Co-authored by Nicole Britton
Africa has historically had large gaps in its insurance coverage and even today access to and uptake of insurance across sub-Saharan Africa remains very low by global standards.
The low-income status of many who live on the continent means that informal insurance or risk pooling – where local or family groups gather together to provide some form of shared protection against risk – remains one of the largest single financial services in South Africa. Despite the fact the World Bank has found “most recent studies show informal insurance arrangements are often weak” and fail to protect the poorest from economic shocks, they remain a prevalent form of risk protection in South Africa.
Traditionally, South Africa has had a robust microinsurance industry, which catered for the lower-income households in the form of funeral insurance in the life insurance market. However, since access to such micro¬insurance was limited to life insurance products only and, given the regulatory cost of compliance in proportion to the target market, barriers to uptake and opportunities for financial inclusion were less than optimal.
South Africa leads the way for financial services in Africa and South Africa’s National Treasury has been behind a long-term push to find better ways to close the protection gap, including providing inclusive insurance to the millions of people who are under or uninsured at present – a project that has been under way since as early as 2008. The results of its work were finally formalised last year with the enactment of the new Insurance Act, which took effect on July 1, 2018.
The act introduced a new microinsurance licence category, which reduces barriers to entry to the formal insurance market and affords greater protection to consumers. It has scaled the regulatory requirements in respect of traditional insurers proportionately to the risk of microinsurance, effectively creating a new category of insurer, with the government looking to attract not only existing players but also co-operatives and other businesses that work with lower-income households, to provide new low-cost, short-term covers across both life and non-life insurance product classes.
Microinsurers are allowed to be profit-making, not-for-profit or co-operatives, which opens up the market to existing community finance groups that wish to extend their operations. Although the size of policy benefits a micro¬insurer can offer have been limited, proportionate scaling of regulation has the effect of reducing prudential requirements imposed on microinsurers, commensurate to their product offering. This, coupled with industry product standards, will reduce costs that previously may have been a barrier to entry and uptake by the lower-income household target market.
By ensuring a better and more accessible regime for entry into the market and operation of businesses wishing to play in the microinsurance space, the South African government hopes it will now be able to enforce the new rules vigorously, without unnecessarily closing down existing providers who previously operated outside of the regulatory space, and which may now be able to register themselves under the new regime.
Two of the key success factors of establishing a successful microinsurance market are that the product offering should be simple and easy to understand and should be accessible to lower-income consumers. In a near-perfect piece of timing the new legislation has emerged in the middle of another important shift in Africa. The lack of landlines means the region has very high mobile phone penetration, right down to the lowest-income groups. Literally almost everyone has a mobile phone.
With the advent of the new microinsurance licence category introduced by the Insurance Act and increased focus in South Africa on insurtech offerings, it will be easier for microinsurers to reach their target groups, with products delivered via apps on mobile phones and taking advantage of phone features such as cameras to help minimise paperwork and time to purchase for buyers. The combination of microinsurance and phone technology will turbo-charge the evolution of a completely new breed of insurer in South Africa.
Let us take an example. New insurtech start-up Pineapple, which provides indemnity insurance underwritten by Compass Insurance Company, uses photos taken on mobile phones and uploaded to an app to deliver a form-free quote within three minutes for any goods an individual wants to insure. With Pineapple’s model the buyer can add and remove items from their insurance wallet at any time and the premium updates as they change the contents of their wallet. Claims are made by voice recording and supported by photos, with supporting data from the mapping device on the user’s phone. No written paperwork is involved at any point.
Or take insurtech competitor Click2sure, whose insurance policies are underwritten by Guardrisk Insurance Company, which has partnered with companies, for example those who supply and fix mobile phones. The user buys their insurance at point-of-sale in the shop, they apply through an app and are given a code, which is loaded on to the retailer’s system. Payment is made to the retailer and passed on to the insurer. All interaction with the client is digital and via an online dashboard.
These innovations are startling, but already seeing remarkable success. The use of mobile phone pictures to document a car for a motor insurance policy is now commonplace in South Africa and as the technology becomes fully mature, we expect to see it rolled out to other markets across Africa, and potentially further into Asia, the Americas and even Europe. It seems microinsurance has the possibility to create an unlikely new insurtech hub, far south in Africa, and one that has the potential not only to cut the protection gap in this whole continent but also to show the way for insurers in other regions of the world.
Ernie Van Der Vyver is a partner and Nicole Britton a senior associate at Clyde & Co Johannesburg.
Reproduced with the kind permission of Informa.