Africa Finance Forum Blog
Reading between the data: Exploring the mismatch between the number of insurance policies reported by consumers vs. providers in Zambia28.02.2017,
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.
First published on the World Bank-People Move website.
Against a backdrop of tepid global growth, remittance flows to low and middle income countries (LMICs) seem to have entered a "new normal" of slow growth. In 2016, remittance flows to LMICs are projected to reach $442 billion, marking an increase of 0.8 percent over 2015 (figure 1 and table 1). The modest recovery in 2016 is largely driven by the increase in remittance flows to Latin America and the Caribbean on the back of a stronger economy in the United States; by contrast remittance flows to all other developing regions either declined or recorded a deceleration in growth.
The top recipients of remittances are, in nominal US dollar terms, India, China, the Philippines, Mexico and Pakistan and, in terms of remittances as a share of GDP, Nepal, Liberia, Tajikistan, Kyrgyz Republic and Haiti (figure 2).
Figure 1: Remittance Flows Are Larger than Official Development Assistance (ODA), and More Stable than Private Capital Flows
Figure 2: Top Recipients of Remittances (Download data file)
Source: World Bank
Table 1. Estimates and Projections for Remittance Flows to Developing Countries
* This group excludes Equatorial Guinea, the Russian Federation, Venezuela and Argentina which were classified as High Income.
Besides weak economic growth in remittance-source countries, cyclical low oil prices have dampened the growth of remittance flows from Russia and the Gulf Cooperation Council (GCC) countries. More worrisome are structural factors such as de-risking by commercial banks, the labor market 'nationalization' policies in some GCC countries (that discourage demand for migrant workers) and exchange controls in many countries faced with adverse balance of payments and falling international reserves. Exchange controls in Egypt, Nigeria, Sudan and Venezuela have increased black market premiums on exchange rates, encouraging a diversion of remittances to unrecorded channels. De-risking, the closing down of bank accounts of money transfer operators due to anti-money laundering regulatory risks, has prompted many international banks to close correspondent bank accounts of money transfer operators, disrupting remittance flows.
East Asia and the Pacific: The outlook for remittance flows for the region has worsened due to weak global economic prospects and de-risking, leading to decrease in growth of remittances to 2.1 percent in 2016 compared to 4.1 percent in 2015. The Philippines is likely to see the slowest remittance expansion in the past decade, to 2.2 percent, reflecting a decline in overseas worker deployments. Remittance inflows to Vietnam's southern hub, Ho Chi Min City, increased by 4 percent during the first seven months of 2016. Pacific Island countries have seen some pick-up of remittance inflows due to strong migrant outflows to Australia, New Zealand, and the U.S.
Europe and Central Asia: Remittances to the region are estimated to fall further, by another 4.0 percent in 2016 after a drastic 22.5 percent decrease in 2015, due to the depreciation of the Ruble against the U.S. dollar and a weak economy in Russia. Most hard hit are Turkmenistan, Uzbekistan and Tajikistan. Countries where the growth of remittances is expected to be positive in 2016 include Bulgaria (3.9 percent), Montenegro (3.8 percent), Bosnia and Herzegovina (3.3 percent), Serbia (2.9 percent), Macedonia (2.8 percent), Romania (2.7 percent), Turkey (1.6 percent), Kosovo (1.5 percent) and Albania (0.9 percent).
Latin America and the Caribbean: Remittances flows to the region increased during the first eight months of 2016. Two factors are responsible for this: i) Recovery of the US economy, which is in its seventh year of expansion, and ii) a slight recovery in Spain in the second quarter of 2016. Remittances are expected to grow by 6.3 percent and reach $72 billion by the end of 2016. From January to August 2016, the year-on-year growth rates in remittance inflows were: Mexico 6.6 percent, El Salvador 6 percent, Honduras 6.4 percent, and Guatemala 15 percent. In Colombia, remittances from the US increased by 12 percent and from Spain by 19 percent during the first half of 2016.
Middle East and North Africa: Remittances to the region are expected to increase by 1.5 percent in 2016 due to a low-base effect given the 5.7 percent decline in 2015. However, it is expected that remittances from the GCC countries would decline. Egypt, Jordan and Yemen, large recipients of remittances, would be impacted the most. In Egypt, the largest remittance recipient in the region, remittance flows through the formal channels are impacted by further depreciation of the Egyptian Pound and emergence of a black market exchange rate premium.
