Time for Nigerian online insurance firms, to unlock over N40bn business

Fola Daniel Commissioner for Insurance

 

 

 

 

Chuks Udo Okonta and agency report

 

Licensing an Online Insurance Company to target e-commerce shoppers, is now the new phase of insurance operation, which the National Insurance Commission (NAICOM) should consider to unlock the over N40 billion businesses in the sector.

Last week, according to Xinhuanet, the China's first online insurance firm was jointly launched by e-commerce, Internet and insurance moguls to target e-commerce shoppers.

This giant step must be considered by NAICOM and operators, even as effort is being made to register Micro-insurers to deepen the industry.

Statistics have shown that Nigeria’s Internet business industry – e-commerce is estimated to be worth over N40 billion ($250 million) and this can be harnessed through the microinsurance scheme that is being planned by the industry.

Taking a cue from the Chinese online insurance firm, which was designed by Zhong'an Online Property Insurance to address issues concerning e-commerce, mobile payment and Internet finance for companies as well as private customers, Nigerian insurers, can also explore such opportunities which have been provided by the rapid growth of the telecommunications sector.

The Chinese firm has a registered capital of 1 billion yuan (164 million U.S. dollars) and its shareholders include top e-commerce company Alibaba Group Holding Limited., the world's second-largest insurer Ping An Insurance (Group) Co., and the country's largest Internet firm Tencent Holdings Limited.

The firm’s portfolio ranges from enterprise property insurance to cargo transportation insurance and liability and guarantee insurance products, according to its Chief Executive Officer (CEO) CEO Yin Hai

"The company will not simply sell insurance online but will provide customized services for Internet enterprises, platforms and individuals," he said.

Initiated in April 2012, the company was assigned by the China Insurance Regulatory Commission (CIRC) as a pilot for online insurance in February 2013. It was then officially approved by the CIRC in October to get the first license in this sector.

"The authorities have always encouraged transformation in the insurance industry," Yin said. "The setting up of Zhong'an will bring about more chemical reactions between the Internet and financial sectors."

According to Ventures Africa, Nigeria, which is Africa’s second largest economy with a Gross Domestic Product (GDP) of $263 billion, is one of the world’s fastest-growing economies. According to the World Bank and Euromonitor International, the country’s middle class has risen by 28 percent while its GDP based on purchasing power has increased by 21.67 per cent in the last four years. The rise in consumer spending, coupled with the convenience of online transactions, has boosted the growth of Internet-based businesses in the country.

Industry Players

Nigeria’s Internet business industry is estimated to be worth $250 million. General merchandise online retailer Jumia, co-founded in June 2012 by a Ghanaian Harvard Business School graduate, Raphael Afaedor, together with Berlin-based Internet start-up incubator, Rocket Internet, is currently the largest ecommerce company in Nigeria. With cash-for-equity funds from investment giants such as JP Morgan, Summit Partners and Millicom, the company has raised over $50 million in the last 12 months.

It ran multi-million dollar marketing campaigns that boosted its online store to the fourth most visited local site in Nigeria and processed over a million transactions within a year. In June, the company revealed its 10,000-square-foot ecommerce campus and a 90,000-square-foot warehouse, located in Lagos.

Jumia’s local competitor and Nigeria’s second-largest ecommerce operator, Konga Shopping Company, founded by former Google Africa lead Sim Shagaya, also secured funds from Kinnevik – a Swedish investment group – and Naspers MIH Internet Africa – the Internet investment arm of South African media giant, Naspers – to grow operations, though the value of the investments is still undisclosed.

Below these two big players are numerous companies with multimillion dollar valuations. iROKO TV, Africa’s largest movie digital distributor, received $8 million in funding from Tiger Global in 2011 and now generates over $2 million annually.

