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How Can Insurers, Reinsurers and Brokers in the CIMA Region Issue Surety Bonds?

30.01.2018Jean Olivier Anet, Manager/Technical Operations, Continental Re

This blog is a summary of a recent book in french by the author (janet[at] about the theoretical and practical aspects of the surety branch and its reinsurance.


The question may sound puzzling given that surety bonds fall within the broader portfolio of traditional insurance products.  Yet, it is a crucial question nonetheless as surety is a highly specialized niche within the insurance world. The issue is equally important if one is to take into consideration the growing interest from mainstream insurance sector players particularly in the CIMA (Conférence Interafricaine des Marchés d’Assurances) region, which includes 13 African francophone countries. However, despite surety bonds being a new phenomenon in the franc zone, a number of specialized companies have already had their licences withdrawn.

More importantly, the issuance of surety bonds is a crucial topic especially with regard to emerging development prospects and synergies between the banking and insurance sectors. This is thanks to financial insurances and bank guarantees. Take for instance the housing finance sector, mortgage guarantee is a case in point with regard to synergies between the housing and insurance sectors.

What is a surety bond and what exactly do insurers understand by the term?

A surety bond is a regulated product that is governed by an agreement that protects against financial loss. As such, there is not one specific definition of the term. If anything, a definition per se does not quite exist. The only explicit reference of the concept in the CIMA insurance code, is in article 328 on the classification of insurance classes. The term surety bond is listed under class 15 and split into two subsectors; direct bond 15A, and indirect bond 15B.

There is no further direct reference of the concept in the CIMA code, hence the recourse to doctrine, jurisprudence, legal references from other countries and professional practice.

What is a direct bond?

A direct bond or surety bond is an ordinary legal guarantee granted by an insurance company.

Stricto sensu, a guarantor is a person committing to guarantee the payment of a liability contracted by a person or company (the principal) with a third person (the obligee), in the event that the principal defaults. On a broader note, a surety bond is a security for the main contract agreement. The surety can be implemented free of charge or paid at a fee of between 0.1% and 3.5% of the contract amount. When the surety is issued by a professional credit and financial institution, a collective credit guarantee entity, or an insurance company, it is referred to as a professional or financial guarantee. A surety allows for the fulfilment of numerous conventional or legal operations.  Whenever there is need for a guarantee, a surety is a definite way of securing the operation.

The business of guaranteeing, also known as « surety » is a financial service. The French Association of Specialised Financial Companies (ASF) defines the concept as: « a commitment made by a surety company (guarantor/surety) on behalf of a person or a company (principal), enabling the principal to offer a guarantee to its financial or economic partners (the surety beneficiaries). If the principal defaults, the guarantor shall replace the former to execute their legal duty. The guarantor may later seek financial redress from the principal.»

Surety bonds apply to a wide variety of cases, for example market sureties, which is necessary for public and private sector procurement. There is also a regulated profession guarantee fund, to protect clients of such professionals, when the latter handle funds belonging to third parties e.g. travel agents, notaries, lawyers, insurance brokers, etc.

As defined above, a surety bond, generally involves three parties, resulting in a dual relationship; between the guarantor and the principal, and between the guarantor and the obligee; which by nature is a personal guarantee or surety (a concept that protects the obligee against financial loss, thanks to a third party commitment). As such, a surety, which is actually a financial service, is not limited to a guarantee. It also covers the independent guarantee, which in itself is a commitment separate from the main contract. The legal nature of a surety bond is similar to a bank loan rather than to an insurance contract. A good rule of thumb is that not all guarantees issued by an insurance company constitute an insurance policy.

To non-specialists, this difference between a surety bond and an insurance policy may not be obvious, and especially because service insurance companies that issue sureties use the same risk management techniques as those in mainstream insurance business. For instance, the risk pooling which includes spreading the risk across a large number of policy holders for risk mitigation, risk selection, premiums, risk reinsurance, provisioning collecting premium tax etc.

