enough food, using satellite imagery to measure area of healthy forage. And in another example of mobile product innovation, UAP Old Mutual Group has launched a program called Kilimo Salama (Safe Agriculture) in partnership with Safaricom, which uses weather data to anticipate loss based on rainfall variation, providing compensation based on crops’ unique rainfall needs. In light of the factors identified as driving growth in Africa’s insurance sector more generally, certain countries offer particularly attractive investment opportunities.
In Zambia, for example, the insurance market is currently small, with just $300 million in premium value in 2014. Additionally, 40% of all Zambians live in cities, a population that is already relatively urban compared to other African countries. Considering the overall trend of diversification away from the economy’s reliance on copper mining, Oxford economists projected annual growth in the insurance sector to exceed 11% between 2014 and 2018, with per capita premium density increasing from $18.20 in 2014 to $24.50 in 2018. However, the primary constraint to growth in Zambia, as identified by local insurers, is the availability of human capital, especially qualified agents and marketing staff.
Ghana, on the other hand, is characterized by a well-educated and professional workforce and political stability. President Nana Akufo-Addo who came into power in 2017 in Ghana committed to creating more employment by building factories in each district of the nation in addition to improving Ghana’s fiscal balance. In 2018, President Nana Akufo-Addo launched a seven-year Coordinated Programme of Economic and Social Development, aiming to improve Ghana’s economic development through aspects like increasing the level of financial inclusion in the country. Perhaps because of these developments, Ghana has experienced substantial growth in its banking sector which can positively impact its insurance market in the future. Still, only 6% of Ghanaians have insurance of any kind, excluding health insurance.
Unlike more consolidated markets like Zambia, the insurance market in Ghana remains extremely fragmented—with roughly 54 insurance companies, 70 brokers, and 6,000 agents operating in the country, compared to 38 brokers and 222 agents in Zambia. Insurers in Ghana have been capitalizing on the intense competition among telecommunications companies by including free coverage add-ons. Insurance premium growth was substantial between 2004 and 2014 in West Africa but this growth slowed down between 2015 to 2017 due a fall in commodity prices, partially caused by the Ebola crisis in West Africa. This reduced Ghana’s growth rate to only 5% in the past two years.
Apart from the brief economic slowdown, regulatory conditions have been cited as the primary constraint for insurers, although Ghana’s business environment is generally perceived as favorable and there have been positive indications that the National Insurance Commission (in Ghana) is committed to improving market conditions through policies and the Ministry of Finance in Ghana has recognized the significance of the insurance sector for Ghana’s development and, as a result, the ministry initiated an insurance and pensions improvement plan to expand insurance penetration and develop capital markets in Ghana.
For example, a previously required 17.5% value-added tax on financial services was removed in 2017. If policymakers in Ghana continue to make new favorable policies, Ghana’s insurance market is a highly attractive destination for investors who are committed to long-term growth and impact. Despite growing urbanization and mobile connectivity, investors interested in Ghana should note that approximately 75% of Ghanaian adultsare employed via the informal sector, and therefore coming up with innovative approaches to serve the informal sector is required.
Since 2007, the number of Nigerians with insurance coverage has increased more than threefold. Like Zambia, the growth projections for Nigeria’s insurance market are more than 10% per year, with annual premiums likely to increase from $1.8 billion in 2014 to $2.6 billion in 2018, or $10 to $13.2 in premium density per capita. Much of the market is concentrated in property and motor insurance, with low penetration of personal coverage, including health and life insurance. As of 2015, the market was unconsolidated and undercapitalized, which implies that a high degree of risk aversion, coupled with high premiums were driving down demand. At the same time, however, product innovation via telecommunications partnerships have proved successful in Nigeria, as in Ghana and Zambia.
MicroEnsure has entered the Nigerian market with a programme that allows customers to make a monthly payment for phone credit that, depending on the amount of credit purchased, provides a certain level of coverage for hospital stays. There is massive potential for further uptake of coverage in other areas.
For example, less than one-seventh of registered motor vehicles in Nigeria are adequately insured, and the government had plans to implement a policy making insurance compulsory which could result in an increase of more than six million motor insurance policies[4]. Thus, the growth prospects are robust in Nigeria, but unlike in Zambia and Ghana, the uncertain regulatory and political climate in Nigeria also implies a high level of investment risk. In 2016, high growth rates in Tanzania led experts at Oxford Economics to project high growth in insurance premiums—up to 7.9% in the following years.
The domestic insurance market is still capitalization reached approximately $400 million in annual premiums in 2018. Technology adoption throughout the country is driving insurance premiums while simultaneously increasing overall growth rates, which average around 7% annually. Tanzania’s high growth, relative to global averages, has yet to translate to concurrent growth of insurance in relation to GDP, which hovers below 1%.
Still, Dar es Salaam, the country’s most populous city, is considered one of the fastest growing cities in Africa and is steadily accumulating interest from investors hoping to offer insurance and capital to the city’s urbanizing population. Tanzania, much like the other countries mentioned, is poised to become a growing insurance market, through which multinational and domestic firms can access unfulfilled demand in the coming years.
