August 8, 2019
In the past decade, the term 'financial inclusion' has been used often, especially in the context of the emerging markets of Africa. It is, after all, a hot topic. Almost every big governmental player, tech giant or private organization wants to dirty their hands by providing financial services to the underbanked and unbanked. We find payments being digitized, microcredit increasing, and digital identities booming. While these products are in high demand by poorer consumers, insurance-enabled financial inclusion has not taken off to the same extent.
The reasons for this are diverse; however, a common thread seems to tie them all. The leading players till now – insurance companies – have not been instrumental in even trying to enable financial inclusion. The majority of the insurance companies have catered to the richer segments of the population or the emerging middle class.
What this has resulted in is unfortunate. Though insurance penetration has improved in the past in other parts of the world, Africa is unique. Despite having close to 16% of the global population, the current insurance penetration in Africa is about 3.5%. South Africa leads with 17%, while others lag. Kenya has a penetration of about 2.9% and in fact, leads East Africa with this low statistic. It is followed by Rwanda at 1.7% and Tanzania at 0.7%.
The traditional insurance providers of Africa have failed in reaching the financially excluded. The fact of the matter is that insurers in the continent have been slow to tailor their products and services to the local realities. Their operations are built in ways similar to those in other geographies – like the US or Europe. Very often, insurance companies have long and complex contracts and are distributed through costly networks of agents & brokers that only reach the urban elite.
No wonder insurance providers in Africa haven’t been able to cater to low-income groups. They feel that 90% of the African population – which is vulnerable and has close to no access to financial services – do not qualify. They find that the process of underwriting would be close to impossible, especially given their lack of credit history.
Does this mean that these segments cannot be provided with insurance? This is not necessarily true. As the saying goes, “Insurance is sold, not bought.” And simply because a segment doesn't actively demand insurance, it doesn't mean they do not want it. They may be unaware of (or may not understand) the benefits that an insurance policy provides. They also may not trust the current insurance agencies or may have access to affordable products.
Research has also tried to examine the challenges that an insurance company may face if they want to move towards inclusive insurance. A report by Micro Insurance Network finds that some of the main challenges they would face in emerging regions include:
This tells us that there are problems on all ends of the value chain in Africa. Primarily, some companies are only looking towards catering to the elite population. Secondly, even if some companies want to provide insurance to the underserved, they struggle to do so. Companies are not able to design the right products of microinsurance for these new types of consumers – they strive to create sustainable business models to cater to them, and they fail to deliver the right types of services. Insurers agree that the delivery of insurance is the main issue that needs to be tackled.
Governmental and regulatory bodies in Africa have recognized this problem. Furthermore, they realize the dual need for insurance to the financially excluded: to help mitigate shocks that may arise and to encourage risk-taking but productivity-enhancing behavior. In lieu of this, they have tried to step up their game.
Let's take the example of microinsurance regulations. In South Africa, access to microinsurance was previously limited to life insurance products only. Moreover, given the regulatory cost of compliance in proportion to the target market, the opportunities for financial inclusion were less than optimal. In light of this, in July 2018, the new Insurance Act was passed, which reduced barriers to entry to the formal insurance market and affords greater protection to consumers. Through this, the government looked to attract existing and new businesses to provide new low-cost, short-term covers across both life and non-life insurance product classes.
In Kenya, it was noted that the regulator was familiarized with new trends in microinsurance and their implications. Furthermore, potential future scenarios were identified and shared across organizations. In Nigeria, a recent amendment increased capital requirements for insurance players. Regulators hope that the "surviving" Nigerian insurers will be stronger and more rooted in their capacity to take on profitable high risks, perhaps including services to the financially excluded.
This is not the case in all countries. Some are still stuck with stringent, compliance-based regulatory frameworks which have less flexibility in supporting innovation. On the whole, however, there is a growing recognition that there needs to be strong regulatory support to ensure insurance-enabled financial inclusion in the continent.
What has this resulted in? With easing regulations and the untapped potential of the emerging markets of Africa, there has been an emergence of newer players in the insurance ecosystem. While the roadblock of catering to the underserved may be within the very foundations of a traditional insurance company, the good news is that technology can be enabled to find solutions to them. And very often, InsurTech startups have begun to take the lead on this.
InsurTech startups are present on all points of Africa's insurance value chain. On the business end, one sees InsurTechs providing risk assessment tools. On the product end, one sees them designing new insurance products that are designed for the local context of the market and their needs. And on the consumer end, one sees them building platforms that require low paperwork.
The number of startups in this segment are increasing rapidly. From 2015 to 2019, this jump has been most significant. Moreover, according to 2019 data, Africa, leads the emerging markets of Asia and LATAM with 202 InsurTech initiatives, while the other regions are far behind.
With this increase in InsurTech startups, investment is also highly demanded to sustain operations. In 2017, during the release of a report by Disrupt Africa, it tracked only 18 InsurTech startups in Africa. Just two years later, it saw over 60 InsurTech startups pitch to investors.
In recent years, strategic funding into InsurTech has been significant. In May 2018, InsurTech was the highest-funded segment within FinTech and reached a total of about $1.7 billion globally. In Africa, InsurTech startups are performing well based on this parameter. This year alone, we have witnessed several such investments into InsurTech initiatives in Africa. Nobuntu, an InsurTech that provides funeral cover and pension savings fund, raised an undisclosed amount of funding from Crossfin in May. Inclusivity Solutions, which designs, builds, and operates inclusive digital insurance solutions, raised $1.56 million this June. Moreover, late last year, Turaco (a startup that provides low-cost, simple, and accessible insurance products to low-income customers) received $40,000 in grant funding from Villgro Kenya.
