Where something doesn’t exist, only gives the potential for it to exist for those that can envision and mould the future. This strongly applies to the insurance industry in African countries. Where most developing countries have polished their secondary sector of their economy, it is only time for them to develop and nurture a tertiary sector barring any major setbacks. A secondary sector is when an economy can use its raw materials to produce manufactured goods. A tertiary sector is where service-based goods are offered such as financial services.
Within the right environment, it has already been proven that the insurance industry can be developed in Africa as countries such as South Africa account for 70.6% of Gross Written Premiums (GWP) in Africa. Although, why is this the case? What type of insurance products and how can this be translated to other countries in Africa?
South Africa Initial Growth
A force that has propelled the growth of the insurance industry in South Africa is structural reform. The governing body in South Africa has made certain types of insurance compulsory. For example, 2 types of required insurance in Africa are known as ODMWA and RAF which are known as Occupational Diseases in Mines and Works and Road Accident Fund respectively. The first protects the workers of one of the biggest industries in South Africa accounting for a significant proportion of the initial growth. The second protects all road users from accidents on the road and protecting your vehicle.
Although this will directly force the insurance industry to grow due to the fact aspects have been made a legal requirement, I believe that the knock-on effects are the most impactful part of this decision. For example, the insurance products that have been made compulsory, none of them have been life insurance policies. Statistically, 80% of gross written premiums in South Africa account for life insurance policies. This shows how knowledge and experience in the insurance industry allow people to learn and trust the insurance industry and has translated to growth in multiple types of insurance products.
However, there are reasons why growth in the insurance industry in Africa has been stagnant. Firstly, is corruption. Most citizens do not believe in their nations governing body for good reasons as underdeveloped countries usually experience higher levels of corruption. A reason why South Africa has lower levels of corruption than others in Africa is due to their electoral system is a proportional representation where everyone’s vote counts. Which in most countries would prevent a dominant party state. Until there are more ethical governing bodies this will continue to prohibit growth.
The insurance industry can only thrive with one major component being data. Insurance companies work off trends shown in data to be able to help predict the future. Although the use of digital payments is increasing, a majority of payments are made in cash which is much harder to track. The same applies to other estimators such as mortality experience so rigorous investigations will need to take place to obtain this knowledge. Without this data insurance companies will struggle with pricing and reserving as their basis will be rough estimates. For data-deprived countries, those who wish to join the insurance industry will be seen as more of a gamble than an investment.
Obtain The Data
However, this brings me back to the opening statement of this article. Someone needs to obtain the data, so those who invest have the possibility to obtain the whole market share. Going back to how structural reform could help the insurance industry develop, countries such as the UK have the ONS (Office of National Statistics) allow for statistical transparency. This will help the insurance industry gain the data to make a start but are dependent on developed and ethical governing bodies.
The insurance industry was expected to grow at the rate of 7% per annum from 2020-2025 barring any major setbacks. However, with the COVID-19 pandemic, this statistic has fluctuated. Contrastingly, with information provision, the pandemic may have encouraged people to understand the importance of insurance and perked interest in the industry.
To summarise, it is completely understandable why scepticism is thrown on the insurance industry in Africa due to corruption and the lack of data. Acts such as structural reform, obtaining data and information provision to the public will nurture growth. Those who crack the formula will heavily profit and see the industry boom.