Microinsurance FOCUS Note Series Microinsurance Development Process – Zambia

 

TAG Zambia Microinsurance

Technical Advisory Group

Microinsurance Focus Note No. 7 | September 2015

The Microinsurance Focus Note Series is published by the Financial Sector Deepening Zambia (FSDZ). This Focus Note has been authored by Lemmy Manje, Microinsurance Coordinator on behalf of the Technical Advisory Group (TAG) and FSDZ. The opinions expressed are not necessarily of the two named organisations but those of the author. Photo: © 2013 Lemmy Manje

 

The Microinsurance Focus Note Series provides insights on the evolution of Zambia’s microinsurance market, sharing achievements, challenges and lessons learned, as well as highlighting future areas of focus. The performance figures are based on the Microinsurance landscape survey data for 2014.  

Developing an inclusive insurance market in Zambia Creating a vibrant and inclusive insurance market that provides access to appropriate insurance services to low-income people in Zambia has been the focus of the Microinsurance Technical Advisory Group (TAG), constituted in 2009. Experience from this process so far shows that improving access to, and quality of, better risk management financial services for the low-income market segment is no easy task, especially in a country where penetration levels are very low, and where a wide-range of constraints need to be both understood and addressed if results are to be attained. In spite of these challenges, Zambia is testament to the progress that can be gained from effective stakeholder engagement and participation: From less than an estimated 100 lives covered through credit life policies in 2009, over three million Zambians are now reported to have insurance, from simple funeral cover to more complex weather index insurance. A large proportion of this cover is provided through embedded schemes, with Airtel Life, launched in 2014 as a loyalty product, currently dominating the market. Overall, evidence suggests that Zambia’s microinsurance sector is growing, with an increasing number of insurers exploring viable business models.

Market performance indicators

• Insurer participation: Over the last five

years, there has been an increase in the number of insurers engaged in the microinsurance business. From two in 2009, there are now several that have launched microinsurance products in the market. The larger life insurers - Madison Life, Professional Life, African Life and ZSIC Life - remain the most active players. Within the last two years, some general insurers are also starting to become more active. FOCUS General and MayFair Insurance seem to be leading in piloting microinsurance for agriculture, mainly weather index insurance. Other general insurers getting involved include Hollard General, NICO Insurance, Advantage Insurance and Professional Insurance Corporation (PICZ). Changing distribution: In 2009, microinsurance was mainly distributed by microfinance institutions (MFIs). Five years on, a variety of distribution channels are now involved, including banks, mobile network operators (MNOs), workers unions, the post office, microenterprise associations, community-based agents, agribusinesses and farmer groups, with MFIs and MNOs surpassing other channels in terms of scale.

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• Increasing coverage: Insurance coverage

within the low-income market has been increasing steadily, particularly life and funeral insurance. In 2013, nearly one million lives were covered. By the end of 2014, the launch of Airtel Life helped increase that to over 3 million with the product accounting for 64% of life and funeral coverage. Credit life now accounts for 20% of coverage while weather index insurance accounts for less than 1%.

• Product performance: Although microinsurance remains a small portion of overall insurance business, it has nevertheless demonstrated continued growth. By the end of 2014, the gross written premiums (GWP) for life, funeral, credit life and weather was ZMW 98,087,736 (US$ 16,053,639), which is 4% of the total GWP of insurance business in Zambia. From 2009 to 2014, Credit life continues to dominate, accounting for 85% of the total GWP of microinsurance business; an indication that the product is still the most profitable microinsurance business line.

• Client value: Most business lines seem to be offering reasonable value to consumers. The average gross claims ratio for life and funeral products was 55%, which is positive, though its clear that product awareness is still a major challenge that impacts negatively on client value. Airtel is planning to switch their life product to an opt-in model in 2015, which should help to address the awareness challenge. Credit life had an average gross claims ratio of 41%. However, two microinsurance schemes had very low claims ratios 12% and 15% under credit life.

