Country: Ethiopia

The potential of remittance-linked insurance products in sub-Saharan Africa

Exploring the potential of remittance-linked insurance products to improve the resilience of households in sub-Saharan Africa (SSA)

Remittances are particularly important on the continent and serve as a lifeline to many households. Yet insurance products that enable the sustained flow of remittances or the resilience of senders and receivers remain unexplored in SSA.  Both remittance senders and receivers face unexpected risk events that have negative effects on their livelihoods:

  • Sender risk events: Senders may no longer being able to send remittances when they are faced with unexpected risk events such as death, disability, accident or illness. Exposure to risk events is exacerbated by the fact that many migrants work in the informal sector and are unable to access basic safety nets. Senders also face income shocks when remittance receivers face a risk event that has a large financial implication and requires senders to send additional money to receivers to cover the financial cost of the risk event. These types of events are unplanned and therefore put additional financial strain on remittance senders. 
  • Receiver risk events: Remittance receivers face shocks to their disposable income due to health, life, asset or business-related risks, which in turn negatively affect their ability to maintain their livelihoods. When this happens, receivers require greater support from remittance senders. Additionally, receivers also face reduced income if senders face shocks and are unable to send money to them. This could be shocks to the sender such as health or business risks, but also more severe risk events like disability or death.  

However, both senders and receivers often do not employ appropriate coping mechanisms to manage these risk events. Distributing insurance through remittance service providers (RSPs), e.g. remittance-linked insurance products, has the potential to build resilience by unlocking greater formal remittance flows to SSA, as well as by increasing insurance uptake to help close the risk protection gap. Transferring risk to an insurer will enable the continued flow of remittances despite senders facing a risk event. Consequently, the welfare of the remittance receivers, who are often highly dependent on remittances for their livelihoods, is protected by ensuring that remittance flows are sustained despite risk events faced by senders. Insurance can also help to smooth the financial burden on senders when remittance receivers incur a shock and require senders to help tide them over. 

This note outlines why remittance-linked insurance products are important, what forms they could take, the business case for such products and the regulatory challenges that still need to be overcome to enable the introduction of such products on the continent. 

Innovative credit models in Africa

As part of our work in credit markets, we aim to contribute to a greater understanding of factors that inhibit the growth of credit markets in sub-Saharan Africa. We partnered with Intellecap to undertake research on market innovations in retail credit markets.

The objective was to assess innovative models emerging in selected countries – South Africa, Nigeria, Kenya, Tanzania and Rwanda – and to identify the critical factors for success. The region continues to face a myriad of challenges across the spectrum of the lending value chain, which affect credit access. These include low-income levels, poor infrastructure, weak policy and a high cost of credit.

In the face of these challenges, innovative digital technologies and business models are emerging in an attempt to solve credit access challenges. The report identifies over 30 credit innovations that leverage technology, multiple data sources and partnerships to enhance access and delivery of financial services to underserved segments across the continent.

The insights generated through the research are intended to highlight market opportunities and challenges, and will be of value to policymakers, regulators, credit providers, financial sector analysts, as well as others interested in supporting credit market growth in the region.

A2ii: 10 years on

The Access to Insurance Initiative (A2ii) celebrates its 10 year anniversary in 2019. On 2 and 3 September, the A2ii hosted its 10-Year Anniversary Conference High-Level Forum and Expert Symposium in Frankfurt and launched the “A2ii: 10 Years On” publication. This publication focuses on the evolution of inclusive insurance over the last decade, probing the impact of inclusive insurance regulations and the way forward to address the gaps that remain.

It includes detailed country case studies on Ghana and Mongolia that are based on a range of interviews with public and private insurance industry stakeholders. In its capacity as a specialist development agency, FSD Africa and DFID supported Cenfri in its collaboration with the A2ii to develop the publication.

You can download the publication from here.

Designing products and developing institutions to serve low-income women

Through our support, over the last five years, Women’s World Banking partnered with three large African banks — in Nigeria (Diamond Bank), Tanzania (NMB) and Malawi (NBS Bank) — on an array of projects to reach low-income women and girls with credit and savings projects, accompanied by financial education.

Major takeaways from this publication include: How to develop a successful digital savings product for women, how to create sustainable financial products for youth and their families, must haves for credit programs focused on women-owned businesses, and best practices for creating leadership programs to drive change.

Compendium of FSD indicators

This Compendium has been developed to address the challenge that FSD Network members face in the identification/design and application of indicators that measure financial market system changes and resultant FSD outcomes and impacts . As part of a broader effort to address the need for tools that support the practical application of impact oriented measurement (IOM) principles, the Compendium is aimed at serving as a resource with a bespoke set of quality indicators appropriate for FSDs to measure outcome and impact level results in a more harmonised manner.

