Africa life insurance still has growth pockets as inflation erodes incomes

By David Whitehouse

Posted on Friday, 2 September 2022 06:00
Life insurance penetration in Nigeria lags that in most other African countries. REUTERS/Finbarr O'Reilly

African life insurance markets still offer “pockets of opportunity” even as inflation and slowing growth cloud the continent’s overall prospects, Absa Life Insurance CEO Eugene Strauss tells The Africa Report.

Kenya, Mozambique and Botswana are markets where Absa Life has the chance to achieve “low double-digit” growth, driven by increased penetration as well as higher premiums, Strauss says in Johannesburg. The company is focusing on investing to increase its presence in these markets, he says.

Corporate group schemes for employees are the “dominant” factor in the pockets of growth, Strauss says. The schemes typically include an element of life cover that the employee may need to add to by purchasing further protection. Prospects in Kenya are also helped by the fact that many people are used to insuring their children’s education, while increased access to products in Mozambique is helping penetration, he adds.

Absa uses its corporate and investment banking relationships to encourage companies to provide such plans – and to increase contributions, Strauss says. Employee contributions currently need to rise to reflect the fact that there is still a risk of excess mortality due to Covid-19, Strauss says. “It’s a big hurdle.”

  • The pandemic has made life cover “more real”, though inflation and  pressure on household incomes is a current headwind, Strauss says.
  • South Africa, where Absa Life does most of its business with 5 million policyholders, and Zambia, will see slower, single-digit growth due to pressure on the consumer, he adds.

Reinsurance cycle

According to McKinsey, levels of insurance penetration in Africa are half the world average as a percentage of GDP, and per head premiums are 11 times lower than the rest of the world. More than 90% of Africa’s insurance premiums are concentrated in just 10 countries, the largest of which, South Africa, accounts for 70%. The bulk of the growth in Africa is likely to come from pensions and individual life insurance, McKinsey says.

The long-term growth prospects look favourable. McKinsey says that Africa’s working-age population will exceed those of China and India by 2034. Research and Markets has forecast that the continent’s insurance market will grow at a compound annual rate of 7.5% to be worth $115.9bn in 2027. Insurers are positioning to grab a share of the growth.

Sanlam and Allianz this year agreed a joint venture which aims to increase life and general insurance penetration in 29 African countries. Prudential, which in 2021 took a strategic decision to focus on Asian and African markets, is considering entering new African countries, while global insurance broker Willis Towers Watson may conclude distribution partnerships in West Africa.

Some argue that price pressures from higher reinsurance prices will prove a stumbling block. The period from 2010 to 2018 saw a long period of “soft” global reinsurance prices when insurance penetration in Africa failed to increase, says Ryan Phillips, chief operating office at Afro-Asian Insurance Services, a Lloyd’s Broker in London. In recent years the global market has hardened across all specialist lines, meaning that the African insurance market is now “the most disconnected that it has ever been from reinsurance.”

The price increases have been especially marked in aviation, casualty, political violence and terrorism cover, he says. While reinsurers are keen to diversify into new areas such as Africa during soft pricing periods, the reverse is true when prices harden, he adds.

Most of the losses that led to the higher reinsurance rates weren’t incurred in Africa, yet the continent, as a relatively underinsured area, bears the brunt of the impact of higher costs. “Affordability has been hard to change,” Phillips says. “No-one has been able to make it affordable for the poor.” He points to a lack of trust in insurers, as well as hard to understand contracts, as part of the problem. As an expert in insurance, he had to study his own Covid-19 policy for two hours before he could understand it.

Phillips sees some grounds for optimism that mobile technology will help to create insurance scale as the middle class grows. But there is still a need to get over the trust hurdle, he says. Even with the right technology, many still seem reluctant to hand money over to an unknown corporate entity, he says.

  • That makes it more likely that African rather than multinational companies will achieve success, he argues.
  • “Governments and regulators have to do more to sell the benefits of insurance,” he says. “It’s not hitting home.”

It’s the economy . . .

Research from the Swiss Re Institute predicts that global inflation will remain higher than in the 2010s throughout the current decade. The impact on insurance claim costs, the research says, will be less in life policies compared with non-life, as life insurance benefits are defined at the outset.

A survey of insurance executives in Africa by EY found that increased household and businesses earnings are the leading driver of premiums growth. Strauss agrees that the economy and the reinsurance cycle will make it difficult to drive up penetration in the continent as a whole. But markets are diverse and it’s “very difficult to draw conclusions at African level”,  he says. Cultural resistance to discussing death means that there can’t be a hard sell.

  • The key criteria, Strauss says, are “flexibility, access and pricing point.” The use of digital products and distribution channels is “non-negotiable” and allowing premium “holidays” at times of economic stress makes policies easier to sell.

Eddie Brown, head of francophone Africa at Prudential, says he “doesn’t entirely agree” with Phillips’ analysis. Prudential, which in 2021 took the strategic decision to concentrate on growth markets in Asia and Africa, has the scale which allows some reinsurance to be supplied internally, he says in Abidjan. The company is big enough to have some bargaining power when using external reinsurance, he adds.

Prudential Africa has 11,000 agents and a bancassurance network of over 600 bank branches in its eight African countries. Brown is confident on growth prospects in Africa, including in Côte d’Ivoire, where Prudential has opened three new agencies this year. “We’re on the ground, we understand the customers and the risks.”

Bottom line

Corporate employers have the power to drive African life insurance penetration by setting up more group schemes.

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