DealDey.com, which received $1 million from Kinnevik in late 2011, had generated $1.27 million in gross revenue by the last quarter of 2012. iReportersTV, a YouTube-like start-up, announced in June that it had recorded over 1.5 million views and received an investment of $8.5 million. Jobberman.com, Nigeria’s leading job search website, has grown by 1,000 percent, also receiving a $1-million injection in 2011. This was after it closed a $63,000-seed-fund investment in 2010. Pagatech, a Lagos-based mobile money service that also runs Internet services, recently closed a $20-million investment.

One thing can be said with certainty: the massive inflow of cash from foreign venture capitals and investment companies has gone a long way in helping to build the online business industry in Nigeria.

Naspers MIH was the country’s first investor. Valued at around $18 billion, the Group owns over a third of China’s largest online gaming and social network company, Tencent, and at least 29 percent of the Russian internet service, Mail.ru. It only just divested from Facebook earlier this year.

In February 2010, Naspers MIH established the Nigerian subsidiary of its successful South Africa-based general merchandise online store, Kalahari.com. Unfortunately, it shutdown the business the following year due to poor patronage and unforeseeable profit in the near future. In February 2013, it pulled the plug on another of its Nigerian online business – Mocality.com.ng, citing similar reasons. Naspers MIH returned to the Nigerian online retail space in January 2013, making an undisclosed cash-for-equity investment in Konga Shopping Company. Reports emerged that the South African investor had acquired 50 percent of the Nigerian retailer, but Sim Shagaya says it is significantly less.

One of Mocality’s main competitors in the business search engine space was Vconnect Nigeria, founded in 2010 with a seed-fund of $63,000 followed by several other injections from the Tolaram Group.

It is currently Nigeria’s largest online business directory with over 700,000 listings. Vconnect CEO, Deepankar Rustagi, believes that Mocality failed because they did not know their market well enough. “Mocality didn’t know the terrain so well. Consequently, they couldn’t get sufficient data and when there is no data, there is no revenue,” he says. “Also, I don’t think they were patient enough.” Rustagi spent the first two years of his company’s life conducting market research, interviewing and registering small business owners on its database.

“We knew we weren’t going to make a dime in the first year,” he says.

“We ignored massive marketing expenses and just focused on gathering and organising information on all SME businesses, starting with Lagos. No one has this kind of data.”

In 2012, Rocket Internet entered Nigeria with a $10 million investment in Kasuwa (now Jumia). Founded in 2007 by the Samwer Brothers, Rocket Internet replicates successful online business models in emerging markets.

The company’s Amazon-esque Jumia, for example, operates in Nigeria, Ivory Coast, Egypt, Kenya and Morocco, though Jumia Nigeria is currently the largest. Rocket Internet’s aggressive global expansion is driven by the belief that scarcity in the availability of retail infrastructure in emerging markets like Africa, the Middle East and Southeast Asia will increase ecommerce share in retail in those markets. In July, Rocket Internet announced plans to triple its 75-company-strong portfolio by 2018 and disclosed that it had raised over a billion dollars in the last 12 months from collaborators such as Summit Partners, JP Morgan and AB Kinnevik.

More than 50 percent of AB Kinnevik’s assets are situated in emerging markets. The group, which also owns a 24-percent stake in Rocket Internet, has interests in several sectors of the Nigerian economy, including oil and gas, financial services and advertising. Its first-known funding in a Nigerian Internet business was a $1-million investment in DealDey in 2011. The following year, it closed a $2-million fundraising commitment with iROKO, while Konga received a single-digit, million-dollar investment a few months later.

Seeing Growth

The Euromonitor Nigeria 2011 report revealed that Nigerians spend $6.3 billion per year on clothing. According to both Jumia’s Afaedor and Konga’s Shagaya, clothing accounts for the largest orders on their online stores. While the proportion of actual sales of site visits via mobile is 20 percent in South Africa, the conversion rate is up to 30 percent in Nigeria, and industry players expect it to jump higher still.

