Insurance in Africa: who is buying it?
The market for insurance in Africa is under-developed, largely because most Africans simply cannot yet afford it. Access to insurance products only starts to increase quickly in the upper middle income groupings; with most Africans still just struggling to meet their basic food and other day-to-day needs, insurance is still a long way off for the majority of Africans.
Factors limiting insurance penetration
Apart from a lack of means, other reasons for low insurance penetration in Africa are:
- People do not trust financial service providers;
- Given how poor Africans are and how challenging the business environments are, there is not enough incentive for multinational companies to enter African markets and develop the sector;
- There is also a lack of reliable information, making it very difficult to assess people’s creditworthiness;
- The legal and judicial systems are poor;
- There is a lack of human capital and expertise;
- Shallow financial markets make it difficult to raise enough to capitalise insurance/re-insurance companies; and
- Communities often make use of informal forms of insurance rather than using the services of formal insurers.
The insurance penetration ratio, which is the gross value of insurance premiums as a percentage of GDP, is often used as a measure of how deep the local insurance market is. According to Making Finance Work for Africa, if one excludes South Africa then the penetration ratio for the continent as a whole was only 1.7% of total income in 2010. For Africa as a whole, the ratio was 3.6% in 2011 according to Swiss Re Sigma, which is higher than most of developing Asia. The bulk of the globe’s insurance industry is still located in wealthy developed countries. In fact, the G7 alone accounts for 65% of the world’s insurance premiums.
Life insurance vs non-life insurance
Within the African insurance sector there is quite a large difference between access to life insurance and non-life insurance. Life insurance remains particularly under-developed outside of South Africa due to poverty – people will only start to think about long-term savings once they fulfil their short-term needs. Other reasons are a lack of data on mortality and longevity as well as a lack of actuarial skills. Due to the near-absence of life insurance on the continent (outside of South Africa), the non-life insurance segment dominates the industry. This is quite different from the global situation, where the life insurance segment has a 58% share of the market.
According to a recent report by the World Bank, 17% of adults in developing economies have health insurance; however, only 3% of people in sub-Saharan Africa and the Middle East and North Africa region have health insurance. A slightly higher share (6%) of people in Africa and the Middle East has agricultural insurance. This is however still extremely low given how susceptible farmers are to bad weather.
The anomaly of South Africa
According to data from Swiss Re Sigma, the value of insurance premiums in Africa amounted to $68.1bn in 2011. South Africa is by far the biggest market on the continent, accounting for 80% of all life insurance premiums and 50% of non-life insurance premiums. South Africa on its own accounted for $46.6bn (or 68.4%) of all insurance premiums in Africa in 2011. Other countries where the insurance market has at least developed to some extent are Morocco, Egypt, and Kenya.
According to an article by Imara, insurance companies traditionally target only the richest 5% of the adult population, with most poor people having no insurance. Even in South Africa, which has a well-developed insurance market, less than 30% of low-income adults have insurance. The figure for the rest of Africa is even higher. This presents an opportunity for micro-insurers to sell low-cost products to the poor.
South Africa’s insurance penetration rate is among the highest in the world and well above the level one would expect it to be given its GDP per capita. In contrast to the rest of the continent, South Africa has a very well developed financial system and, more specifically, a well-developed and dynamic insurance sector. The country’s life insurance sector in particular is miles ahead of the rest of the continent. Reasons for why South Africa has such a large insurance penetration rate are manifold, but include the following:
- A sophisticated financial sector;
- A high level of competition within the insurance market;
- Despite the low GDP per capita, there is a sizable group of wealthy people that can afford insurance;
- People trust the local financial providers enough to allow them to manage their long-term savings; and
- A high level of risk awareness, which is perhaps intensified by the high level of crime and car accidents in the country.
The other African countries where the insurance penetration rate is above the fitted line are Namibia, Kenya, Zimbabwe, Mauritius and Morocco, all of which are countries that have – or used to have in the case of Zimbabwe – well-developed financial markets. Kenya and Zimbabwe in particular perform very well, with insurance penetration rates of above 3% despite very low GDP per capitas.