South Asian Region: Remittances to the region are expected to decline by 2.3 percent in 2016, following a 1.6 percent decline in 2015. Remittances from the GCC countries continued to decline due to lower oil prices and labor market 'nationalization' policies in Saudi Arabia. In 2016, remittance flows are expected to decline by 5 percent in India and 3.5 percent in Bangladesh, whereas they are expected to grow by 5.1 percent in Pakistan and 1.6 percent in Sri Lanka.Sub-Saharan Africa: Remittance flows to the region are projected to decline by 0.5 percent in 2016, compared to the 0.8 percent decline of 2015. Faced with weak earnings from commodity exports and other balance of payments difficulties, many countries in the region - Angola, Nigeria, and Sudan, for example - have imposed exchange controls. Nigeria, which accounts for two-thirds of the regions' remittance inflows, is projected to register a decline of 2.2 percent in 2016 following a 1.8 percent decline in 2015. A significant parallel market exchange rate premium- in September 2016, the market rate was around 450 Nairas/$ compared to the official rate of around 320- has dampened flows through the official channels. Flows to Nigeria, Somalia and other countries in the region are also impacted by a disruption to the services of many money transfer operators due to de-risking behavior by international correspondent banks.
UN Summit on Large Movements of Refugees and Migrants
On a related note, the year 2016 marks an important turning point in global migration governance: the United Nations General Assembly (UNGA) hosted a summit meeting, on September 19, to address large movements of refugees and migrants, and welcomed the International Organization for Migration (IOM) to become a UN-related organization. The New York Declaration on Refugees and Migrants proposes two global compacts: A Comprehensive Refugee Response Framework and a Global Compact for Safe, Orderly, and Regular Migration. Negotiations on both compacts are expected to continue through 2017, with final adoption expected in 2018.
Ahead of the UNGA Summit, the World Bank Group released a paper "Migration and Development: A Role for the World Bank Group". The paper provides an overview of the economic benefits and challenges associated with migration and highlights a role for the International Financial Institutions in four areas: i) financing migration programs; ii) addressing the fundamental drivers of migration; iii) maximizing the benefits and managing the risks of migration in sending and receiving countries; and iv) providing knowledge for informed policy making and improving public perceptions.The multi-faceted nature of migration will require partnerships with other UN organizations, multilateral development banks, civil society, and the private sector. Viewing migration through the lens of reducing poverty and sharing prosperity while respecting human rights can provide a unifying framework for operationalizing the Bank Group's knowledge on migration and mobilizing its financial resources and convening power.
Also, on September 20 2016, the United States hosted a Leaders' Summit on Refugees. The outcome of this Summit include: i) an increase of funding to humanitarian appeals and international organizations by approximately $4.5 billion over 2015 levels; ii) almost doubled the number of refugees through resettlement or other legal pathways in 2016; and iii) access to education for one million refugee children globally and access to lawful work for one million refugees globally. President Obama also announced the launch of the World Bank's new Global Concessional Financing Facility.
[i] Prepared by Dilip Ratha, Supriyo De, Sonia Plaza, Kirsten Schuettler, Hanspeter Wyss, and Soonhwa Yi of the Migration and Remittances Unit (DECMR) of the Global Indicators Group of the World Bank. We also received useful comments and contributions from Nadege Desire Yameego and Ganesh Kumar Seshan of the Migration and Remittances Unit.
First published on the Milken Institute Blog website.
A key step in developing a local capital market is to develop the "buy side"-to encourage greater participation of local institutional investors such as pension funds and insurance firms. If managed well, these pools of savings can become important sources of long-term financing, including for infrastructure, which can drive socioeconomic growth.
The share of residents in East African Community (EAC) countries Kenya, Rwanda, Tanzania, and Uganda who access pension and insurance products is still small, although growing. Savings managed by local institutional investors in these countries nearly doubled in just four years, to about $19 billion by early 2016. We recently surveyed buy-side institutions in these four countries to ask how they are managing savings across asset classes and EAC countries. See the findings here.
We found that most of these investors want to further diversify their portfolios, but they are impeded largely by a lack of investable securities and risk-management products that allow them to invest in a way that meets their aims. This points to a need in these markets for more long-term investment vehicles, in particular-as well as market participants. For example, a large majority of surveyed investors showed strong interest in new vehicles such as a regional "fund of funds" that could pool their resources and manage risk by investing across diverse infrastructure projects by sector and country.
There already are clear signs that pension funds, in particular, have been diversifying their portfolios over the past decade-shifting further away from the most liquid asset classes. Surveyed pension funds hold an average of just 1 percent in cash and demand deposits across the EAC focus countries. And pension fund and insurer investments in short-term government securities typically fall well below national and even internal ceilings. Survey findings show pension funds generally hold much more in longer-term than short-term government securities. But very limited corporate bond holdings, even for pension funds, is at least partly the result of small market size and lack of product.
