Africa’s low insurance coverage: Apathy or ignorance?

BY: Graphic Business
Steve Kyeremanten — MD, Activa Ghana

It has been established that only about five per cent to six per cent of Africa’s estimated 800 million people, excluding South Africa, has access to insurance services.

The low insurance penetration in Africa may be analysed from two perspectives: the structural economic perspective and the demand and supply considerations.


The famous Peruvian development economist, Hernando de Soto, has established that developing countries are characterised by non-representation of substantial assets in recognised formats such that their financial value could be capitalised. Such assets could in principle be protected with insurance coverage. In effect, such potential assets structurally remain outside the scope of insurance and the owners of such assets being the majority of Africans remain without insurance on their assets.

Conversely, African insurers are practically barred from covering such risks and must contend with providing insurance for only assets in the formal sector.

With respect to personal insurances, the same structural economic impediments prevail such that only a fragment of African nations’ potential labour markets can be found in the formal sector earning regular income with which they could buy life insurance, for example.

In a FINSCOPE Ghana 2010 study, commissioned by Ghana’s Ministry of Finance, it was concluded that ‘64 per cent of those with no formal insurance regard affordability as a barrier.’

In the same study, it was also found that ‘income for the majority of the adult population is irregular and inconsistent small amounts.’

Demand and supply issues

It has been established from the preceding paragraph that low-income levels represent a significant influence on effective demand for financial products and services such as insurance.

The above mentioned FINSCOPE Ghana 2010 study reveals that ‘in exploring why the financially excluded do not use formal financial products, income-related reasons are most frequently cited’.

Indeed, the study shows that ‘financial products and service usage is inextricably linked to people’s livelihoods’.

Effective demand for insurance is adversely affected by competing coverage of contingencies in the African social setting by mechanisms based on communalistic family structures in which loss and damage to property, as well as injury or death are usually provided for.

An alternative solution to funeral insurance for example is family-organised funerals which are sometimes elaborate and expensive.

To be fair, in many African markets, formal funeral insurance is making serious in-roads and driving phenomenal growth in life insurance. Many African communities may pool resources in the family based on the societal value of ‘ubuntu’ and ‘solidarity’ to fund the education of their intellectually gifted children much in the same way as a child education insurance policy would pay for child education.

As regards damage or loss of property, African communities would typically come together and rebuild one’s property lost through fire. Non-family groupings providing similar support include clans, clubs and associations.

Demand for property damage and liability insurance by industrial/commercial concerns in the formal sector is influenced by need and potential benefits based on clients’ information and knowledge.

Financial and accounting management considerations underpin demand such that large and medium-sized companies who may have borrowed to finance their operations are compelled to protect their material assets and exposure to liability as a condition for lending by commercial and investment banks.

Demand for insurance products may also be based on local requirements such as compulsory motor insurance.

Finally, demand may be influenced by the available range of insurance products which in Africa may be of a limited nature.

Certain niche and non-traditional products such as agricultural insurance, micro-insurance, political risks, trade credit and natural catastrophe covers are of diminished importance in Africa.

The impact of advertising-driven demand is also not felt in insurance.

The other side of the coin to the above painted demand scenario is a conclusion of the FINSCOPE Ghana survey, which established that health Insurance, under Ghana’s National Health Insurance Scheme (NHIS), has achieved almost 60 per cent coverage of the population whereas not more than 1.4 per cent of respondents in general had formal insurance. The high coverage of health insurance among the population is obviously driven by need.

On the supply side, both traditional and non-traditional products are available and on offer in most African markets through the support of reinsurers and intermediaries both local and foreign. However, sales and marketing of products are considered not competitive and effective enough.

Distribution channels are characterised by the lack of innovation and extensive reach. Inefficient internal processes and long-winded bureaucratic procedures involving delivery of policies and processing of claims adversely affect the delivery of insurance such that potential buyers are easily discouraged.

On the issue of possible lack of consumer confidence, it must be remembered that the underlying insurance principle of ‘uberrimae fidei’ (utmost good faith or most abundant faith is the legal doctrine which governs insurance contracts) must always be respected by practitioners otherwise the small numbers of insurers who are guilty of moral hazard, risk further eroding consumer confidence.

Pricing of policies is not always technically based on results that prices are either too high or too low. Sales and marketing are insufficiently supported by communication activities.

Product and marketing research and development remain severely underfunded. Technology backed retail products in insurance are generally absent as compared to the banking sector where for example in Kenya, ‘M-Pesa’ (mobile phone banking) products have become important and widely used by the population.

Remedial measures

Role of governments: In trying to chart the way forward in resolving the low penetration of insurance in Africa, it would be necessary for African insurance markets and governments to undertake in-depth and extensive surveys and ‘research into how individuals source income and how they manage their financial lives.’

Such a study ‘will provide insight into attitudes and perceptions regarding financial products and services’ as has been established by the FINSCOPE Ghana report.

It is suggested that the development of insurance markets is directly linked to the economic fortunes of countries. It is, therefore, expected that sustained economic performance in Africa would result in an increase in the rate of insurance penetration.

The enterprise level: At a micro-economic or enterprise level, an increase in banking intermediation in various economies is expected to result in further development of various insurance markets.

A careful study of both demand and supply aspects of the phenomenon of low penetration would be a necessary backdrop in establishing strategic initiatives to bolster insurance penetration.

Efforts in this direction should be undertaken by national insurance regulatory bodies through modernised and strict regulation, and by national insurance associations, sub-regional and regional insurance associations through self-regulation and compliance with established codes of industry ethics.

Public education: Conferences and seminars deepen knowledge and experience sharing. Insurance operators who are ultimate beneficiaries of expected growth in the demand for insurance must play their part in improving distribution and offering innovative, needs-based insurance solutions.

From a macro-economic perspective, governments stand to benefit from supporting the growth of insurance which as is known in developed economies, contributes significantly to the Gross Domestic Product (GDP) of countries through savings, investments and other instruments of financial intermediation.



The writer is the Managing Director of Activa Ghana