In actual sense, the difference between the two concepts is rather obvious. Unlike in insurance where the risk is linked to the occurrence of an unforeseeable/unavoidable event, such as a fire or an accident, surety applies when the damage is as a result of a person’s or a company’s inability to honour their commitment.  Yet, a principal’s failure to honour his engagement is seldom an accident. It is usually the result of either financial, technical, judicial, economic or political situations, which in some cases could have been avoided. The damage does not result from unforeseeable circumstances as would be the case with traditional insurance. Additionally, unlike an insurance contract, a surety bond gives an obligee, subrogatory or personal recourse in the event that a payment is made out on his behalf. Unlike bankers who control financial flows of the clients they guarantee, which enables them obtain a reimbursement for payments made out on their behalf, a guarantor does not have direct access to their clients’ bank accounts. It is for this reason that a surety has to build his business model around a sound risk management mechanism and a clear and innovative re-insurance structure.

In a nutshell, a bond is not an insurance product but rather a financial service. If an insurer were to issue such a product, he would be forced to adopt a banker's attitude, while managing the constraints of the insurance world.

What about suretyship (indirect), the second subsector of sureties?

Suretyship (indirect), also known as surety insurance by legal advisors is a type of insurance that provides a cover to sureties such as banks and financial institutions or entities other than surety companies. Surety insurers mainly target banks, financial institutions, surety funds, or even individuals. It is crucial to note that indirect bonds have the same judicial connotation as insurance contracts. As such, they can only be issued by insurance companies. That is the particularity of such bonds.

What is the purpose of this book and more precisely, who does it target?

Success in any given insurance sector can only happen if one fully understands and masters the parameters that govern the sector. The book "La branche caution et sa reassurance: Théorie et Pratique" (Surety and Reinsurance: Theory and Practice) allows the reader to have a better understanding of the reinsurance sector. It is a contribution to the sector as it scientifically examines the business of surety bonds in a neutral and practical manner.

The book covers topics such as; risk and claims management, the financial selection of risks, information systems etc. It is a guide book to be used as a strategic tool for decision-makers in the industry.


About the Author

Jean Olivier Anet is currently the Technical Operations Manager at the Continental Re-insurance in the Abidjan Regional Office. Prior to joining the organization, he worked for ten years as a Senior Underwriting Assistant in charge of claims management and underwriting of surety and credit insurances.  In 2012, Jean Olivier received the FANAF’s Jean CODJOVI Award in recognition of his work in surety. The Jean CODJOVI award aims to promote research in the Insurance and Reinsurance field. Jean Olivier holds a Master’s degree (Msc) in Management and another in Insurance.

Natural Disaster Risk Pooling to Enhance Financial Access

08.01.2018Johannes Wissel, Financial Consultant

This blog is a summary of Johannes Wissel's Master's thesis on "International Economics and Development".

Limited financial access in times of natural disasters

In her blog of 5 June 2017 Sonja Kelly ascertains the low success of weather-indexed insurance and depicts the reasons why it is not working. She regrets that although these problems are not new, the industry has not managed to solve them.

In addition to insurance, Elodie Gouillat, Rodrigo Deiana and Arthur Minsat and Bella Bird in their blogs of 29 June 2017, 24 October 2017 and 19 December 2017 point out the limited access to finance particularly for low-income households and small enterprises.

Microfinance institutions (MFIs) fail to meet the demand of their clients, especially in times of a natural disaster. Despite the debate on the advantages and disadvantages of microfinance, financial access helps to strengthen the natural disaster resiliency of affected communities. MFIs are constrained in providing their services because in times of natural disasters they themselves lack financial access. They are generally not well diversified around the globe. A natural disaster leads to a widespread defaulting on credits in one region and consequently many credits of one MFI have to be written off. Without the access to external financial resources, this will hamper the MFI's capital ratio which is a key indicator of an MFI's solvency and subject to financial supervision. To avoid further risks, MFIs restrict their lending activities.