14,178,729

83,450,734

458,273

Life + Funeral Credit life Weather index

GWP - Microinsurance Products 2014 (ZMW)

55% 41%

191%

Life + Funeral Credit life Weather index

Microinsurance Performance 2014 Average Gross Claims Ratio

79.4%

20.4%

0.2%

Life + Funeral,

3,397,623

Credit life, 872,713

Weather index, 9,110

Microinsurance Performance 2014 Policies/Lives covered

Life + Funeral Credit life Weather index

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PACE analysis of two microinsurance products PACE is a tool developed by ILO’s Impact Insurance Facility to assess client value and focuses on four dimensions namely product access, cost and experience. The tool was developed in response to the microinsurance industry’s demand for a simple yet holistic approach to understanding client value in real time. The tool has since been applied on various microinsurance products in Africa and Asia. In Zambia, the first PACE analysis was conducted on two microinsurance life plans providing cover for funeral expenses and other financial demands resulting from death. The results show that two products were offering reasonable value on the product and cost dimensions but scored low points on access and experience dimensions. Summary of results: Good product but with limited offerings and small payout – a ‘cushion’ as opposed to significant payout. Access inhibited by low investments in promotions and the type of distribution channels used. Summary of results: Great value product but serious access problems and an opportunity to improve client experience.

Observations and lessons Scale alone is not enough: Some insurers are making good progress in scaling up their microinsurance products, particularly those working with appropriate distribution channels. However, some schemes are facing challenges in achieving or maintaining scale. This section includes some observations as to why this may be the case, some of which are confirmed.by the PACE analysis. • Several good products have access

challenges. While some products have been designed to be simple with minimum exclusions and streamlined documentation, there is room for improvement, particularly in terms of benefits: most products only offer a monetary payout and differentiation is currently only on price, sum assured and number of beneficiaries.

• Distribution remains a challenge. While many insurers are investing more in identifying appropriate distribution channels for their product, progress in defining win-win propositions and closing deals remains a challenge.

• Little attention is given to client experience. In

a market with little understanding of and experience with insurance among low-income people, there is need for greater focus on client experience including timely payment of claims, and customer care, as well as marketing and consumer education.

• More attention on managing distribution

partnerships is needed. Likely reasons for the partnerships that have failed to date include: failure to define and articulate win-win propositions with the parties involved, including poor alignment of goals and roles, and insufficient monitoring of partnership implementation. Most insurers are on a learning curve with respect to managing these partnerships effectively.

Organisational development is critical for success: While some insurers have been involved in microinsurance business for a number of years now, most have not yet invested sufficiently in structuring and developing the human resources and processes needed to really drive and support this business. This, in turn, has contributed to poor product performance that undermines the investment and also reduces prospects of creating a sustainable viable microinsurance sector.

Insights  

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LOOKING AHEAD

An industry approach to consumer education: Collaborating closely with the TAG, IAZ has been spearheading Insurance Week each year with support from the regulator and various industry stakeholders and in partnership with development agencies such as FinMark Trust and FSDZ. Insurance Week is an industry-led consumer awareness campaign aimed at promoting insurance as a risk management financial service and showcasing insurance product offerings. The campaign trail so far has had the following themes: 2013 Insurance for all 2014 My life, my well-being, my insurance During Insurance Week 2014, over 460 school children and 22 microentrepreneurs attended consumer education classroom-based sessions, while radio programmes, product exhibitions and television edutainment were also used to disseminate awareness messages to the general public. Key lessons from implementing the event so far: • Insurers and other market players stand to

benefit from increased awareness of insurance if they pool their resources in this way.

• Consumer education alone cannot trigger product uptake. It needs to be accompanied with an availability of appropriate products and ideally with testimonial marketing.

• Education programmes targeted at specific market segments are likely to yield better results than mass awareness through media. Through the implementation of targeted programmes insurers get a valuable opportunity to understand the needs of their targeted consumers, which helps inform appropriate product design. Interaction between insurers and microentrepreneurs during focused group discussions conducted as part of a course on market research for microinsurance in 2014 confirmed this: the microentrepreneurs demanded further interactions with insurers to understand product offerings.

“Lessons from other developing markets show that most microinsurance schemes that achieved scale did this so quickly by seeking out and maintaining access to large target groups, either through mandatory sales, partnerships or direct agents.” ILO Impact Insurance Facility, Briefing Note No. 25 In Zambia, the only microinsurance scheme that reached significant scale following its launch is Airtel Life. However, the planned transition from a loyalty to an opt-in model is likely to reduce this product’s scale in the future, with product education needing to play a much greater role in driving uptake. Other distribution models that have achieved promising scale include the partnership between Professional Life Assurance Limited and Zambia Postal Services. Consumer education is critical: The majority of Zambians still cite lack of knowledge of insurance as the reason for not buying - 42% in 2015 (FinScope 2015). Zambia’s Insurers Association of Zambia (IAZ) is demonstrating increasing interest and capacity in coordinating industry consumer education activities. The association has so far spearheaded two successful annual Insurance Week events and has plans for more. Regulation is necessary for propelling market growth: Zambia’s regulator, the Pensions and Insurance Authority (PIA) remains supportive of microinsurance market development. In 2014, with input from TAG and FinMark Trust, the PIA drafted microinsurance regulations, which were shared with industry for review. Two key issues that have been highly debated during this review process are: • Defining microinsurance: The regulations

define microinsurance based on national average income, with the proposed product benefit limits being 50% of the annual national average income, currently equivalent to around ZMW 25,000. Industry stakeholders consider this to be too high, observing that some conventional products would qualify within this ceiling.

