The most common measure of the development of the insurance industry is the insurance penetration rate which is expressed as the ratio between insurance premium volume and GDP.
Insurance penetration in Kenya is stagnating at around three per cent compared to the highest in Africa, South Africa, around 13 per cent. Recently, countries such as Ghana, Ivory Coast, Morocco and Angola are seeing a rise in penetration rates.
Other measures of the sector include premium density and the actual number of the insured. What can Kenya and other African countries do to improve on their insurance penetration rate? A key focus must be around product development.
Micro insurance, the so-called bottom of the pyramid, has long been viewed as one of the key ways to foster financial inclusion and growth of the insurance industries in Africa. Most of the people insured are from the formal sectors of the economy and there was need to design a product that could meet the needs of people in the informal industries, the argument goes.
Some of the main characteristics of micro-insurance include low levels of premiums, simplified policies with smaller benefits, relatively easy accessibility, simple collections and claims processes.
Since the introduction of micro-insurance in Kenya, we have witnessed its growth and evolution in an attempt to encourage uptake. However, challenges remain.
The factors are complex due to the very nature of insurance and global pressures that are also impacting Africa.These challenges include lack of a developed legal framework surrounding micro-insurance, inappropriate distribution channels, poor pricing of products and negative perception by target clients. However trust and understanding stand out.
Arguably, the biggest influence on whether people take up micro-insurance products is how they perceive insurance. Unfortunately, most low income and middle income individuals view insurance as an expensive product reserved for the “wealthy”.
If it was a choice of buying bread, seed or insurance then insurance would always be the lowest priority. This is lack of knowledge not just in the informal sector but more typically so and more typically in rural areas.
Another layer to view this is that most people do not trust insurance organisations and their employees. Settlement of claims is a major source of doubt.
The trust gap can also go both ways- it is sometimes inferred insurers are reluctant to play in this space as they have concerns around collection of premiums and fraud exposures. This is why micro-insurance is a strategic decision that requires scale. The reality is the consumers in this segment do not understand how to use the product they have bought.
The key to penetrating the micro-insurance target market is addressing perception and convincing low- and middle-income earners that property, should be protected.