Industry analysts and experts did not foresee such a massive growth surge in the online retail sector. In recent times, dot-com companies have taken to television, radio, print, Internet and even billboards to drive traffic to their online platforms. “It’s a combination of strong GDP growth, right timing, significant investment, [mobile] Internet penetration and perfect execution,” says Manuel Koser, founder of South African retailer Zando.com, and SilverTree Capital, an investor in Nigeria’s glamour.com.ng and sunglasses.com.ng.

Nigeria’s Internet subscriber base grew from 200,000 in 2000 to over 44 million by 2010. But the ecommerce industry was far from an instant success. Many of the country’s earliest online businesses were small and poorly funded and did not experience much growth, primarily due to a lack of online infrastructure, expertise and trust. This state of affairs discouraged operators from pursuing it as a viable option for their businesses, though perhaps the biggest problem lay with secure online payment facilities.

Until as recently as 2009, online buyers made payment by depositing cash into the bank accounts of ecommerce companies before online transactions were processed. The process was painfully manual, taking away the crucial competitive advantages of online transactions: speed, ease and convenience.

Nigeria’s notoriety for online fraud further hindered growth. In 2005, PayPal (a global ecommerce operation that allows payments and money transfers to be made through the Internet) closed all Nigerian accounts and denied registration to any user traced to a Nigerian IP address. Financial services avoided the country and orders received in from a Nigerian IP address triggered red flags at the backend of numerous online payment companies. This method of payment was thus no longer an option for local online retailers.

The move by Visa-backed ValuCard Nigeria, Interswitch and eTransact to provide online switching and payment systems is slowly changing this state of affairs. The Central Bank of Nigeria’s policies such as the CIBSS, which enables online financial transactions across local banks, as well as the launch of Internet banking from local lenders like Guaranty Trust Bank and First Bank, has further supported the adoption of ecommerce.

What the Future May Bring

According to Shagaya, Konga has to raise between $100 million and $150 million over the next six years in order to scale its business. But he says investors have not been enthusiastic about the prospects of investing long-term in Nigerian ecommerce. Investors responded to Konga’s funding appeal by saying that they were looking to invest in India and Indonesia and not Nigeria, because they felt ecommerce was at a premature stage in the West African country. “The emergence of Nigeria’s ecommerce [industry] will take 10 years to build,” says Shagaya. “Even Russia and China are still rated as early ecommerce markets. Ecommerce in Nigeria will grow not only on deep Internet penetration but also on the increased disposable income of the average resident.”

Some online start-up founders, such as Pagatech’s Tayo Oviosu and Raphael Afeador, believe that ecommerce is a gamble on Nigeria’s economic future and that short-term profitability has not been a reality of local ecommerce companies. They further feel that the exponential growth of the companies is all that has encouraged the investments received so far. Analysts have also cautioned that, given the number and size of international investments (with more still to come), the government should intervene with legislations to guard against capital flight.

On the other hand, Nigeria’s Minister of Finance, Ngozi Okonjo- Iweala, sees the emergence of dot-com companies as contributors to the development and diversification of the country’s economy. Economists also posit that Internet-based companies could help mitigate the country’s youth unemployment problem. Jumia and Konga, the largest employers within the online business industry, have a staff of 500 and 300 respectively, with most employees below 30 years of age.

iROKO ‘s Jason Njoku has great passion and vision for Internet business growth and its impact on the economy. He raised $1 million to seed-fund SPARK, a hub of 13 Nigerian ecommerce start-ups offering services from accommodation, to bus tickets, to online gaming. Currently, the SPARK network has some 150 employees with the average age below 30. Njoku’s goal is to grow the companies to create employment for 1,000 young talents by 2015. “I don’t own a house or land for that matter, so I literally bet on tomorrow’s Internet titans,” he says. “Nigeria’s fledgling tech scene doesn’t need words of wisdom, inspirational talks or well wishing from friends and family. It needs cold, hard cash. That’s all.