Risks and Challenges
Implications of the COVID-19 pandemic are still unfolding, and the insurance industry will have to adapt accordingly in the future. The challenges are as follows:
Decentralized Cross-Country Market with Regulatory Barriers. Unlike in other financial sectors, Africa’s insurance markets are characterized by a high level of fragmentation and diversity. Several challenges have prevented growth in the industry to date. The regulatory climate remains unwieldy at both national and regional levels, with four out of five insurance executives citing the difficulty of meeting various reporting and capital requirements as a major impediment to doing business. Meanwhile, cross-border business is hampered by the limited harmonization across countries. The recent adoption of the African Continental Free Trade Area Agreement (AfCFTA) offers a unique opportunity to solve this challenge and boost intra-continental trade and investment in Africa.
Major Gaps in Regulatory Enforcement. Even where improvements have been made, significant gaps remain at the level of implementation. Regulators often lack the capacity and credibility to punish companies that fail to meet industry standards—a problem that has been especially apparent in Ghana[5]. Moreover, the current push to reform Africa’s financial sector, with governments under pressure from the African Development Bank (AfDB) and major IFIs, has generated uncertainty in the market about the nature and pace of imminent regulatory changes.
Shortage of Technical Human Capital. From the supply side, insurers working in the region note the shortage of technical and human capital as a major impediment to growth. Education gaps and the resulting deficiency of a high-skilled workforce means that there is a shortage of both talented and experienced professionals needed to staff an insurance office. Executives surveyed in countries as varied as Kenya, Nigeria, and Uganda repeatedly cite the difficulty of finding and retaining qualified employees, especially in the key areas of marketing, sales, and technology.
Low Demand for Insurance. On the other hand, demand for insurance has been relatively low in Africa to date. This is not only due to the low levels of disposable income, but more importantly to the general lack of awareness of both the availability of insurance products and the potential benefits of those that are available. An ‘insurance culture’ does not yet exist in Africa, as most people have not been exposed to services that would credibly protect them against future loss. Moreover, despite notable improvements in macroeconomic stability in most countries, risk perceptions remain high and consumers tend to have short time horizons. Research indicates that most Africans do not trust either the financial ability or willingness of insurance companies to follow through with claims settlements.
Market Volatility. In fact, given the infancy of Africa’s insurance sector, market volatility is a concern for insurers themselves. In Kenya, underwriting capacity and the economic outlook of the sector are leading concerns cited by executives. The possibility that macroeconomic indicators, or individual or environmental risk factors, could change substantially between the time of quoting and selling an insurance product and the time that a claim is made generates negative perceptions about the profitability of an insurance venture. Insurers are also concerned about fraudulent claims from customers, a problem exacerbated by a lack of data and technological oversight. Overall, high levels of social trust and stable, long-term time horizons are an important prerequisite for the growth of a viable insurance industry.
Looking to the Future
Across the world, the insurance industry is undergoing a sea of changes that are likely to transform traditional business models. On the one hand, distribution systems are changing due to the impact of analytics and digital technologies. The number of internet-connected sensors and devices in use is likely to surpass 50 billion by 2020, which will exponentially increase the availability of real-time information and its efficient use for estimating risk and managing loss.
The COVID-19 pandemic is highlighting the need for insurance services but at same time continues to create unprecedented economic pressure for insurers to manage going forward. Conversely, global economic, demographic, and environmental transformations are rapidly increasing demand for insurance services, especially in low-penetration markets. Meanwhile, Africa’s emerging markets have been among the most rapidly growing in the world since 2010—a trend that is likely to continue.
Insurance density and penetration rates are exceedingly low on the continent, except for South Africa. These trends and statistics signal massive potential for growth in the sector[6]. The biggest insurance markets in Africa will not necessarily be the best markets to invest in if current stagnation trends observed in South Africa and Nigeria persist[7]. Investors could benefit more by investing in smaller emerging insurance markets on the continent that are experiencing double-digit growth of insurance premiums and these countries include Namibia, Uganda, and Côte D’Ivoire.
Investors should expect to see increased alignment and coordination on insurance procedures by African countries in light of the importance of preventing environmentally caused damage and invigorating development amid global climate change. Currently, fourteen countries in francophone Africa are governed by the Inter-African Conference of Insurance Markets (CIMA) Code.
Established in 1992, this code is one of many on the continent intended to consolidate legal and regulatory provisions on insurance and reinsurance. Coordinated policies ensure premiums are kept within the countries of operation and encourage regulatory capital to incumbent insurance companies. Risk placement and company compliance are monitored through CIMA Code protocols and similar regulations across Africa, which will become more relevant to new companies entering the insurance and reinsurance market. Given the recent adoption of the African Continental Free Trade Area Agreement, investors should anticipate seeing even higher degrees of co-ordination of policy across African countries in the near-future.
Insurance companies that capitalize on opportunities to improve their margins will command enormous market share in Africa as the sector continues to develop. Doing so will require increasing information and data, developing innovative and context-specific products, recapitalizing and consolidating investment, as well as moving first to roll out new technologies as they become affordable. Even more significantly, companies that are successful at pursuing these strategies will help to create the insurance culture that is currently lacking in the region, and benefit from having their brands recognized as pioneers of credible and convenient insurance services in Africa.
