Insurance: Future is micro and mobile

Telecoms companies are redefining Africa's insurance landscape, using their brand recognition and wide customer reach to offer micro-insurance products to the tens of millions of uninsured Africans.

The continent's largest mobile telephone network operators, such as Airtel, Safaricom, Tigo, MTN and Vodacom, are battling it out to attract new customers through innovative business models that rival the traditional premium payments system popular in the West.

"Mobile telephones have huge potential to completely revolutionise the insurance sector, and that step change has already begun," explains Samuel Kiruthu, chairman of Kenyan telecoms firm Cellulant.

Africa has a unique set of challenges and the insurance market has responded with a unique payment solution

"The possibilities are enormous. It's just that you need a very dynamic and innovative insurance business to exploit this space. It's the firms that move fast that will really succeed."

Low penetration

Africa has an insurance penetration rate (measured as premiums as a share of gross domestic product) of only 3.5%, according to reinsurer Swiss Re, which is far below the global average of 6.3%.

However, the continent's insurance heartland, South Africa, is second only in the world to Taiwan with 15.4%. If this outlier is discounted, the continent's insurance penetration rate tumbles to under 1%.

Meanwhile, mobile phone penetration is soaring, with around 65% of sub-Saharan African households owning a mobile phone, and this number is set to rise to 79% in 2020, according to market research group Frost & Sullivan.

When Safaricom first rolled out M-Pesa in Kenya in March 2007, few predicted its stellar growth or the impact it would have on the financial landscape across the continent.

Attracting just 20,000 customers in its first year, the mobile-money payment system, which allows telephones to be used to send and receive payments, has ballooned to more than 20 million users today, with more than KSh1.8bn ($19.7m) transferred daily across the network.

Boston Consulting Group predicts that by 2019 mobile payments across sub-Saharan Africa will generate some $1.5bn in fees each year for mobile-money providers.

Reaching consumers

Mobile payment systems provide a cheap and simple mechanism to reach consumers, and the race is on across the continent to win new business.

In Ghana, mobile network operator MTN's life insurance product mi-Life is battling it out with Tigo's Family Care Insurance, while in South Africa Clickatell's funeral insurance Cover2go is rivalling the My Funeral Card product offered primarily by the network operator SharedPhone.

Airtel and Tigo both offer micro-insurance life products in Tanzania, while Vodacom launched a micro health insurance product in January called bimaAFYA.

Econet now offers mobile phone users in Namibia and Zimbabwe its Ecolife life insurance.

Safaricom dominates the Kenyan micro-insurance sector with health insurance via Changamka, life insurance through Akiba Sure, personal accident through Kopa Bima and flood/ drought insurance via Kilimo Salama.

Systems such as M-Pesa allow consumers to pay premiums, file claims and receive payouts through their mobile phones.

Such a platform means administration costs are kept to a minimum, a key factor in keeping low-margin micro-insurance profitable.

"Africa has a unique set of challenges and the insurance market has responded with a unique payment solution," says Richard Leftley, chief executive of micro-insurance provider MicroEnsure, describing the 'freemium' payment structure, in which varying levels of telephone airtime use are rewarded with free insurance coverage.

"There is fierce competition among telecommunications companies for clients.

Many customers have several SIM cards so customer loyalty is a real problem," continues Leftley.

In response, telecoms firms started offering free insurance linked to phone use. The more credit you buy, the higher the level of insurance coverage you get.

Feelgood factor

For example, Airtel's Nigerian division offers life insurance and "hospital cash cover", a single payment for customers who are hospitalised for three days or more, with a maximum of four hospitalisations a year.

Customers who spend N1,000 ($5) in a month on telephone credit earn N100,000 in life cover and N10,000 in hospital cash cover for the following month, while those spending N5,000 earn N250,000 and N25,000 of cover, respectively. Users can pay to extend coverage to family members.

"Insurance is not a well-established product across much of Africa, apart from South Africa," adds Leftley.

"This presents two challenges to insurance firms. Firstly, they do not have a recognised brand that the public trusts.

"Second, there is the question of educating the population about the benefits of insurance.

"Telecoms firms, however, do have brand recognition. Your phone provides you with a means to speak to your family, get help if you are in trouble. They are trusted brands which are linked to a lot of positive feelings."

For MicroEnsure, the shift into the freemium model has transformed the business.

It took 10 years to build up a client base of four million people through the standard premium business model, but this swelled to 14 million in 18 months through the freemium system.

The company, which raised more than $10.4m in fresh investment in 2014 – with South African giant Sanlam and international group Axa now among its shareholders – now operates in 11 African countries and plans to boost its customer base to 30 million by the end of the decade.

The dangers brought by technological innovation have not escaped the attention of the world's insurers.

A 2015 Morgan Stanley Research and Boston Consulting Group report warns "the industry is on the brink of major technology-driven changes," adding that insurers that failed to forge partnerships with telecoms providers "will be increasingly sidelined".

Frank O'Neill, Swiss Re's managing director for Africa and Middle East, says that control of the technology and customer data it provides put telecoms companies in a powerful position in their partnerships with insurers.

However, while mobile telecommunications firms present the greatest current threat to insurers' market dominance, an even larger competitor is on the horizon.

"If Google didn't have an insurance company operating pretty much globally within the next seven years, I would be very surprised," adds O'Neill, predicting a radically different insurance outlook during the next decade with much greater involvement for other computing giants such as Apple and Yahoo.

"These are companies with massive resources and which are extremely agile. When they build an expertise in a technology around distributing insurance products, they are going to be very hard to stop." ●

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