LIFE ASSURANCE FOR EMERGING AND DEVELOPING MARKETS
History Life assurance is by no means a modern invention. Some 2000 years ago in ancient Rome; a form of life assurance was practiced by burial societies. The societies paid the cost of a members' funeral expenses out of monthly contributions and helped survivors monetarily. It is believed that these were year to year arrangements, and there was certainly no scientific evidence on which to base calculations of how much payments should be. Similar organizations sprang up in the middle ages in Britain as Trade guilds tried to provide the funeral costs of members.
Again, there is no scientific evidence to show how premiums were calculated. The earliest recorded life policy in England was affected on 15th June, 1583 when the office of Insurance within the Royal Exchange issued a policy. The policy was a twelve month term assurance. The first life Assurance company to be established in England was the Life Assurance and Annuity association. The company went bankrupt due to the premiums set too low.
There were a number of mutual life assurance schemes set up in the early 1700s. None provided their members with a fixed sum on death and they were short lived. The first life Assurance society founded on mathematical (Actuarial) principles was the Equitable Society which started business in 1762 as a mutual society under a deed of settlement. From the outset, it started by issuing whole life policies based on the principle of charging a level premium throughout life, calculated from the mortality tables and graduated according to age of entry. By the twentieth century, there were a large number of life offices doing business in the UK in ways which are now familiar. During this century, a variety of different policies emerged.
We now have health insurance, group policies, waiver of premium benefits and critical illness covers. Many life policies are now used for investment as well as protection purposes. In the 1960s and 1970s, unit-linked life assurance policies were developed and now a high proportion of new life whole life and Endowment business is unit linked. Throughout the twentieth century, sums assured increased to substantial amounts and this led to the practice of reassurance.
Another development has been the formation of life office subsidiaries by financial institutions which were not originally insurance companies. Many of the banks and building societies now have their own life assurance subsidiaries.
THE MORTALITY TABLES
The early burial and funeral societies were not run on sound mathematical principles as there were no statistics on which to base the contributions. Civilization had not yet developed to the extent of recording births and deaths and thus there was no real idea of what human’s expectation of life was. One of the earliest mortality tables was the North Hamptons Table based on the deaths in the years 1735-80 in the town of North Hampton. This was followed by the Carlisle Table published in 1815 based on deaths in that town from 1780-1787. This was used by life office for many years.
In the nineteenth century, accurate mortality tables became possible because the Government introduced a census in England every ten years from 1801. This gave much more reliable data from the whole country rather than just one town. The English life table no 1 was based on the 1841 census and further English Life tables were based on subsequent censuses. These became more comprehensive and reliable as the years passed. The only problem was that the tables were based on the whole population and not insured lives, where the experience might be different.
CURRENT MARKET TRENDS
According to Insurance Penetration Report- Sigma vol. 2-2011, a total of US$. 2,156 billion was written in the Industrialized World. This was an increase of 1.8% from the premiums written in year 2009. The contribution to this Global figure was made up of regional premiums as follows:-
Premium figures in US$.
Billions REGION UY 2010 UY 2009 MARKET SHARE GROWTH
Western Europe 946 920 38.00% 2.8%
Japan 609 595 24.00% 2.4%
North America 558 561 22.00% - 0.6%
South & East Asia 238 202 9.5% 18%
Latin America & The Caribbean 55 49 2.2% 12%
Africa 47 48 1.9% - 2.4%
Oceania 39 38 1.60% 2.7%
Central & Eastern Europe 20 19 0.8% 5.7%
Middle East, Central Asia & Turkey 4 3.57 0.2% 12%
TOTAL 2,516 2,435.57 100%
Most of the regions experienced growth in premiums in year 2010. The highest growth was experienced in Japan and the newly Industrialized Asian Countries, but weaker in the US and some European Countries and of course Africa. In North American, the premiums suffered a decline due to the challenging economic environment.
New Business premiums contracted for the third year in a row and this was mainly due to the slow recovery of employment and wage growth. In Africa, life assurance premiums fell by 2.4% to US$. 47 billion in 2010. This was majorly attributed to a 2.1% decline in the South Africa Market, which is the dominant market and accounts for more than 90% of the African premiums volumes.
The 2.1% drop was because sales of annuities were adversely affected by lower interest rates, which resulted in lower annuity rates. Life Insurance in the region is likely to experience growth in the medium term as the various economies gain momentum. Premiums in Egypt, the third largest market in Africa also shrank by 18%. However a number of Takaful companies have set up operations in Egypt as well as in other African countries and this is likely to increase the appeal of life assurance to the continent’s Muslim population.
