Key findings from the 2014 Africa CFO Survey

Reassuring (future) penetration in African insurance markets

The insurance market in Africa on the other hand is under-developed as – apart from South Africa, Namibia, and Mauritius – all countries have very low penetration ratios. According to Swiss Re, the total value of Africa’s insurance premiums was just shy of $70bn in 2013, down 2% from the $71.35bn in 2012. This means that Africa’s share in the global market was only 1.5%. The poor performance of Africa on a global stage is particularly noticeable if South Africa is excluded, as South Africa accounted for nearly 74% ($51.6bn) of all African insurance premiums in 2013, with the other 53 countries contributing $18.3bn, which is then only 0.4% of the global insurance market.

Low insurance penetration in Africa is mainly because most of a lack of awareness and the fact   that most Africans are still too poor to afford insurance. Typically, access to insurance only starts to increase quickly in the upper middle income brackets, but 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. It’s for this – according to an article by Imara – that insurance companies in Africa traditionally target only the richest 5% of the adult population. Even in South Africa, which has a well-developed insurance market, less than 30% of low-income adults have insurance.

Additionally, other key determinants of an insurance sector in any particular country are income levels, political stability, the depth and sophistication of the financial sector, the level and volatility of inflation, culture, and the capacity of companies to innovate.

Africa’s insurance markets, however, are gradually changing. A few African countries already have fairly high income levels and therefore sizable middle classes, which is spurring the development of insurance, and the most recent growth in the volume of insurance premiums in Africa has been among the highest in the world over the past few years.

Africa’s ‘uninsured’ or underserved insurance markets present a burgeoning of opportunities for not only large foreign and African insurance companies, alike, but also for micro-insurers to sell low-cost products to the lower income bracket. Additionally, the advent of mobile money has also brought a new dimension to Africa’s insurance industry, where buying insurance on a mobile phone is an exciting growth area as it offers a more affordable way for Africans, especially in remote regions, to gain access to insurance products. The successful rollout of such products or services, however, does require the cooperation of telecommunications companies, banks, and insurance companies.

Overall, the non-life segment will continue to dominate in the short term, however, as Africans’ incomes grow and consumers become more financially savvy, there will be more and more opportunities in the life segment as well.

Historically, the main reason for the low level of financial inclusion on the continent pertains to low income levels in general. And, the second most significant barrier to the use of formal financial services relates to the distance that needs to be travelled so as to access such services.

However, with rising incomes and a rapidly growing middle class, an increasing number of financial institutions have woken up to the massive potential that lies within Africa’s one-billion-plus consumer base. These financial institutions have also been spurred to reconsider the way in which they do business and embrace innovative strategies so as to – go beyond the realm of ‘traditional banking products’ per se and – shape products to fit African consumers’ rising financial sophistication needs.

Should banks be able to tap into the large ‘under/unbanked’ and ‘uninsured’ populations across the continent, it could lead to a significant increase in new deposits and premiums, respectively. Also, even at lower profit margins, the benefits associated with leveraging economies of scale should contribute to returns on the bottom line. So, while not without challenges, Africa’s financial services sector presents compelling investment opportunities – don’t you think?

Related articles:

Insurance in Africa, who is buying it? 

Insurance for companies moving into Africa – an essential precaution

David Okwara

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