Insurance coverage in Africa is still, with the exception of South Africa, very low, particularly in retail markets. Commercial general insurance is the most mature segment, but even here the industry is only around 2% of the total global market. But with such a low base, and accelerating economic activity and unprecedented inward investment into the continent, there is enormous opportunity for African insurance markets.
Progress is quickly being made in all segments, including at the sovereign level. African countries are pooling their resources to respond more efficiently to natural disasters with the African Risk Capacity (ARC), established in 2012 after flooding in East Africa left several countries devastated.
ARC is a specialised agency of the African Union established to assist member states in tackling the impact of natural disasters on vulnerable people. It is split into two arms, ARC Agency, which deals with capacity building, and ARC Ltd, which deals with insurance. ARC transfers the burden of weather and other natural disaster risks away from governments, enabling them to build resilience and plan, prepare, and respond to extreme events.
ARC works closely with several partners to do its work. In addition to the founding agencies, it also works with multilateral development finance institutions such as the African Development Bank and the World Bank, who are key partners in providing the insurance premium support for countries that can’t afford it. It also works with organisations that help it to collect data including satellite, insurance and technology companies.
Payments triggered in real time
Speaking to African Business, the CEO of ARC Ltd, Lindelwe Lesley Ndlovu says: “The agency coordinates disaster relief and does a lot of work around the risk profile of a country, helping them to build capacity and technical skills around disaster management. ARC Ltd provides the insurance and reinsurance mechanisms to insure against those risks using a parametric trigger.”
In traditional insurance schemes, policyholders are insured against an actual loss, which has to be assessed. In contrast, under parametric insurance, payment is triggered upon the occurrence of a defined event. Ndlovu illustrates this with the example of a drought. The insurance company and the countries agree on a formula for what constitutes a drought based on a vegetation index, measured through a satellite image. If the formula indicates that the threshold for a drought has been crossed, the insurance company will make a pay-out to the country. The money received can then be used for disaster relief.
“The advantage of using insurance to do all this is that the parametric trigger is triggered in real time and the country can then get money well in advance instead of waiting for the goodwill of donor agencies, which only tends to kick in when the impact of the disaster is already very severe”, he says.
Ndlovu is the former CEO of AXA Africa Specialty Risks, a Lloyd’s of London insurance syndicate. He has several years’ senior experience in corporate finance, audit, tax advisory, insurance and investment management sectors in several countries including Bermuda, Singapore, France and the UK.
In his role at AXA XL, Ndlovu has worked primarily in commercial general insurance, for large infrastructure projects and other commercial deals. This is the more developed and better known African insurance segment on the international markets, particularly in London.
How can Africa develop its insurance market?
Ndlovu is passionate about the ability of insurance to protect individuals and communities from calamity and is determined to widen access and coverage, particularly to the most vulnerable.
“There is not much insurance penetration across the African retail market with the exception of a few key markets, and that is characterised by the outsized dominance of South Africa,” he says. “But we see even in bigger markets such as Nigeria that insurance penetration is less than 1% and then in markets like Rwanda and Uganda, it is even lower.”
Even though there is a lot of opportunity, and a buzz around the potential for microinsurance, the challenges remain steep. Given a low customer base and limited market infrastructure, how can the industry develop? Can insurance markets in Africa become robust, and even globally competitive?
Ndlovu says consumers need to be educated more about the purpose of insurance, allowing them to pay a fixed amount every month or year in exchange for being covered in catastrophic events or illness, eliminating the need for a big savings pot.
As he sees it there are three reasons for the low level of market development.
- First, the unsuitability of products – in most cases, insurance products are a copy and paste of Western products, which require monthly premiums linked to monthly income for people in a fixed monthly wage cycle in formal employment. By contrast, many Africans have irregular and precarious income. Product development needs to take this into consideration.
- Second, distribution of insurance is also a problem. Insurance is more often sold at very high cost to the insurer for relatively low levels of coverage.
- Third, and finally, the industry as a whole can do more to educate consumers.
Building resilience and self-reliance
ARC does not though deal directly with retail consumers. Even though payouts do eventually end up in the pockets of individuals, ARC operates solely at the sovereign level, which is the first line of defence for a country, and where there are some promising innovations to insulate countries against a turbulent world with changing weather patterns and fast-moving epidemics made worse by increasing population density. With the help of ARC, countries could become a lot more agile and self-reliant in the case of disasters and emergencies.
For example, for events such as the plague of locusts currently afflicting East African countries, the parametric triggers could help deliver much-needed payouts.
ARC could similarly help manage epidemics such as the coronavirus and Ebola – if parametric triggers were obtained for such events in real time, the responses could be much more timely and effective.
In addition to these more complex ideals, Ndlovu has some fundamental priorities he is aiming to achieve, including ensuring that ARC widens coverage to as many people as possible.
“At the moment we only have 11 out of 54 countries in the pool. This isn’t nearly enough. We should also look to increase the coverage limit which is currently at $30m. We should also think about expanding beyond sovereigns to work more closely with NGOs, farmers’ cooperatives and local government to get coverage closer to the people that need it.”
Listen to more of Dr Desné Masie’s interview with Lindelwe Lesley Ndlovu on African Business Podcast E06