The ancient Chinese farmer, medieval Venetian merchant and
the conquering Victorian company man had one thing in common. They took
insurance. Arguably, our civilization has gone this far because men took risks
and knew there was a fallback plan in the face of insurmountable odds.
Generally, the insurance industry has grown over several
centuries into a hydra of products and services, vastly complex and vaguely
understood. However, through all its manifestations, the primary goal of
insurance is to hedge against the risk of contingent loss. To this end, it has
failed to ignite the African imagination.
Historically brought by the white man as he colonized and
disenfranchised Africa, Insurance has suffered shame in the hands of a
misinformed continent. Only the affluent and middle class seem to grasp its
power with penetration rates in the continent
below 5%.
Insurance agents have also failed to inspire its uptake with a general feeling
that they are unreliable, untrustworthy and missell the complex product they
represent.
Let us underline the fact that more than
48.5%
of sub-Saharan Africa live on $1.25-a-day, 414 million people as of
2010.
More than 70% of the poor in
Africa live in rural areas and depend on agriculture in smallholdings.
The grim picture is
that they are faced with poor crop production, lack of access to markets and
poor infrastructure. They are poorly organized, isolated beyond the reach of
social safety nets and poverty programmes. HIV/ AIDS is also a burden…
While this is happening, Insurance companies are doing brisk
business in the cities and towns fighting for a dwindling upper to
middle-income market, made up of mainly formally employed people. The
competition between insurance companies in Kenya (one of the
best
performing insurance markets in Africa) is dire, with
49
licensed insurance companies, fighting for a market with
3.4% penetration.
Traditionally they have been risk-averse with most of their investment going to
‘secure’ government securities.
There was a predominant lack of customer focus, and lack of
market intelligence to appreciate the needs of 90% percent of market, that is,
the middle-low income to those living below $2 dollars per day (as shown in the
diagram below). Before the mobile phone revolution, it would have been next to
impossible and costly for the insurance industry in Kenya to tap into this
segment of the market.
Fortunately, M-Pesa made financial inclusion a reality in
Kenya.
More than 70% of households in Kenya and more importantly,
more than 50% of the poor, unbanked and rural populations use the service.
Technology is the primary reason
microinsurance is one of the fastest growing microfinance products in the
world. Does it then mean Insurance companies are on a trajectory to a massive
disruption in a “software
is eating the world” era?
The battle lines are being formed and a
lot of strategic maneuvering is happening among the top insurance companies in
Kenya. Acquisitions, cross border expansion, and engagement of pedigree global
management consulting firms being the order of the day.
The reality is more modest; competition
should be for the customer
interface. A traditional
brick-and-mortar-services approach will guarantee losses and certain demise.
To understand the mismatch, you need to
understand what we call digital capital—the resources behind the processes key
to developing new products and services for the digital economy. Digital
capital takes two forms. The first is traditionally counted tangible assets,
such as servers, routers, online-purchasing platforms, and basic Internet
software. They appear as capital investment on company books. Yet a large and
growing portion of what’s powering today’s digital economy consists of a second
type of digital capital—intangible assets. They are manifold: the unique
designs that engage large numbers of users and improve their digital
experiences; the digital capture of user behavior, contributions, and social
profiles; the environments that encourage consumers to access products and
services; and the intense big-data and analytics capabilities that can guide
operations and business growth. They also include a growing range of new
business models for monetizing digital activity, such as patents and processes
that can be licensed for royalty income, and the brand equity that companies like
Google or Amazon.com create through digital engagement. (Sourced from McKinsey
Quarterly - Measuring the full impact of digital capital)
Noninsurance companies (read Safaricom)
with strong digital capital may be poised to redefine insurance in Kenya rather
than the incumbent. The picture below paints this picture vividly.
The disruption that faces the insurance
industry in Kenya will be driven by the entity that understands and captures
the microinsurance segment.
Why?
Digital disruption is driven in three
dimensions simultaneously: new product, lower
price and better customer satisfaction; cheaper, better and highly intimate.
Information will become the tool of disruption and will bring about a
competitive advantage.
Why will it happen?
Insurance is an intangible product
therefore the entire value chain can be digitized. To this end, there is a lot
of experimentation happening in the market and innovation is inevitable.
The potential client in the
microinsurance market needs financial instruments to empower themselves. They
need support and knowledge in farming. They need weather prediction. They need
market intelligence on where to sell their produce profitably. They need cost
efficient storage for their produce. They need instruments that allow them to
pool in groups and buy life- changing machinery or equipment; they need
subsidies et cetera. The intention is to ultimately reduce their risk and
ensure their success, which in term guarantees their upward mobility.
To accomplish this, it is essential for
the Insurance industry to exist in an ecosystem and borrow a leaf from other
markets. In Peru, LA
Positiva
uses rural water networks to distribute its products by adding premium
payments to water bills. In Sri Lanka, Sanasa
offers livestock insurance, with RFID microchips placed on livestock. It also
offers weather index insurance offering protection against weather-related
risks and natural disasters for food crops
Can the Insurance Industry in Africa
align with community-based projects? Can they invest in projects that empower
communities instead of offering traditional products? Can they be investors and
partakers of the success of the farmers?
For this to happen, a link between
financial services and insurance will have to exist and insurance products
“will and must” be simplified and individualized—a
necessary reality in an era of data analytics.
The main competition for Insurance
companies in Kenya will definitely have to be indecision; a situation where
people wait until a disaster strikes to pay out of their pocket for expensive
health, funeral and other services. The other consideration will be family and
informal savings and lending groups that people depend on when disaster
strikes.
There is room for mutual
microinsurance, which is more intimate, grassroot driven, community focused and
inspires trust. As we speak, someone somewhere is studying it and developing a software
solution that will cater to this market my hope is that it is an incumbent
insurance company in Kenya.
In conclusion, microinsurance is a
weapon for poverty alleviation. It is a safety net for microentrepreneurs, and
with microfinance, it creates synergies for success.
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