NAIROBI, Kenya — In sub-Saharan Africa, excluding South Africa, total insurance penetration remains low — around 1 percent of gross domestic product per capita, far from the 5 percent level observed in Asia. Experts agree that increased insurance penetration — including for life, health, property, and livelihoods — supports growth and development, and can protect the most vulnerable.
But as part of the informal economy, most workers in Africa lack traditional, employer-provided insurance. At the same time, insurers have been slow to tailor their products and services to the local realities of the African context, and have unsuccessfully tried to repackage complex and expensive products to fit the needs of emerging customers, Garance Wattez-Richard, head of multinational insurance firm AXA’s Emerging Customers department, told Devex.
Now, a new generation of tech-driven microinsurance products is helping to fill the gap and provide a safety net for those working their way out of poverty.
The evolution of microinsurance
Piggybacking off the microfinance craze of the late 1990s and early 2000s, the development sector began exploring a new form of insurance to improve financial inclusion for vulnerable people in developing markets. A first wave of donor money flowed into the space. In 2007-2008, the Bill & Melinda Gates Foundation issued grants of $24.4 million to Opportunity International, one of the world’s largest microfinance institutions, and $34 million to the International Labour Organization, to support the exploration of inclusive insurance schemes. These products, simplified and cost-adjusted to meet demographic needs, became known as microinsurance.
The ILO funding seeded between 70-80 pilot projects and supported the establishment of a microinsurance working group housed under the Consultative Group to Assist the Poor at the World Bank. The CGAP working group evolved into the MicroInsurance Network, a global multistakeholder platform for professionals and organizations that are committed to making insurance inclusive.
"Using insurance and risk-management approaches ... effectively is critical to achieving several of the Sustainable Development Goals because of the resilience they can bring to vulnerable groups," said Katharine Pulvermacher, executive director at the Microinsurance Network.
The group’s research led to the establishment of a wave of microinsurance companies, including MicroEnsure and Pula Advisors, which are now operating in Africa. Their goal is to protect some of the world’s most vulnerable people from developing market risks that could destroy their lives and livelihoods.
Insurance from MicroEnsure saved George Kamau Githome, who sells movies and hardware supplies from two wooden kiosks he owns in Mathare, one of Nairobi’s largest slums. The small-business owner’s stalls burnt down, leaving him with no source of income to support his two wives and 10 children. “I was crying,” Githome told Devex. “Now where will I start and how will I begin?”
“It struck me that all this great work going on in development was fantastic, but if we couldn’t put a safety net under people that stops them from falling back when inevitably bad things happen, then we’re all wasting our time.”— Richard Leftley, CEO at MicroEnsure
But Githome had taken out a loan from a microfinance institution, and property insurance was bundled into it. “They paid off my loan and supported me with something small,” Githome said. “Then I started this business. I was able to go on and grow.”
MicroEnsure uses mobile technology and data-driven approaches, including partnering with major telecommunications companies, to provide microinsurance to small-business owners. Customers can enroll and register their insurance using simple mobile phones; send claims documentation using WhatsApp; and receive payouts via mobile money services.
“They’re trying to work their way out of poverty, but they’re only one disaster or two disasters away from being back below the poverty line,” said Richard Leftley, MicroEnsure’s chief executive officer. “It struck me that all this great work going on in development was fantastic, but if we couldn’t put a safety net under people that stops them from falling back when inevitably bad things happen, then we’re all wasting our time.”
As MicroEnsure’s insurance products have gained popularity and demonstrated financial viability, the company has transitioned from a model supported by development donors to a business attractive to private sector investors, including Omidyar Network and AXA.
“Microinsurance, by its very nature, is a lower-cost insurance product so then it can be accessible to poorer people. But … to attract the private sector without the need for donor support for ever more, it needs to be delivered at a large scale, for it to be sustainable. If it can’t wash its own face, it won’t last,” said Emily Coleman, an insurance expert with the International Fund for Agricultural Development.
But while some companies are now shifting to a private-sector driven model, industry experts believe donor money is still critical to helping drive technological innovation in microinsurance.
“There’s a need for someone to fund the high-risk startups, many of which will fail, but some of which will succeed and will revolutionize the market. And I think that’s the role for the donors,” said Leftley.
A “second wave” of donor money is now helping microinsurance companies continue to drive innovation, by supporting pilots that are experimenting with how cutting-edge technologies can increase insurance penetration in emerging markets.
Pula, which has received funding from both donors and private sector investors, employs satellite technology to track rainfall patterns and other variables, and uses this data to provide index insurance to smallholder farmers.
These methods have made it easier and cheaper to insure thousands of farmers in remote locations across Africa, allowing them to better manage risks, invest more confidently in their diverse livelihoods, and increase productivity. Still, fewer than 1 percent of smallholder farmers in Africa have agricultural insurance.
Henry Jaru and his father Thomas, smallholder farmers in northern Nigeria, live in perpetual uncertainty from threats to each year's harvest, such as poor rainfall and crop disease, but they have never bought insurance for it.
"Our experience with insurance in this country [means] we still have our doubts that it will work," Thomas told Devex. "Generally, when the time comes to pay you and insure you, you will not find them. They will show you the small print — you didn't do this, you didn't do that."
Pula has partnered with major insurance companies, seed and fertilizer distributors, and even credit unions to take on the costs of insurance and bundle it with the sales of other products. It has designed easy mobile sign-up schemes to attract skeptical consumers. This quick, easy, and cost-free option recently led the Jarus to purchase their first crop insurance.
Continued aid and development funding is also necessary to help improve regulations and create enabling environments for nascent insurance markets, some said.
“It’s very difficult to talk about, as a donor, just focusing on building the private sector because I think there needs to be understanding of the public sector … [including] the sensitization and capacity building of government,” said Coleman. IFAD uses donor funds to educate farmers, local insurers, and governments to improve the insurance environment in developing markets.
The German Society for International Development, GIZ, is also working to improve market regulations though programs such as their Access to Insurance Initiative, supporting the healthy development of insurance markets on the supply side, and providing information and increasing trust among consumers on the demand side.
For NGOs working in the space, continued donor support for microinsurance projects is crucial to improving the resilience of vulnerable people.
“I think [the private sector has taken over] in some respects, but for some more complex products, like climate insurance, it’s still a very immature market,” said Josh Ling, Mercy Corps’ director of financial inclusion.
“Donors are not funding microinsurance as such,” he said; with the attention to investment in startups and cutting-edge technology, governments, and regulation, “they’re funding holistic resilience interventions.”