Our findings also show that tiny allocations so far to private equity and venture capital (PE/VC) reflect limited experience and capacity evaluating these new asset classes-more so than lack of demand or investment limits. In fact, national regulatory approaches are still evolving. Greater clarity on how regulators will treat these new asset classes may encourage more investment. While certainly not risk-free, some investment in PE/VC as part of a well-managed portfolio could help generate returns. At the same time, it will be important to boost risk-evaluation capacity among regulators, investors, and financial intermediaries.
How do national regulations affect how these investors manage their portfolios? We found that in most cases, national regulatory investment limits are not the binding constraint preventing local institutional investors in the EAC from further diversifying their portfolios. Their actual allocations to public equities and corporate bonds generally fall well below national regulatory caps. And internally set targets tend to fall well below national ceilings-as does actual investment in these securities.
Around half of investors said they invest some of their portfolio assets outside their home countries-typically in other EAC countries. How can these EAC markets draw on regional ties to attract institutional investors? Roughly half of survey participants said access to better strategies and instruments for managing foreign exchange risk would make them more likely to invest in assets across EAC borders.
We found that some investors may not be clear on the intraregional restrictions by asset class they actually face. Regulators should step up communications with investors to ensure they clearly understand both the limits and opportunities in how they invest within the EAC and across asset classes. A well-functioning buy side can reduce an economy's reliance on foreign portfolio investors, increasing its resilience to sudden capital inflows and outflows. Further progress on intraregional integration within the EAC may help mitigate some of the risks associated with cross-border investment. Limited investable securities in local capital markets strengthens the case for easing or harmonizing restrictions intraregionally. This, in turn, could improve market liquidity, deepen the EAC's capital markets, and make it easier for local institutional investors to diversify their portfolios.
Our complete survey findings are available here.
About the Author
Jim Woodsome is a Senior Research Analyst at the Milken Institute's Center for Financial Markets. In this role, he conducts research, organizes events and helps manage initiatives related to the Center's Capital Markets for Development (CM4D) program.
First published by FSD Africa on 9 February 2017.
Nearly a year ago, we joined the A2ii in Abidjan to sit down with a roomful of regulators to discuss the challenges and imperatives CIMA faces in regulating mobile insurance at the CIMA-A2ii Workshop on Mobile Insurance Regulation. In the CIMA context, as with most countries in Africa, mobile network operators (MNOs) and the technical service providers (TSPs) that support them are emerging as key players in extending the reach of insurance. The discussions at the workshop focused on how insurance regulators can broaden their focus to include these MNOs and TSPs, as well as how to cooperate across different regulatory authorities.
A year on, these considerations remain as valid as ever, but we have come to realise that there is more at stake than m-insurance. Digital technology is changing the insurance landscape as we know it by paving the way for new players and business models with the potential to rapidly expand coverage. This is causing a re-think of how insurance is traditionally delivered. In addition, while m-insurance remains important, looking beyond m-insurance to the broader insurtech field is important to truly understand the opportunities technology provides to change the game in inclusive insurance and the associated risks.
Thus far, the insurtech debate has largely focused on developed country opportunities. But the tide is turning. My colleagues and I recently scanned the use of insurtech in the developing world to see what the potential is for addressing challenges in inclusive insurance. We found more than 90 initiatives in Asia, Latin America and sub-Saharan Africa that fit the bill. What we saw is that the "insurtech effect" is happening in two ways.
Firstly, digital technology is a tool to make insurance as we know it better: it is being used as a backbone to various elements of the insurance life cycle, in an effort to streamline processes, bring down costs and enable scale. Examples include new ways of data collection, communication and analytics (think big data, smart analytics, telematics, sensor-technology, artificial intelligence - the list goes on), as well as leveraging mobile and online platforms for front and back-end digital functionality (such as roboadvisors, online broker platforms, mobile phone or online claims lodging and processing, to name a few!). It also allows for more tailored offerings: on-demand insurance initiatives are covering consumers for specific periods where they need that cover, for example for a bus ride, on vacation or when borrowing a friend's car for one evening, while advances in sensor technology mean that insurers can adapt cover and pricing based on usage, for example allowing customers to only pay car insurance for the kilometres they actually drive every month.
In all of the above, digital technology, including the application of blockchain for smart contracting and claims, makes the process seamless.
