Microinsurance Technical Advisory Group FOCUS NOTE No. 9 JUNE 2018 Funded by
ABOUT THIS FOCUS NOTE Since 2009, the Technical Advisory Group for Microinsurance (TAG) has been spearheading the development of an inclusive insurance sector in Zambia. With so much traction in the number of products and scale, Zambia demonstrates what can be achieved through a structured sector coordination approach focusing on demand stimulation, supply strengthening and an enabling environment. This focus note summarises the results of the Zambia Microinsurance Landscape Survey conducted by FSDZ in collaboration with the TAG with support from the Insurers Association of Zambia (IAZ) and Pensions and Insurance Authority (PIA). The survey provides insights into the state of the microinsurance sector in Zambia as of end of 2016. It also helps define the challenges and opportunities to improve policy objectives and to enable market development initiatives to expand inclusive insurance (otherwise known as microinsurance) in Zambia. This note is part of a series of regular updates on the landscape of microinsurance in Zambia published by FSDZ in collaboration with the Technical Advisory Group (TAG). Microinsurance Technical Advisory Group Disclaimer: The Microinsurance Focus Note Series is published by the Financial Sector Deepening Zambia (FSDZ). The authors of this Focus Note are Mauwa Lungu and Lemmy Manje, working on behalf of the Technical Advisory Group (TAG) and Financial Sector Deepening Zambia. The opinions expressed are not necessarily those of the two named organisations.
CONTENTS 05 Key Highlights 07 Introduction 08 State of the Market 09 Microinsurance Coverage 10 Business Engagement 11 Distribution 12 Business Case 14 Industry Perspectives 16 Enabling Environment 17 Recommendations FOCUS NOTE NO. 9 3
Key Highlights Coverage Only 2.8% of adults in Zambia are insured [Finscope 2015] 1.6 million low-income consumers were covered by at least one microinsurance product 11 insurers are engaged in microinsurance out of the 35 Insurance companies 9 insurers are very active in the microinsurance space Products Microinsurance is mainly distributed through financial institutions. Other distribution channels include associations, mobile network operators and direct agents Business case Development of microinsurance regulations was completed and awaits enactment of the new Insurance Bill Microinsurance principles have been formulated and were endorsed by the private sector in February 2017 FOCUS NOTE NO. 9 Business engagement in microinsurance Microinsurance product offering is limited to Credit Life, Funeral Insurance, Weather Index, Personal Accident and Hospital Cash Plan Distribution Microinsurance contributed about ZMW91 million in gross written premium to the insurance industry Regulations 5
Introduction The microinsurance sector in Zambia continues to evolve, as more insurers embrace the business case and begin investing in microinsurance solutions. Although there are some insurers that are sceptical of the business case, there is growing evidence that microinsurance is a viable business line. This is particularly true if the insurers have a long-term perspective in terms of investment. The Microinsurance Landscape Survey 2016 presented a portrait and trends of microinsurance developments in Zambia. It also provided some of the market and regulatory interventions that have been implemented to accelerate the development of the national microinsurance sector. The survey provides market and regulatory insights for a wide variety of stakeholders, including insurance companies, distribution channels, donors, regulators and the government. As an emerging sector, microinsurance is progressively being recognized in the country as a financial service that can expand and deepen the insurance market and contribute significantly to financial inclusion. As more stakeholders begin to see the potential of microinsurance for business and development, there is an inevitable need for regular updates of performance, challenges and opportunities in microinsurance. To address this and as part of an ongoing national microinsurance development process and strategy, the Microinsurance Landscape Survey 2016 was conducted by Financial Sector Deepening Zambia (FSDZ) in collaboration with the Technical Advisory Group for Microinsurance (TAG). This was done with support from the Pensions and Insurance Authority (PIA) and the Insurers Association of Zambia (IAZ). The specific objectives of this landscape survey were: To provide insights on the evolution and status of Zambia s microinsurance market; To identify gaps in both knowledge of and access to microinsurance; and To identify opportunities (supported by the data) to make a significant impact in expanding microinsurance. In identifying what constituted microinsurance, the survey relied on the following internationally accepted definition1: An insurance product developed intentionally to serve low-income people (insurance that is not just purchased by low-income people but products that are specifically made for low-income people tailored to their needs, income and level of risk). This focus note provides insights into the findings of the survey in terms of coverage, business case, performance, products, distribution channels, client value, industry perspectives, regulatory considerations, and recommendations for the future of microinsurance in Zambia. It is part of a series published by the TAG and FSDZ; previous focus notes are available on the FSDZ website2. Smallholder farmers in a Focus Group Discussion (FGD) brainstorming how to best explain a weather index insurance product - Pemba district, Southern Province, Zambia Definition used in the Global Microinsurance Landscape Survey undertaken by the Microinsurance Network, Microinsurance Centre and Munich Re Foundation. 2 http://www.fsdzambia.org 1 FOCUS NOTE NO. 9 7