To improve an MFI's financial access, its natural disaster-related high unsystemic risks need to be transferred out of the region it mainly operates in. Financial investors follow the same principle by diversifying their wealth. However, the only existing opportunity for microfinancial actors to transfer their disaster risks, is looking for reinsurance or reinsurance-like solutions individually. The comparatively unknown market and a non-perfect competition in reinsurance induce an inefficient and costly risk transfer. MFIs usually do not make use of these possibilities.

Introducing a risk transfer innovation

Alternatively, MFIs can mitigate the unsystemic disaster risks by bearing them collectively. A certain extent of risks can be transferred out of a region by pooling the risks among microfinancial actors. Only a minimised remaining risk of the pool itself needs to be transferred to the global capital market, which is expected to save costs. Two decisive prerequisites are fulfilled that allow for a pooling of these risks among microfinancial actors. Firstly, natural disasters do not occur in every region of the world simultaneously. For example, the risk of El Niño floods in Peru is high between January and March and Vietnam might be affected in June and July. Secondly, the distribution of microfinancial actors among the world regions is relatively balanced.

GlobalAgRisk, a U.S.-based research and development company with linkages to the University of Kentucky, intends to implement such a risk pool in 2018. In one hypothetical example, they envisioned a 31%-reduction in funding needs to cover the risks of two microfinance networks by pooling their risks. The impact of a natural disaster on an MFI's portfolio has been modelled for different disaster types and severities based on historic data, in order to determine the extent of contributions that a pool-participating-MFI has to make and the required payouts it potentially receives. This facilitates an index-based risk pooling which enables a quick disaster response and eliminates potential mistrust problems between different participants. In GlobalAgRisk's concept, an affected MFI is projected to receive a credit payout in order to meet the rising demand for credit of its clients and a capital payout that the respective regulatory authorities classify as equity in order to restore the MFI's capital ratio.

In my thesis titled, “Natural Disaster Risk Management in Microfinance”, I evaluated GlobalAgRisk's concept and portrayed potential improvements to increase the concept's likelihood in achieving its aims and depicted certain constraints for the implementation of potential improvements. The full thesis can be found here.

Recommendations: Inclusion of insurance risks in the concept

One potential improvement is the inclusion of insurance risks in the concept. High costs are a common explanation why weather-indexed insurance does not reach scale (see e.g. Sonja Kelly's blog). Microinsurers make use of the outlined costly reinsurance possibilities. Thus, weather-indexed insurance can benefit from the cost advantages risk pooling offers.

If the risk pool contains both credit and insurance risks, its size and diversification are expected to grow and therefore realize additional cost advantages; for example, through lower fixed costs per participant and better prices for reinsuring the pool's remaining risk externally. Moreover, a higher market penetration of weather-indexed insurance improves credit access, because insured clients benefit from a higher creditworthiness.

Even reinsurers can benefit from pooling both risk types among microfinancial actors, by covering the remaining risks that the pool cannot bear by itself. As such, the extent of covered insurance risks decreases for the reinsurers in comparison to insuring full risks. However, the total reinsurance business might grow because reinsurers can incorporate credit risks in addition to insurance risks.

The consolidation of both risk types appears feasible because the pool's payout patterns are similar to those of microinsurers reinsurance. The contribution payment into the pool is equivalent to a reinsurance premium and a payout is triggered if an insurance taker suffers from a damage. The modelled impact of a natural disaster on an MFI's credit portfolio fits in the already prevalent weather-indexed insurance.

Further success factors

For a successful risk pooling, the basis risk that comes along with an index-based risk pooling should be minimised as much as possible. To achieve this, a compartmentalised model that considers the pivotal risk types (e.g. floods, storms, drought, earthquakes) is crucial.

If the risk pool operates as a for-profit company, the benefits of the concept might be endangered. In order to be attractive, the pool only needs to be slightly cheaper than the existing risk transfer possibilities and could charge much higher contributions from the participants than the payouts amount. Establishing the pool as a mutual or cooperative company eliminates these potential profit extractions. In case of profits, they can be returned to the participants. Insuring the pool's remaining risks minimises the danger of suffering from losses as a co-owner. If certain microfinancial actors are restricted because of their co-ownership possibilities, they can participate in the performance of the pool without being a formal co-owner.

