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Posted on Thursday, 22 May 2014 15:46

Insurance: Ripe for growth

By Jana Marais in Johannesburg

Solutions through innovation: Safaricom’s M-PESA is a collection platform for Linda Jamii health insurance. Photo©ReutersThe predicted rise in sub-Saharan Africans earning $5,000 or above represents an opportunity and a challenge for South African insurers looking to widen their footprint on the continent.

 

South Africa's major life insurers – Old Mutual, which is headquartered in London but earns about 70% of its operating profit in South Africa, Sanlam, Liberty and MMI Holdings – see the rest of Africa as a major growth opportunity, says Willem Loots, an analyst at Fitch Ratings.

We try to instil trust by paying out claims as quickly as possible, with a targeted turnaround time of 12-48 hours

"Insurance penetration in South Africa is one of the highest in the world. The economy is growing slowly and consumer disposable income is under pressure, making it difficult
to grow premiums.

"The big four life insurers are looking to the rest of Africa as the main source for growth. While the contribution to profit from these ventures is small at this stage, they are profitable as a group. Looking forward, the rest of the continent will become a bigger contributor to local insurers' bottom lines," he explains.

Old Mutual, with operations in eight African countries including South Africa, aims to earn 15% of its operating profit from its non-South African operations on the continent by 2015, up from 10% in 2013.

Last year, it made acquisitions in Nigeria, Ghana and Kenya, which it sees as the key growth markets on the continent. Old Mutual added Faulu Kenya, Ghana's Provident Life Assurance Company and Oceanic's Life Insurance and General Insurance businesses in Nigeria to the group.

"There is an improved regulatory environment, institutional capacity is improving and profitability is becoming attractive – and all this is happening against the background of the African growth story, with a promised demographic dividend, rising income levels and fast-growing economies," says Johannes !Gawaxab, managing director of Old Mutual Africa.

Growing client base

By 2020, 128m African households will earn $5,000 a year or more, up from 85m in 2008, according to a 2010 study from consulting firm McKinsey. "This is a great and compelling opportunity for us," !Gawaxab says.

A number of countries on the continent are attractive thanks to high economic growth rates – particularly if compared with South Africa – and low insurance penetration rates, says Margaret Dawes, CEO for the rest of Africa at Sanlam Emerging Markets, which operates in 10 African countries outside South Africa.

"We see many markets as being attractive. While we've historically been in English-speaking countries, we are committed to expanding to Mozambique and Angola in the near term," explains Dawes. The group prefers to buy shares in existing operations or find local partners, she says.

While the growth potential is great, many challenges remain. Building efficient distribution channels, educating consumers about insurance and other financial products, developing affordable offerings and finding ways to collect premiums are some of the main obstacles, says WJ De Vries, an insurance analyst at Avior Research.

"Typically we see insurers benefiting from a bancassurance model [bank insurance model - BIM], where they go into a partnership with a bank and sell their insurance products through the bank's branch network. This makes distribution easier, lowering acquisition costs, and it is also easier to collect premiums as customers already have some banking service. The products are simple, featuring few exclusions, ensuring accessibility to all in order to reach scale," De Vries explains.

Insurers are also partnering with telecommunications operators as a way to collect premiums by taking a portion of the airtime customers load on their phones.

In Kenya, Safaricom's M-PESA is used as a premium collection platform for Linda Jamii, a micro-insurance medical cover product. An annual subscription is payable and premiums can be paid in instalments. Partial benefits can be accessed as soon as a minimum amount of KSh6,000 ($69) is saved.

Mobile operators have also started to offer free insurance products as a way to build consumer loyalty. In Ghana, Airtel, MicroEnsure and Enterprise Life launched a product in January offering free life, accidental permanent disability and hospital cover. The cover increases as customers spend more on airtime, with a minimum of ¢5 ($1.90) a month required to qualify for the product.

Game changer

Partnering with mobile operators is seen as a way to penetrate the informal market, which remains largely untapped. Finding a way to offer simple and affordable products, and to build an effective distribution and payment collection system to service customers outside formal employment, will be a "game-changer", asserts !Gawaxab.

Innovation is also driving growth in the agricultural micro-insurance sector. In Kenya, the Kilimo Salama intiative, which means "safe farming" in Swahili, first piloted weather-related insurance for crop farmers in partnership with companies including UAP Insurance and Swiss Re Corporate Solutions in 2008.

Last year, it insured 185,000 farmers in Kenya and Rwanda and is targeting one million clients in East Africa by 2015, indicating the huge growth potential in the sector.

In Zambia, South African agricultural group NWK Agri-Services has partnered with MicroEnsure, Focus General Insurance and African Life Assurance, a Sanlam subsidiary, to offer life- and weather-related insurance products to NWK's contract farmers.

The aim is to increase farmer loyalty and the amount of land dedicated to cotton farming.

Building consumer trust is an ongoing challenge in many markets, says Dawes. In Zimbabwe, hyperinflation in 2008 and 2009 created a lot of distrust in savings products. Fly-by-night insurance companies across the continent have also made people wary of insurance products, she says.

"We try to instil trust by paying out claims as quickly as possible, with a targeted turnaround time of 12-48 hours," explains Dawes.

Regulatory and cultural differences also pose challenges, and local market knowledge is essential to develop the right products. "South African insurers aren't going into these markets with zero competition. Locally established insurers are in most territories already, with well-developed local expertise and an understanding of the market. They find when they enter new markets that they do have to mind the competition," Fitch's Loots says.

Building scale is one of the biggest challenges. Insurers like Sanlam and Old Mutual have been expanding through acquisitions and organic growth. !Gawaxab says that potential targets are not easy to find, however, and where available, come at significant premiums.

Expanding footprints

Despite the challenges, investors are keen to see companies expand their footprints. Releasing its 2013 results in February, Liberty, which serves mainly institutional clients in Southern and East Africa, assured shareholders it "remains committed to a West African acquisition".

While its earnings grew 28% last year, its African insurance business outside of South Africa remains tiny, contributing only 1.5% to headline earnings.

"Building a life insurance business organically from scratch will take years and years before shareholders see value. The first challenge is to acquire something with scale. Then you have to address education levels of consumers and a lack of, for example, actuarial and financial skills. IT [information technology] platforms, business processes – these are all things we have to take from South Africa," says !Gawaxab.

The race is on to build an African insurance giant, and !Gawaxab sees two factors that will be key in shaping the future. "The first is the demographic shift: we need to understand and anticipate the changing needs of changing demographics. Secondly, if you can harness technology, that will be a real differentiator." ●



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