The top three reasons why business owners in Nigeria don't have insurance are a lack of trust in insurance companies, a failure to see the need, and religious beliefs.
The same can also be said for individuals, but there's a new wave of insurance that can solve this problem.
It is a type of insurance where the insured doesn't know they are buying an insurance product, eliminating the biases of trust, necessity, and religious beliefs.
The insurance type commonly referred to as bundled insurance is being championed by startups such as Pula and Etherisc. Mostly used in East Africa, they are focused on smallholder farmers.
Speaking with Techpoint Africa, representatives from both companies explained their approach to insurance and how it could help with Africa's low insurance penetration.
Why is insurance penetration in Africa low?
As of 2022, South Africa had the highest rate of insurance penetration in Africa at 11.3%, followed by Namibia (7%), Morroco (2.1%), and Kenya (1.2%). Other countries on the list had less than 1%.
In 2021, Africa had an insurance penetration rate of 2.1% the second lowest in the world after the Middle East with 1.7%. Various scholars have researched the state of insurance in Africa and come up with many reasons for its low penetration.
According to the Journal of Financial Risk Management, some of the reasons for low insurance penetration in Botswana are poverty and lack of awareness.
In the Journal of Developing Country Studies (2020) the lack of funds is also a reason, but other reasons, such as poor legal and judicial systems and lack of qualified personnel also contribute to why Africa has low insurance penetration.
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While all these reasons could be valid, Augustina Steve, Assistant Director, Complaint Bureau Life at Nigeria's National Insurance Commission (NAICOM), feels one of the main issues impeding insurance penetration in Nigeria is a lack of trust and confidence in the Nigerian insurance industry resulting from non-settlement of claims.
Steve believes that the problem with insurance in Nigeria is a bad image.
“Non-settlement of claims has negatively impacted confidence in the industry,” she said in an FSDAfrica article.
Her take is corroborated by Intelpoint's Nigerian Insurance Industry Report, which found that the main reason business owners have refused to get insurance is because they do not trust the insurance companies.
Eunice Kinungi, CEO of Kenya's Griffin Insurance, also agrees with this.
She told New African magazine that “insurance, unfortunately, does not have the best reputation, and there is a general distrust of insurance companies perpetuated by poor customer service and unpaid claims.”
However, this does not take away from the fact that there are still other challenges such as religious beliefs, poverty, and lack of awareness.
How bundled insurance can increase insurance penetration in Africa
When Techpoint Africa spoke to Etherisc in 2022, the insurance model reduced the barrier to entry for the insured. It did this with something called parametric insurance, which helped insure farmers against things like climate change or bad weather.
According to Michiel Berende, Chief Inclusive Officer at Etherisc, it is a type of insurance that executes payment based on external parameters. For instance, if a farmer insures his crops against flood, he has a right to insurance claims if there's a flood.
But as simple as it sounds, there had to be some technology and creativity to sell it. The bags of seeds that farmers buy come with scratch cards. When they send the numbers on these cards to Etherisc via Unstructured Supplementary Service Data (USSD), Etherisc’s Generic Insurance Framework captures their geolocation and receives information about the area's climatic conditions with satellite data.
This data has an added blockchain/smart contract layer, which means that if a farmer ensures his farm against flood, the smart contract automatically executes the payout.
An insurance premium of $0.5 has also been added to the price of seeds, which means it is affordable insurance. Bundling insurance premiums on top of seeds is where bundling as a way of sharing insurance comes in.
Pula, a Kenyan insuretech that raised $20 million earlier this year also uses a similar insurance tactic.
One of Pula's key collaborations is a long-standing partnership with the Zambian government, where they integrate insurance premiums into fertiliser and seed packages, extending their reach to farmers nationwide.
In Ethiopia, Pula teamed up with the World Food Programme (WFP), German Development Bank (Kf)W, and a local insurer to embed insurance within an input voucher scheme, benefitting 122,000 farmers.
Bundling insurance works.
Pula, for example, has recorded success with its insurance style. Thomas Njeru, the startup's co-founder told TechCrunch that "our impact is reflected in our renewal rate and growth. Eighty per cent of the farmer groups and aggregators that buy Pula-developed insurance products from our partner insurers renew the following year, which is above the industry average."
In Etherisc's case, payout cycles have been cut down from 45 days to 24 hours.
Can bundling insurance work outside agriculture?
While one can argue that this form of insurance will only work in the agricultural sector, Etherisc's Co-founder, Jan Stockhausen, thinks otherwise because the company is currently working on subsidising insurance premiums with carbon credits.
The need for subsiding insurance premiums arose when Etherisc realised that the price of insurance premiums were rising because of worsening climate conditions.
Carbon credits allow companies to release some greenhouse emissions. They buy credits from other companies that have taken proactive steps to reduce their own greenhouse emissions.
Etherisc teaches farmers sustainable agricultural practices, such as climate-smart agriculture and agroforestry, which can help them earn carbon credits.
The revenue generated from the sale of these carbon credits could be used to subsidise the cost of insurance for farmers, making it more affordable.
Stockhausen argues that this strategy can be used in other forms, such as car insurance. Ride-hailing drivers, for instance, can decide to use EVs and earn carbon credits to pay for insurance.
In theory, this could work, but carbon credits aren't that easy to come by. In Nigeria, the idea for a carbon credit market is still in the ideation stage, which makes earning these credits difficult.
Without subsidies like carbon credits, insurance will get more expensive, and this, according to Fiona Hoffman-Harland, Director of Strategic Partnerships and Growth at Pula, is one of the major challenges in selling insurance — even the bundled one.
Hoffman-Harland noted that even in developed economies where there is high insurance penetration, it is still being subsidised by the government.
Therefore, the answer to general insurance penetration in Africa is either a reduced level of poverty or government subsidies.