Finally, some countries' legal frameworks might require that the pool acquires insurance licences in order to provide the capital payouts. To avoid the acquisition of numerous licences, fronting might be a way out. Insurance companies that already possess licences in the respective countries can insure the participants and pass the risks on to the pool.


About the Author

Johannes Wissel recently graduated from Hochschule für Technik und Wirtschaft Berlin - University of Applied Sciences, with a Master's in International and Development Economics. He worked in sales management for Hannoversche Volksbank, a German Cooperative Bank. Prior to this, he worked with two international Christian organisations; Forum Wiedenest in Germany and Diguna in Kenya. Johannes is a licenced Corporate Bank Customer Consultant.

Pension provision in Africa remains low

26.09.2017Gerald Gondo, Business Development Executive, RisCura Africa

This post was originally published on the Financial Nigeria Website.

With 72% of sub-Saharan Africans employed in the informal sector, the traditional pension system is being called into question.

The traditional pension system of course works on the premise that members are formally employed, work for 40 years and contribute regularly during this period, resulting in suitable retirement savings. As more people enter the labour force and become formally employed, they are in essence able to contribute towards their future savings.

If we juxtapose the traditional model to the current African landscape, where most people are employed in the informal sector, consistent employment for one year - let alone 40 years - is a stretch. While permanent or continuous employment may not be a reality for many in Africa, these members of African society (where possible), remain economically active in the informal economy during periods of unemployment.

Pension coverage

The large numbers employed by the informal economy have historically limited the size of traditional pension funds and partially resulted in the continent’s low level of pension coverage. According to the International Labour Organisation, in sub Saharan Africa, only 8% of the labour force contributes to pension insurance and earns rights to a contributory pension, compared to 47% in North Africa.  As in most low-income countries, the low level of contributor coverage ratio can be explained by the small share of formally employed wage and salary earners, and the pervasiveness of informality, evasion, and inadequate law enforcement.

Despite higher levels of informality in labour markets, the provision of pension coverage and pay-out should remain an imperative if Africa is to make progress on its developmental agenda.

Providing pension access via African-based financial services and distribution channels such as M-Pesa, EcoCash, Leap Frog Investments and Equity Bank, which are innovative and disruptive, are natural and obvious choices.

Importantly, informing the thinking and messaging surrounding the provision of pension to potential members should be driven by simplicity.

Nigeria leads the way

Nigeria, Africa’s most populous nation, is leading the charge in making advances towards an alternative pension model for the informal sector. Its National Pension Commission (PenCom) has adapted their existing pension scheme for formally employed workers - the Contributory Pension Scheme - by making it the backbone for the rollout of the Micro Pension Plan of Nigeria.

The Micro Pension Plan is designed to cover small-to-medium enterprises, self-employed Nigerians and the broader informal sector. It is estimated that the informal sector constitutes 70% of Nigeria’s total workforce. In the absence of the Micro Pension Plan, these economically active citizens would not be covered by any form of structured pension scheme. Out of a total 59 million adults in Nigeria, there are 38 million potential contributors that will come from the informal sector by activating the micro pension scheme. As at the end of 2016, total pension scheme membership for the formal sector alone in Nigeria was almost eight million members.

Target-Dated Investing

At RisCura, we strongly advocate for pension fund fiduciaries to spend more time on objectives or goal setting. But, we are mindful that this must also take into account the nuances of Africa’s developing savings base and the differences between micro and traditional pension plans.

There may be merit for pensions and savings practitioners to look to Target-Dated Investing (TDI) for micro pension products. Under TDI, the member has a clear view of the investment strategy being undertaken on their contributions based on a set term to retirement that they have selected. TDI offers informal savers the benefit of a simplified savings programme and the goal is to ensure that the investment starts paying out at a pre-set date.