Those from outside the continent are also seeing this opportunity. Most recently, on July 23, the UK's Department for International Trade (DIT) launched the 'InsurTech for Development' conference in Nairobi, Kenya, which aimed to provide a platform for the African tech and insurance sectors to collaborate on development opportunities. This is not a one-off opportunity. The conference was a lead up to the UK Government's Africa Investment Summit on January 20, 2020, in London.
Alongside this, existing insurance companies are also looking to partner with some of the top startups in the region. While for an insurance company itself, the aim may not be financial inclusion – they have access to new ways of distribution. They ease the process of custom onboarding since they are usually also built-in with other features, including payments mechanism (for example, through mobile wallets) and digital identities. Some of the big names that are collaborating with InsurTech startups include Old Mutual, Hollard, etc.
Leveraging technology, increased funding, and improved partnerships, Africa's InsurTech is altering the rules of the game and spurring the creation of a new ecosystem that drives innovation. It is enabling financial inclusion one step at a time. According to a recent report, Africa's InsurTech space is worth $60 billion.
Let us look at some of the InsurTech startups that are enabling financial inclusion in Africa's developing regions. (This is not an exhaustive list)
Although we have seen several InsurTech startups in Africa that are enabling finclusion, some models have truly set themselves apart – one such player is BIMA. Founded in 2010 by Gustaf Argartson, BIMA provides microinsurance products to serve those on the bottom of the pyramid. The startup has raised $112 million in funding so far with the backing of several big players. It has remained silent on details of its financial statements and revenue – but claims to be profitable in many regions.
Today, BIMA is headquartered in Sweden but has operations in 14 markets across Africa, Asia, and Latin America. However, BIMA was started in Ghana and expanded to other markers within a few years. Till date, they have transformed the lives of over 30 million people. And this is the most impressive statistic: three-quarters of these 30 million have never owned insurance in the past.
Over the years, BIMA’s business model has changed, and this is what presents an interesting proposition to other startups looking to disrupt the region. It initially offered free insurance based on customers' airtime spend – this was done in partnership with Mobile Network Operators (MNOs) who agreed due to the heavy competition they faced. Customers were not loyal and often owned two or three sims from different service providers. Instead of providing free airtime/packages like BIMA or other competitors previously did, it offered free insurance whose coverage depended on the airtime spend. The more the amount spent, the higher the coverage – and it varied between $104 and $520.
What this did was to provide customers with the ability to try out insurance, and see the benefits that it reaped. It helped BIMA earn trust in the ecosystem, especially amongst the skeptics. And for the MNOs, BIMA provided them with improved customer loyalty. BIMA offered products such as pay-as-you-go life, personal accident, and hospitalization insurance.
Since then, the startup has moved to a paid model. Similar to before, based on the amount a customer can pay directly as premium, the coverage varies. In emerging markets, its microinsurance products start with a coverage of as low as $30 per month. Even these small amounts can help those who are in poverty in cases of emergency.
BIMA’s customer base grows by over half a million new customers every month. And interestingly, a majority of them live on less than $2.5 a day, and about 93% live on less than $10 a day. For many of these customers, small amounts of money are deducted on a near-daily basis.
While the low-cost microinsurance product itself is key to its popularity, that is not all. The user interface is easy and takes only two minutes to sign up for insurance. Users pay the premium through their mobile phones. Even if a user does not have a smartphone, they can avail access to insurance by subscribing via a phone call or SMS. Moreover, BIMA does not ask for several documents while signing up; they believe in basic verification at the time of claims – this simplifies the process of the underserved buying insurance.
BIMA further realized that it is challenging to underwrite insurance themselves, and hence drives its business model through partnerships with local partners. In each region it conducts operations in, it has an elaborate chain of partners ranging from underwriting insurers to MNOs. For instance, in Ghana, it has partnered with Tigo Insurance, which recently reached 2.7 million active customers in 2019.
Moreover, the founder realized that while technology is important to enable insurance penetration, it wasn’t enough – the human touch is a key factor. With this in mind, BIMA employs over 3,500 agents worldwide to assist customers with buying insurance and seeking out claims. These agents are often hired locally, and hence understand nuances of the issues faced. It makes the best of both technology and agent-driven awareness to improve the plight of the underserved slowly.
As we see in the case of BIMA and other insurance players in the region, it is certain that Africa is making leaps and bounds to enable financial inclusion. Some players are designing new products and bundling them with existing and 'urgent' needs of customers, while others are helping insurance companies with distribution channels through technology and improved customer experience.
The potential that remains, however, is undeniable. Mobile phone penetration is at around 80% in Africa, but the penetration of insurance is low in comparison. This shows us that there is still a need for creating culture-specific microinsurance products to tackle issues in different countries of the continent. Newer risk assessment tools must be deployed to cater to problems of the rural poor. Technology needs to be leveraged to help the underserved gain access to microinsurance products.
However, all of this cannot be done in the absence of education and increased awareness. Consumers need to realize the advantages that insurance presents them with, and human involvement is needed. Stronger marketing strategies and simpler distribution channels are a must for increased insurance penetration.
Today, we see InsurTechs in Africa leading the way, especially with their increased partnerships with existing players. There are new technologies emerging with innovative distribution channels and interesting microinsurance products being introduced. In the near future, it would be interesting to see how these startups further tap into the underserved markets and to what extent they can finally unravel the blackbox of financial inclusion.