State of the Market Zambia s microinsurance sector is relatively young. Since 2009, microinsurance has grown from less than 100,000 lives to 1.6 million lives covered by a microinsurance product in 2016, as per figure 1 below. Figure 1: Microinsurance Coverage ( million lives ) 3.7 1.0 1.1 1.6 0.1 2009 2013 2014 2015 2016 Over time, insurance companies have extended their services to low-income consumers, to improve their risk management options while remaining profitable through expanded market outreach. Since 2009, the variety of products has evolved from only credit life and funeral policies to agricultural products (weather index insurance), personal accident and hospital cash plans by 2016. The landscape survey shows that microinsurance is still dominated by compulsory insurance products such as credit life (65%), as per figure 2 below. Figure 2: Performance of microinsurance (coverage by product type 2009-2016) 95% 64% 79% 74% 65% 35% 5% 0% 0% 0% 1% 0% 0% 20% 0% 0% 0% 21% 5% 0% 0% 28% 5% 1% 1% 2009 2013 2014 2015 2016 Life/insurance Credit Life Agriculture insurance Hospital Cash Personal Accident 8 FOCUS NOTE NO. 9
Microinsurance Coverage The last 10 years have seen growing interest among some of Zambia s insurers in designing microinsurance products. However, while the size and number of microinsurance transactions has been growing, coverage and variety of products is still relatively narrow. Credit life, weather index and funeral insurance are the dominant microinsurance products. Designing low-cost health, fire, personal accident and hospitalisation insurance policies remain untapped areas. Generally, people in the rural areas of Zambia have lower access to financial services such as insurance. However, they are the most susceptible to risks such as death or illness, unexpected expenses and natural disasters. With increased investments by private insurers in providing cover for farming and household risks, smallholder farmers and rural families are likely to benefit from more effective risk management options. The increasing traction of microinsurance cover for smallholder farmers is slowly influencing private sector investments and public-sector interest in weather index insurance. The changes in the variety of products in Zambia s microinsurance sector are well aligned with the standard framework of product evolution applicable in many countries, moving from simple mandatory products to voluntary cover as well as to more complex products. The evolution of microinsurance coverage by product type is summarised in figure 3 below. Figure 3: Zambia s microinsurance coverage product evolution framework Voluntary Hospitalisation Cover Voluntary Personal Accident Voluntary Personal Accident Voluntary Personal Accident Bundled Funeral Policy Voluntary Funeral Policy Voluntary Funeral Policy Voluntary Simple Life Cover Mandatory Credit Life Mandatory Credit Life Credit linked Weather Index Embedded Weather Index 2009 Level of complexity 2016 Phase I: Mandatory; credit linked (MFIs) simple products - life, funeral (easy to administer) Phase II: Greater product sophistication; voluntary, new distribution choice, outreach Phase III: Use of technology; more complex products (e.g. health and agriculture); composite products; multiple partners (e.g. hospitals, mobile phone provider, public-private partnerships) Source: FSDZ, adapted from ILO s Impact Insurance Facility FOCUS NOTE NO. 9 9
Business Engagement Currently there are few market players engaged in microinsurance in Zambia. The landscape survey revealed that only 9 out of the country s 35 licensed insurance companies are active in this space. The survey showed that out of the 9 active players, only 7 have products servicing more than 5,000 clients in a year. However, the variety of risk coverage provided so far shows that insurers are looking beyond the credit life business and are beginning to develop more products that best suit the diverse needs of the low-income market segments. Figure 4: Level of business engagement Figure 5: Microinsurance coverage by product type Not engaged Engaged Personal Accidents, 1% Hospital Cash, 1% Funeral, 28% 74% 26% 9 Active Insurers Weather Index, 5% Credit Life, 65% Credit life insurance still dominates microinsurance coverage in Zambia, taking up 65% of the total microinsurance business. Funeral microinsurance products account for 28% coverage. The country has also seen growth in newer microinsurance products on the market such as weather index insurance, hospital cash plans and personal accident products. A number of funeral policies are targeted at microentrepreneurs who operate in some of the country s busy markets. 10 FOCUS NOTE NO. 9
Distribution The microinsurance distribution channels in Zambia are evolving and becoming more innovative. Insurers are realizing that to get value, they need to use low-cost distribution channels that can reach clients in large numbers. They have also realized that channels need to be innovative enough to target and reach even those with no experience of insurance. In Zambia, distribution is largely driven by microfinance institutions and financial institutions (82%). The 2016 landscape survey revealed that insurers have taken more innovative distribution routes in their provision of microinsurance. Distribution is now provided through agrobusinesses, associations, cooperatives and mobile network operators (MNOs), as demonstrated in figure 6 below. Although the use of mobile services is recorded at about 2%, there is an opportunity to administer microinsurance through this platform and via other digital services. In 2014 and 2015, MNOs accounted for a large proportion of coverage through the Airtel Loyalty simple life insurance product Figure 6: Microinsurance coverage by distribution channel Associations & Cooperatives 6% Agrobusinesses 9% Mobile Network Providers 2% Sales Agents 1% MFI & Financial Institutions 82% Based on microinsurance best practices, distribution channels can be used for promotion, enrolment, education, value added services, premium collection, claims reporting, claims assessment and/or claims payments. However, in Zambia there seems to be a challenge in most distribution partnerships in the allocation of roles and responsibilities. The landscape survey established that most of the channels are mainly being used for premium collection and claims payments only. FOCUS NOTE NO. 9 11