The combination of micro pension provision and TDI presents itself as an acceptable compromise for the possibility of an erratic contribution from some members. This dynamic may not offer the most elegant solution, but may serve as an important initiator of further improvements.

Echoing the sentiments of former Nigerian President Olusegun Obasanjo, “Emphasis must be placed on the urgent need for pension arrangement for the informal sector, given that it constitutes at least 61% of urban employment across the continent and will be on the rise due to population growth. We advocate for micro pensions, especially as the proportion of Sub-Saharan Africans in vulnerable employment has attained an alarming rate of 85% for women and 70% men”.


About the Author

Gerald Gondo serves as an Executive within RisCura Africa and is responsible for Business Development. Prior to joining RisCura, Gerald was also a founding partner of a specialist investment advisory and investment management business (Atria Africa) based in Mauritius. Gerald's passion to have first-hand experience in investing in Africa led him to join a leading pan-African asset manager (Imara Asset Management) where he had dual responsibility of being lead analyst on listed equities in Egypt, Morocco, Zambia and Mauritius whilst also building the fixed income capability of Imara Asset Management in Zimbabwe. He started his career in private equity investment in Sub-Saharan Africa (Business Partners) and has also worked as a credit analyst for a highly-rated specialist institutional fixed income boutique (Futuregrowth Asset Management), where he was responsible for credit analysis for corporate credit and securitisation issuances within South Africa.

Weather-Indexed Insurance: Why Isn't It Working?

05.06.2017Sonja Kelly, Director of Research, Center for Financial Inclusion (CFI)

This post was originally posted on the CFI-Blog Website.

Weather-indexed insurance is brilliant. It's just not working.

It's brilliant because it solves one of the basic challenges of insurance: moral hazard. Under the principle of moral hazard, having insurance tends to make an individual's behavior riskier, increasing the likelihood that the product will be used. If I have fantastic health insurance, for example, I may be more likely to make riskier life decisions because I don't feel the financial effects of the consequences of those decisions quite so acutely. If insurance is tied to the weather, however, nothing an individual does (unless you believe in the efficacy of a rain dance) will "trigger" the insurance.

Weather-indexed insurance is not a new phenomenon. Over the last decade we've heard exciting stories about weather-indexed crop microinsurance and the lifeline it offers to farmers given our world's quickly-changing climate. Weather-indexed insurance was bundled with agricultural inputs like seeds or livestock, and the product was lauded as a way to increase the inclusion of poor people in insurance.

Amazing, right? So why, after a decade, aren't customers buying? In India, for example, only 5 percent of farmers have taken it up where available.

  • It's complicated. Insurance is incredibly complex to explain to a consumer. There are no easy examples for consumers to reference in their mental maps of products. The concept has no analogues in the local culture.
  • It costs a lot. Low-value insurance is very expensive for companies to offer, and weather-indexed insurance is no exception. While the weather-based trigger makes it cheap to determine when claims are valid, the product requires a critical mass of people to break even, and it is costly to acquire all of those customers.
  • And it's undervalued. At the same time, customers often under-value insurance. In experiments looking at whether insurance products are priced appropriately vis-à-vis customer perception, there is skepticism regarding the price of premiums for an intangible product. A number of years ago, some researchers discovered that even when subsidized so that insurance would yield an expected return of 181 percent, only half of households offered the product decided to purchase it.
  • Making an insurance claim is annoying, and recourse mechanisms are not great. Weather-indexed insurance targets individuals living in remote areas who might lack experience with insurance claims or formal financial services. Moreover, available weather data has been a limiting factor for the scope and accuracy of the services' automation. Recourse mechanisms are often a struggle with financial services for the base of the pyramid, and there have been documented incidences of similar issues in the weather-indexed insurance segment.
  • "Freemiums" can give insurance a bad rap. A "freemium" is an insurance product offered for free alongside another product that the customer is paying for. For example, rental car insurance comes with a credit card. Credit life insurance comes with a microloan. Health insurance comes with a mobile wallet. The problem is that customers often don't know they have the product, which can reduce the offering's credibility. The freemium approach has been met with success in some cases, but to achieve this, it's essential that customers have a strong awareness and understanding of the product.
  • Governments aren't really on board, even though the product would increase economic growth. Noteworthy exceptions to this are the governments of Canada, India, and the United States, which subsidize premiums by at least 50 percent. However, such involvement by many governments in Africa, for example, would likely not be affordable.