• Microinsurer licensing category: In an early draft of the regulations, a new licensing category was included to encourage and permit new players that wished to only underwrite microinsurance. In line with global trends, this license would allow microinsurers to underwrite composite products. Market players raised concerns about this, in light of the history and rationale that led to separation of life and general insurance in 2006.

Insights  

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Growing the future demand for insurance: insurance education session with school children

Responding to these concerns, the PIA has dropped this licensing category, meaning that microinsurance will now only be able to be underwritten by registered conventional insurers. Some observations on this issue are as follows: • There is growing recognition globally that a

separate licensing category is essential for stimulating competition and growth of microinsurance business. Across many developing markets in Africa, Asia and Latin America, microinsurance is, to a significant extent, driven by companies that are specialising in microinsurance product development and distribution.

• Low premiums with high fixed and marginal costs result in most schemes struggling to reach profitability and sustainability. Allowing the underwriting of composite products should not be seen as unfair, but rather a realistic response to the unique characteristics of the low-income market and necessary for achieving product viability and sustainability.

• Irrespective of such as allowance, existing insurers should still be able to underwrite microinsurance products with limited additional effort, leveraging existing staff and systems.

The rationale for microinsurance regulation: Globally, there is recognition that specialised regulations can either promote or restrict microinsurance provision, depending on how they are structured. A well-designed regulatory framework is an important factor in enabling efficient microinsurance provision. Such a framework should not only provide rules on effective supervision, but also include provisions that facilitate innovation, scale and professionalism. Each country needs to contextualize its own regulatory framework based on factors such as regulatory regime, size of industry and state of the market. However, developments and emerging insights from other countries which are implementing their own frameworks help provide useful lessons on the impact of different provisions on business growth.

Insights  

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Looking ahead  

Zambia’s microinsurance sector is approaching a crossroads, requiring important actions from both the regulator and other industry players. The absence of regulations, albeit with a supportive regulator, has had both positive and negative outcomes. It has meant that products have been approved on a case-by-case basis rather than through the lens of a transparent framework. As more insurers have become engaged in microinsurance business and products have become increasingly complex, some approvals have resulted in disagreements within the industry, particularly, on which organisations are eligible to underwrite certain products. Going forward, close dialogue between the regulator, insurers and other stakeholders such as the TAG will be important. Zambia is praised for its market development process which is supported by local ownership and effective stakeholder engagement. Traction in product penetration is a positive outcome of this process, helping to justify on-going support to stimulate further growth. A new strategic goal of IAZ is to provide insurance cover to 6 million Zambians by 2019, a target has been endorsed by the TAG. Market facilitation activities will continue to be implemented and scaled up in future years to increase prospects of achieving this goal. Insurance providers still have much to learn in establishing and maintaining effective distribution partnerships, as well as in designing products that offer both client and business value. Capacity building in these areas will remain a core support activity. In 2015 and beyond, market stimulation tools such as the Microinsurance Acceleration Facility (MAF), currently financed by FSDZ, will focus on encouraging the piloting of innovative product benefit packages and distribution models that respond to the real needs of Zambia’s low-income people. Health and agriculture insurance will be specific focal areas for support including initiation of dialogue between government and the private sector on prospects for Public Private Partnerships (PPPs). Greater investment in consumer education is also required. IAZ will continue to position itself as an organisation that can put pooled industry resources to good use, through well-structured consumer education initiatives. Some associations around the world have made significant progress in this area. There is therefore so much to learn from and indeed so much to do in Zambia.

Microinsurance FOCUS Note Series MICROINSURANCE DEVELOPMENT PROCESS - ZAMBIA

FOR MORE INFORMATION Lemmy Manje Microinsurance Coordinator Email: lemmy_manje@msn.com Phone: +260 97 787 1427 Juliet Munro Technical Advisor – FSDZ/FSDA Email: juliet@fsdafrica.org Phone: +260 97 784 8311 Titus Kalenga Chairperson – Technical Advisory Group Email: titus@nicoinsurance.com Phone: +260 97 777 2238

TAG Zambia Microinsurance

Technical Advisory Group