Secondly, digital technology is a game changer. In many ways, it is changing the way insurers do business, design and roll out their products, and, importantly, who is involved in the value chain. Peer to peer platforms (P2P) are a much-discussed example of these next generation models. They are designed to match parties seeking insurance with those willing to cover these risks. The revolutionary element lies in the ability to cover risks that insurers usually shy away from due to the lack of data to adequately price the risks - all now enabled by digital technology. But these platforms are often positioned in regulatory grey areas: if all the platform does is match people to pool their own risks, does it then need a licensed insurer involved? And if advice is provided by a robot powered by an algorithm, who is ultimately accountable? No wonder insurance supervisors are sitting up straight when you mention the word "tech". As Luc Noubussi, microinsurance specialist at the CIMA secretariat, said at the 12th International Microinsurance Conference in Sri Lanka late last year: "Technology can have a major impact on microinsurance, but change is happening fast and regulators need to understand it".
So, how do they remain on the front foot in light of all of this, what different functions, systems and players do they need to take into account and what are the risks arising? In short: how can they best facilitate innovation while protecting policyholders? Front of mind is how current regulatory and supervisory frameworks should accommodate new modalities, functions and roles - many of them outside the ambit of "traditional" insurance regulatory frameworks - and what cooperation is required between regulatory authorities to achieve that.
Two weeks from now we'll again be sitting down with regulators from sub-Saharan Africa for the Mobile Insurance Regulation conference hosted in Douala, Cameroon, from 23 - 24 February 2017 by the A2ii, the IAIS and the 14 state West-African insurance regulator, CIMA, supported by UK aid, FSD Africa and the Munich Re Foundation. This conference will delve into the opportunities that mobile insurance present and the considerations for regulators and supervisors in designing and implementing regulations to accommodate it. The imperative to find an m-insurance regulatory solution remains, but it is clear that the horizon has broadened: at play is the way that insurance is done across the product life cycle, who the players are in the value chain and, at times, the very definition of insurance.
As we suggested in an earlier blog, this could be microinsurance's Uber moment, but then regulators need to be on-board. We look forward to taking part in the discussions to see how supervisors plan to do just that.
About the Author
Catherine Denoon-Stevens is a Senior Research Associate at Cenfri and has been part of the team since 2012. At Cenfri, her research has focused on building access to inclusive insurance markets, specifically the harmonisation of insurance regulation within the Southern African Development Community (SADC) region; innovative financial services distribution models; and Making Access to Financial Services Possible (MAP) studies in Southern Africa and South Asia. In addition, she is part of the team that runs Cenfri's capacity building portfolio, coordinating open-enrolment and in-house executive education trainings in microinsurance and national payment systems.
Let me begin by wishing you all a very happy and prosperous 2017, on behalf of all of us at the MFW4A Secretariat.
2016 was a rewarding year for MFW4A. We were proud to host the first Regional Conference on Financial Sector Development in African States Facing Fragile Situations (FCAS) in Abidjan, Cote d'Ivoire, jointly with the African Development Bank, FSD Africa, and FIRST Initiative. The conference attracted some 140 policy makers, business leaders, academics and development partners from over 30 countries, to discuss the role of the financial sector in addressing fragility. The conference has already led to several initiatives by MFW4A and our partners in the Democratic Republic of Congo, Liberia, Sierra Leone and Somalia. We expect to build on this work in 2017.
Our support to the Conférence Interafricaine des Marchés d'Assurances (CIMA), the insurance regulator for francophone Africa, helped them to secure financing of EUR 2.5 million from the Agence Française de Développement. The funding will help to expand access to insurance in a region where penetration rates are less than 2% - well below the average for the continent. We worked closely with a number of our funding partners to help define their strategies in Digital Finance and Long Term Finance. These results are a clear demonstration of how the Partnership can directly support the operations of its membership.
With the support of our Supervisory Committee, we took steps to ensure the long term sustainability of the Partnership. The approval of a revised governance structure which fully integrates African financial sector stakeholders, public and private, was a first critical step. The ultimate objective is to expand membership and build a true partnership of all stakeholders in Africa's financial sector.
2017 will be a year of transition for the Partnership. It marks the end of MFW4A's third phase, and the beginning of its transformation into a new, more inclusive partnership, with an expanded membership. We will focus on revamping our value proposition to provide more focused, needs based services with the potential to directly impact our current and potential membership. In so doing, we hope to consolidate MFW4A's position as the leading platform for knowledge, advocacy and networking on financial sector development in Africa.
In closing, I must, on behalf of all of us at the MFW4A Secretariat, thank all our funding partners, stakeholders and supporters, for your constant support and encouragement over the years. We look forward to working together to strengthen our Partnership.
With our best wishes for a happy and prosperous 2017,
MFW4A Partnership Coordinator