These results are not new. It's just that the industry has not found compelling solutions to these problems.

It's no wonder weather-indexed insurance for low-income populations continues to limp along, even though it is one of the financial sector's greatest inventions (in this blogger's opinion). The best way forward for weather-indexed insurance is either providing it for free (which is why Shawn Cole advocates so strongly for public-private partnerships) or bundling both the price and the service with existing financial products. And ensuring that individuals sufficiently understand the products and their benefits, and that the products work well - i.e. making a claim or a complaint is as seamless as possible.

But I'd love to be proven wrong-do you know an example of a weather-indexed insurance that's working?


About the Author

Sonja Kelly conducts and facilitates financial inclusion research at CFI, directing the CFI Fellows Program, developing frameworks to understand critical concepts like financial health and financial capability, and facilitating the Global Microscope research. She serves as research lead on many topics related to financial inclusion. In her own research and work, Sonja focuses on regulation and policy, the role of banks in financial inclusion, and especially vulnerable populations. Sonja has a doctorate in international relations from American University, where her dissertation focused on financial inclusion policy and regulation. She has previously worked at the World Bank, the Consultative Group to Assist the Poor, and Opportunity International. Sonja is currently a member of the board of directors of People Reaching People, and has held volunteer positions as president of the Washington DC chapter of Women Advancing Microfinance, and as president of the steering committee for Northwest Chicago Young Life.

Reading between the data: Exploring the mismatch between the number of insurance policies reported by consumers vs. providers in Zambia

28.02.2017Jeremy Gray

First published on the Cenfri website.

In 2014, 22.2% of adults in Zambia were covered by insurance. In 2015, just 2.6% were. If you are working on insurance in Zambia you would probably think the magnitude of this change was because of the discontinuing of the Airtel Life product. But even if you exclude Airtel Life from the 2014 data, it captures three times more insurance policies than the 2015 data. So why the mismatch?

The mismatch is not bad reporting or survey design, but simply that many adults do not know that they have insurance. The 2014 data is from the Landscape of Microinsurance in Africa study which collects data on the number of insurance policies through provider consultation, whereas the 2015 data is from the FinScope Consumer Survey and (as the name suggests) from interviews with consumers. Many of the products that providers report are compulsory, embedded or group policies. This often leads to consumers not being aware, and thus not reporting, that they are covered, while providers continue to collect premiums without worrying about being called to pay claims. Exploring why this is the case reveals some interesting insights into the existing Zambian insurance market and its future development.

First, the low use of insurance does not reflect the risk experience of most Zambians. As in any other developing country, Zambians are subject to a range of different risks. However, as the figure below shows, few rely on insurance to deal with these risks. It shows that more than three-quarters of adults experienced an insurable risk in the last year, but largely used savings together with credit and the sale of assets to mitigate it.


Figure 1: Risk experience vs. risk response in Zambia                                 Source: FinScope Consumer Survey Zambia (2015)

This begs the question, given the risk experience in Zambia, why do adults prefer to use other risk mitigation mechanisms rather than insurance? And, if insurance can be a better risk mitigation mechanism, how do we change this behavior?

Step 1, pay claims. A market dominated by compulsory, embedded and group policies is not in itself negative. Chamberlain et al. (2016) explain that this is a necessary stage for most developing insurance markets. However, if the beneficiaries are unaware of the insurance cover, they may not claim on the insurance product. Where such claims are automatically settled, consumers will not be aware of the role that insurance has played in reducing their liabilities. In both these cases the lack of awareness undermines the development of the insurance market. In order for a retail insurance market to develop beyond a compulsory, embedded and group policies to the next stage of voluntary retail sales existing consumers need to be made aware of the value that insurance provides them.