Business Case Microinsurance has in recent years contributed to the Gross Written Premium (GWP) of the industry worldwide. Other African countries are already starting to see microinsurance premiums compose a more significant share of the total insurance market. The Landscape of Microinsurance Africa 2015 study reported that microinsurance premiums account for 14% of the total market in Burkina Faso and 7.5% in Swaziland. The Zambia Microinsurance Landscape Survey 2016 on the other hand, shows that in 2016, the total identified microinsurance business contributed roughly ZMW 90 million GWP which accounted for about 3 percent of the total GWP to the entire insurance industry. 70,855,160.01 Figure 7: Distribution of GWP by microinsurance product type (ZMW) 3,582,036.71 15,396,605.68 58,370.00 1,157,520.00 Credit Life Weather Index Funeral Personal Accidents Hospital Cash One of the measurements of client value is the claims ratio 3. However, relevant data for most current microinsurance products was not provided by the market players. Based on the available data, it is evident that most business lines seem to have low claims ratios. The average gross claims ratio in 2016 was 35.7% for the credit life business, clear evidence that product awareness is still a major challenge impacting negatively on client value. In terms of the weather index product, 2016/17 was a season of good rainfall which saw less claims payout. In the 2014/15 season which recorded poor rainfall in almost all parts of the country, over 100% of weather index claims were paid out. Figure 8: Average Claims ratio (2015-2016) 195% 35.7% 31.3% 41% 10% 55% 2016 2015 Credit Life Funeral Weather Index Source: Microinsurance landscape survey 2015 3 The claims ratio is the percentage of claims costs incurred in relation to the premiums earned. The ratio is used to measure how value an insurance product is to the insured. 12 FOCUS NOTE NO. 9
There is increasing interest by several Zambian market players in expanding into the low-income market. Several insurance companies that have already embraced the business case have realised that scale is critical for viability. However, investments in scale must not overshadow investments in client value. Figure 9: Level of interest in microinsurance Figure 10: Microinsurance investment plans 10% 5 years + 11% 20% High Medium Low 3-5 years 22% Within 1 year 34% 70% 1-2 years 33% The survey confirmed this growing interest with 70% of insurance companies wishing to develop a microinsurance product and about 67% planning to engage in microinsurance within the next two years. Microinsurance product sales in action; leveraging mobile phone platforms for efficiency and administration cost reduction. FOCUS NOTE NO. 9 13
Industry Perspectives Findings of the 2016 landscape survey also provide an overview of industry perspectives concerning microinsurance. As described in figure 11 below, the majority of market players (60%) strongly believe that low income people have the ability to afford microinsurance products. However, almost all market players (90%) believe that knowledge about insurance is low among low-income consumers. This is also evident from Finscope 2015 findings which show that only 2.8% of Zambia s adult population are insured; lack of awareness being the most significant barrier. Further, three quarters of market players (75%) also believe that the insurance culture in Zambia is low. Figure 11: Industry perspectives on microinsurance demand Insurance culture 25% 75% products 10% 30% 60% client base 10% 90% clients 25% 35% 40% Low Medium High Concerning the required market support functions, over half (55%) of the market players believe that availability of information in the development of microinsurance products and support by the Insurers Association of Zambia (IAZ) is relatively high. Almost half (45%) of the market players believe that the regulator is key in the support of microinsurance, and that there is a great need to identify distribution channels that effectively meet the demands of low-income people. Almost half of the market players (45%) feel that there is still a need for investment capital to develop microinsurance products. Figure 12: Support for microinsurance development Availability of information to help in the development of insurance products for the low-income market 20% 25% 55% Availability of investment capital for developing microinsurance 25% 30% 45% 20% 35% 45% Availability of reinsurance for high-risk microinsurance products 30% 35% 35% Support by the Insurers Association 5% 40% 55% Support from the regulator and / or supervisor 20% 35% 45% Low Medium High 14 FOCUS NOTE NO. 9