Life Insurance in the region is likely to experience growth in the medium term as the economic recovery gains momentum. There is a huge potential for Life assurance in Africa, with currently 2% penetration.
The South African Life Assurance Market is without doubt the biggest and the most sophisticated in Africa and compares very well with the other World Markets.
SUMMARY OF INSURANCE PERFOMANCE IN SELECTED COUNTRIES OF AFRICA. COUNTRY LIFE PREMIUMS IN US$ (Million) PENETRATION %
South Africa 43,186,000,000 12.00%
Morocco 827,000,000 0.90%
Egypt 647,000,000 0.30%
Namibia 610,000,000 5.00%
Kenya 334,000,000 1.05%
Nigeria 188,000,000 0.10%
Tunisia 102,000,000 0.20%
Algeria 87,000,000 0.10%
The African continent is on the path of Economic recovery and growth in most regions. This would be conducive to growth in Life assurance; new markets are opening up as the concept of National Saving is catching up. In Eastern Africa, political stability has ushered in Economic growth that is now seeing the re-emerging of Life Assurance in Rwanda, Burundi, Tanzania and Uganda and growth of the same in the Kenyan market. In the west and North, political stability has also ushered in economic growth that is providing Life and Pensions growth environment.
DEVELOPMENT OF LIFE ASSURANCE IN AFRICA
As compared to other Continents, Africa is regarded as an emerging and developing market. Historically speaking, there existed in African Traditional Social Security System which was strictly y guarded by the family systems, myths and rulers of the day. They were based on traditional beliefs and the extended family system that covered old age, and spouses and children of the late family head. Colonization of Africa introduced the cash economy that eventually played total havoc with the subsisting traditional social security systems. It also brought with it separation from rural to urban life.
By and large, the traditional saving and social security system became dysfunctional and less effective. With the benefit of hindsight, we can say that they were the best and most successful cooperative ventures in the world. They had provided Life Assurance, Pensions, Group Life and Health Assurances in their simple traditional ways. There was care for the bereaved widows and children, Education and growth and personal developments. We have since attempted to institute the Western type of social security programmes and have met with limited success due to the following reasons:-
- Poor transition from traditional groupings into modern cash dominated economies that emphasize personal wealth creation.
- Bad governance by new regimes which replaced colonial rule and these regimes were more interested in personal wealth accumulation with little regard for the improvement of the standards of living for the rest of the population. This is in fact at the expense of the rest of the population.
- Poor allocation of resources towards long term investment ventures to create appropriate infrastructural developments managed on professional basis.
- Developing economies where growth has been stunted by poor or lack of planning and experiments with ideologies.
- Economies highly dependent on debt financing to the exclusion of domestic savings capacity mobilization.
- Poor management of the few Social Security Funds or private occupational
Group Pension Funds, leading to loss of benefits by members and thereby breeding justifiable suspicion of any such schemes and of Life Assurance in most countries. Life assurance in Africa has tended to follow or has been influenced by the politics of the Continent, the management or mismanagement of economies in some parts of the continent and in some regions it has been influenced by religion and traditional beliefs. In some societies, it is a taboo to plan for ones eventual demise and it is taboo to plan for own funeral so one would find it difficult to sell funeral assurance in such societies.
CHALLENGES FACING THE LIFE ASSURANCE INDUSTRY IN AFRICA
The African Life Assurance Industry is becoming of age, but there are challenges that must be overcome and some of these challenges are:-
- The AIDS pandemic
- Slow growth in Information Technology
- Lack of Skills
- Lack of up to date and relevant rating guidelines
- Low literacy levels
- Poor communication systems
- Poor economic performance
- Bad Politics
- Lack of /under utilization of resources
These are just some of the problems and challenges that life Assurers in Africa have to contend with. The Life Reassurers participating in the African Markets will also need to focus on these problems and device helping life Assurers overcome them, through Training and Skills Development. The Reassurers can also help in the areas of Information Technology.
LIFE REASSURANCE IN AFRICA
Reassurance business is by its nature international and hence there are Reinsurers from Europe, America and Asia participating in Risks and programmes from Africa. Africa has also put in place Reinsurance Companies in several regions. In these category we have continental one like Africa Re, Regional one like Zep- Re and local private and publicly owned reinsurers. In terms of skills and resources, these reinsurers still have a long way to go . The old traditional way of doing reinsurance business is fading off as demands and needs of Life Assurers’ are changing. Life Assurers now face stiff challenges from other Financial Houses who are offering competitive products. There has been a shift from the traditional Life Assurance product to new and exciting investment products. Reassurers need to find ways of nurturing these products to ensure their continued growth.