Hence, pursuing compulsory product lines with low awareness, and as a result low claims, may be lucrative in the short-term. However, it undermines the perceived (and actual) value proposition of insurance amongst consumers and the potential for long-term market development.

This is the situation in which the Zambian insurance market currently finds itself. The existing compulsory insurance cover presents a good opportunity to grow both awareness of, and appreciation for, insurance products if these are offered in a way that provides value to the policyholders. However, instead claims ratios are low and insurance products are not perceived as providing value. The Pensions and Insurance Authority of Zambia (the insurance supervisor) reported claims ratios of 40% in the Life industry and 38% in General in 2014. Anecdotal evidence suggests that for some products, claims ratios may be as low as single figures. Additionally, two of the major barriers to using insurance products identified by FinScope respondents were that "insurers don't pay when you claim" and that they "don't trust insurance companies." If consumers have no faith that the insurer will pay claims then the product has no value to them.

Step 2, Design better products. Paying claims is critical to demonstrate the value of insurance after a risk event, but getting consumers to take up insurance in the first place requires products that actually meet their needs. For example:

  • Adults face multiple risks. Bundling insurance products that cover multiple risks can better meet needs and hence offer greater value. For example, the index insurance products offered by Focus and Mayfair (insurance companies in Zambia) not only offer farmers cover against adverse weather but, understanding that they also face a range of personal risks, bundles it with funeral cover and intends to add hospital cover in future.
  • Formal insurers are competing with informal providers. Informal risk mitigation mechanisms are used by a large portion of Zambian adults: 38% of adults indicate that they use some form of informal financial services (FinScope, 2015). Whilst most of these informal products may not be insurance type products, most can be used to manage insurable risks. For example, borrowing from friends and family or using the savings from under the mattress to pay for transport fees to get to the government hospital. These products are not only used because they have low barriers to entry, but even adults that can use formal services, prefer to use them. Informal products are effectively competitors to formal providers. Understanding this, and why they are preferred, is a critical step for providers looking to drive further uptake.
  • Insurance products lack tangibility. Insurance is a credence product. Given that many insurance markets start with micro-life or funeral products, adults only derive value after someone has died. This often makes it hard to sell to first time buyers. Insurers in other markets sometimes overcome this by offering in-life benefits to policyholders to add tangibility to their insurance policy, something not currently prevalent in Zambia. In-life benefits also enable providers to maintain an on-going relationship with the consumer. Traditionally, a consumer will only engage with the insurer when they purchase the policy and when they claim, which may be many years later or by one of their family member after they are dead. In-life benefits facilitate an ongoing interaction, making it easier for the provider to maintain a relationship with a consumer.

The mismatch between demand and supply-side data reveals a market with low awareness and a likely lack of value for policyholders. Whilst this may be initially lucrative, this short-sighted approach should be a concern for providers and policymakers. The profits currently enjoyed by incumbent providers will erode over time as competition increases (Zambia has seen the number of insurers triple of the last 10 years) and most importantly, undermines the long-term development of the insurance market as there is no basis for voluntary sales to grow. For policymakers this also limits the potential of insurance to contribute to capital markets.

Although there is some evidence of insurers beginning to innovate with product design and targeting new markets, reading between the data reveals many insurers still asleep at the wheel - undermining the potential contribution of the industry to the welfare of adults in Zambia.


About the author

Jeremy Gray is a Senior Research Associate at Cenfri. He has worked across a range of financial inclusion projects in countries throughout SADC (Southern African Development Community) and ASEAN. In particular, he has worked on MAP (Making Access Possible) financial inclusion diagnostics in Zambia, Malawi, Swaziland, Lesotho and DRC. Previously, he worked on a number of microinsurance projects including the A2ii Cross-Country Synthesis study, which involved analysing and synthesising the various microinsurance business models, inherent risks and appropriate regulatory responses found globally.




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