The common view shared by most industry players (90%) about what is needed to propel the growth of microinsurance is consumer education and financial literacy, as well as access to better distribution channels (70%) and information technology (IT) systems (75%) specifically for microinsurance. Half (50%) of the market players suggested more exposure to viable business models, putting microinsurance regulations in place, more training for insurance professionals, and the need for market demand studies to better understand client needs. Others (40%) suggested that financial support to insurers interested in piloting microinsurance products and technical assistance for research and development would propel microinsurance growth in the country. Figure 13: What needs to propel microinsurance growth Coinsurance for life general insurance 20% Putting microinsurance regulations in place More training for insurance professionals in microinsurance 45% 45% TA for research and development for feasibility studies Financial support to insurers interest in piloting microinsurance product 40% 40% TA to insurers in product development and distribution 35% Actuarial risk tables covering the low-income market More reinsurance options for high-risk microinsurance products 20% 20% Market demand studies to help insurers better understand clients needs 45% More exposure to viable business models 50% More / better distribution channels 70% IT systems specific for microindurance 75% Capacity building in microinsurance for insurers 45% Market education and financial literacy efforts for consumers 90% Nurturing future demand of microinsurance through insurance education in high schools. FOCUS NOTE NO. 9 15
Enabling Environment Regulation is necessary to propel market growth. Zambia s insurance regulator, the Pensions and Insurance Authority (PIA), remains supportive of microinsurance market development. However, the insurance industry in Zambia currently has no specific microinsurance regulations. In 2014, with inputs and support from the TAG and FinMark Trust, the PIA drafted microinsurance regulations which were shared with industry for review. Two key issues that have been debated during this review process are: defining microinsurance, and the introduction of a Microinsurer licensing category. The absence of specific microinsurance regulations implies a lack of coherent industry supervision, reporting and consumer protection. Nonetheless, the PIA has been supportive of microinsurance development initiatives and has approved microinsurance products on a case by case basis. There have been notable delays in some product approvals, since conventional rules are used as a checklist. The long period (over 9 years) to enact a new Insurance Act has affected progress in this area. The Pensions and Insurance Authority has also supported various consumer education initiatives such as the Annual Insurance Week. 16 FOCUS NOTE NO. 9
Recommendations Since 2009, the microinsurance market has evolved in terms of size, scale, distribution channels and product provision. Zambia has been commended for its coherent market development process characterised by local ownership, leadership and effective stakeholder engagement through the TAG. The following are some of the areas that need the attention of the industry to improve the performance of the microinsurance sector: More investments in awareness: It is prudent for the insurance industry to look beyond a single annual event to improve public education on microinsurance. Through Insurance Week, some insurers have now seen the value of collective efforts in increasing awareness of the benefits of insurance and available microinsurance products, IAZ should complete, launch and implement a comprehensive national consumer education strategy, and ensure strong insurance information in the emergent Grade 1-12 national financial education curricula. Search for the optimal balance between business viability and client value: It will be important to assist the active market players in finding the drivers of business and viability and client value. There are a few products that have not yet achieved profitability; for some of the products, there has not been significant investments in understanding consumer needs prior to product rollout. Market players can benefit from FSDZ s innovation facilities such as the Microinsurance Acceleration Facility (MAF), Inclusive Insurance Upscaling Challenge Fund (IIUCF) and Finclient Centric Cycle (F3C). Stimulate and maintain distribution partnerships: Finding and maintaining effective distribution partnerships is a critical challenge. Some insurers believe they have great products but lack distribution channels or have not engaged potential distribution channels in their product development. Consequently, there is a mismatch between consumer expectations and available products. Additionally, there is normally a mismatch between the expectations of insurance companies and distribution channels owing to inadequate investments in finding the right value proportions. Building the capacity of insurers in distribution management would therefore be critical. FSDZ facilitated one training programme on managing distribution partnerships in 2016; more of such training programmes are required. More investments in capacity building: As insurers begin to engage more with low-income market segments, it is inevitable that they must invest in building staff skills and knowledge of the microinsurance business. The most critical identified capacity building areas are product development, market research, client value and distribution. Building sound and good business practice in microinsurance through regulations: As more insurers become engaged in microinsurance, it is critical to accelerate and ensure facilitation and safe landing of microinsurance regulations. The launch of the microinsurance regulations for Zambia has stalled due to delayed enactment of the new Insurance bill. Microinsurance principles are also important to instil best practice in the design and delivery of microinsurance products. The Microinsurance principles were drafted by the Technical Advisory Group and endorsed by private sector in 2016 and now await launch by the Pensions and Insurance Authority. A number of countries around the world have made significant progress in these areas. There is a lot more that Zambia can learn from them, and so much the industry can initiate to ensure growth of this sector. FOCUS NOTE NO. 9 17
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