LIFE ASSURANCE IN KENYA
The penetration of insurance services in Kenya is almost 2%, which is way below the global average. There is significant untapped market potential. There is need for Insurance Companies to come up with more strategic view on how to grow their business and increase the market share/penetration to the current 2% share. This poor performance can be attributed to:
- Poor goodwill
- Lack of awareness
- Expensive products
- High Inflation
REGULATORY FRAME WORK
The main statute regulating the industry is the insurance Act; Laws of Kenya, Chapter 487 which governs its operations. It came into being in 1987 when the office of the Commissioner of insurance (now the Insurance Regulatory Authority) was formed. The authority is charged with the following duties:
- Enforcement of the provisions of the Act;
- Formulation and enforcement of standards of conduct
- Protecting policy holders
- Approval of tariffs and rates of insurance in respect of any class or classes of insurance Self regulation also happens through AKI – Association of Kenya Insurers and AKR, the Association of Kenyan Reinsurers.
Distribution accounts for the largest element in insurance costs and impact the profitability. Distribution capabilities strongly influence product design and have a direct impact on the insurer’s image. Integrity of distribution channel is a key concern of regulatory mechanism.
This is a network of management personnel, sales and service support personnel structured to distribute life insurance products. It involves the sale and service of insurance products on a personal basis, usually one- on- one (agent to buyer) The agency channel of distribution accounts for about 90% of all the individual life insurance business in Kenya (AKI- (2009) The Agents distribute all types of products and there are over 4000 insurance agents in Kenya. Two types of exist:
- Independent Agents
- Tied Agents BROKERS A broker is an agent who negotiates contracts of purchase and sale.
The broker is a corporate entity that serves the applicant for insurance by assisting in placing risks. Channel accounts for about 90% of corporate life benefits and general/nonlife insurance business. The Channel is highly fragmented with 5% of the brokers controlling more than 90% of business. There are 141 licensed insurance brokers Compensation is 100% commission
Involves an insurance company negotiating a contract with a banking institution which in turn sells the insurance company’s schemes alongside its banking products to its existing and new clients. This method is gaining popularity globally and is gradually breaking down traditional barriers in how businesses supply financial products and services. The products can be stand alone or embedded in the banking products – Credit Life. Current Challenge in the Kenyan market is the banking act that inhibits banks from selling insurance products.
This method gives third parties the right to participate in the company’s business as agreed upon in the terms of the franchise agreement. Examples include car manufacturers/dealers, established supermarkets and retail chains (e.g. fire and theft insurance on electronics), Mobile phone companies), supermarkets (food stores/restaurants (e.g. personal accident-PA- insurance) airlines and travel agencies (travel insurance) Method commonly used to distribute general & medical insurance.
This is the method of distribution that permits the supplier and the consumer to make transactions directly with each other. Under this method consumers have direct access to the supplier through the mail, by telephone, or other media. Companies using this model have direct marketing staff responsible for handling direct client value chain.
The current channels are deemed appropriate for Kenya’s level of development, literacy levels and education. However, these channels have only been efficient to a small extent because they have not been able to reach out to a large percent of the Kenyans. Brokers have been particularly efficient in reaching out to the high end in the market while agents have only reached the individual clients (mainly middle income earners and the employed people).
- Bancassurance is on the other hand still a young channel in the industry and very underdeveloped.
- Other channels that are seen to have high potential are;
- Partnering with community based organizations
- Invisible insurer
- Virtual marketing WAY FORWARD
- Retain the existing channels due to their efficiencies and complexity of insurance products that require human intervention.
- Explore alternative channels so as to increase the level of penetration within the market. – Alternative channels with high potential and that the Kenyan insurance businesses can adopt are; Bancassurance, internet led channels, worksite marketing, telemarketing, partnering with community based organizations, invisible insurer and virtual marketing.
- Develop simple stand alone products that can be sold easily through other channels.
- Develop more innovative products that can be sold through other channels.
- Invest more in technology to enable them take full advantage of emerging channels.
- Advocate for legal amendments to the law to allow adoption of other channels.
THE AUTHOR IS THE TRAINING MANAGER ZEP- RE