Value for money framework

This document sets out an approach and framework for assessing Value for Money (VfM), for FSD Africa (FSDA). It has been developed as a resource for the FSD network. The VfM framework is intended to be practical, user-friendly and to minimise the reporting burden for MRM staff. At the same time, there is a minimum level of effort required in VfM assessment to ensure credibility.

The framework also aims to support a consistent approach to VfM assessment and reporting, while retaining sufficient flexibility to accommodate differences in context and guard against making invalid comparisons.

Value for money design, assessment and reporting: a practical guide for financial sector deepening programmes

This document sets out a step-by-step process and a series of templates to guide FSDs in designing and completing a Value for Money (VfM) assessment. This document should be used in conjunction with the VfM framework, which contains full details of the approach and methods.

Behavioural science interventions for financial services

In June 2019, the i2i Facility published three reports that explore the behavioural interventions which have proven to influence financial decisions. The first report  provided an overview on Behavioural
interventions for financial services. It identified four focus areas with  23  related behavioural interventions for financial service providers.

As we explore how behavioural science can narrow the gap between customer intention and customer action, the other two reports have started to look at examples from specific financial services with a focus on Behavioural Interventions for Insurance  and Behavioural Interventions for Remittances respectively.

These reports were prepared collaboratively with FSD Africa and form part of the insights being generated through our Risk, Remittances and Integrity Programme, which is a partnership between FSD Africa and Cenfri.

Below is an extract from the reports, highlighting key concepts, behavioural interventions and their application in financial services.

What is behavioural science?

Behavioural science is the scientific study of human actions. It seeks to understand the underlying factors that influence judgement and decision-making. These can relate to the individual or to the contextual environment. Someone living with very little income, for example, will find it more difficult to make long-term decisions around savings or accessing credit. Their constrained circumstances will force them to focus on their immediate needs.

Application of behavioral science to financial services

Financial service providers (FSPs) are increasingly seeking to translate new insights from behavioural science into the design and delivery of financial services. These insights have been mostly used by financial service providers to reduce the cost of acquiring new customers, improve the retention of existing customers and to achieve positive customer outcomes such as timely loan repayments. These FSPs use behavioural interventions to influence the financial decisions (or behavior) of potential customers or existing customers.

Types of behavioural interventions

According to studies done globally by behavioural scientists in 2017 and 2018, there are 23 behaviour interventions for financial service providers with respect to the savings, credit, payment and insurance decisions of financial service customers. These interventions are categorized into 4 main intervention areas i.e. (i) client choice architecture, (ii) commitment features, (iii) pricing and financial benefits and (iv) client communications.

Client choice architecture refers to how product choices (e.g. loan sizes or monthly pension contribution levels) are presented to the customer during the sales or services process. Commitment features relate to product features that commit an individual to a predefined course of action or goal e.g. labelling as an intervention under this area refers to tagging services e.g. ‘Education or holiday savings. The first two intervention areas and interventions are as illustrated below:

More details on the intervention areas and interventions can be found in the report by the i2i Facility titled Behavioural Interventions for Financial
Services

Application in insurance

Insights from behavioural science can be used to inform the design and delivery of insurance products and increase uptake and retention of existing consumers.

Fourteen studies by 44 authors tested 10 interventions on insurance uptake and usage, across eight countries. Key findings based on the application of various interventions were as below:

Under the intervention area Client choice architecture, utilizing the choice set intervention

a) Among Mexican MFIs, the uptake of life insurance policies decreased by 30% when customers were asked to pay insurance premiums in an upfront lump-sum amount, as opposed to paying in weekly installments.

b) The number of cotton farmers in Burkina Faso buying weather index insurance increased by 15.5% when claim payments consisted of both a pay-out of the loss event and a rebate of the premiums paid to date. Farmers were willing to pay 10% more for the premium rebate policy than the traditional policy in which only a claims payment would be received if a loss were incurred

More key findings under the report by the i2i Facility titled Behavioural
Interventions for Insurance.

Application in remittances

Remittance providers are increasingly looking for innovative ways to increase formal remittance flows, in terms of number of customers and frequency and value of transactions. Behavioural interventions can be applied to reduce the cost of acquiring new customers, to improve retention of, and usage by, existing customers and to achieve positive customer outcomes.

Nine studies by 16 authors tested four interventions on remittance behaviour. The studies were conducted in three countries with senders from ten different countries. Key findings were as below:

Under the intervention area Commitment features, utilizing the labelling intervention:

a) Filipino migrants in Rome were willing to remit 15% more to family members in the Philippines when the transfer was labelled as being for educational purposes. When the label was enforced by sending the money directly to the school, Filipino migrants in Rome were willing to remit 17.2% more.

b) When given up to US$400 to remit, Salvadoran migrants in the United States remitted 16% more (US$35) when they had the option for the recipient to receive the funds in cash, as opposed to in grocery vouchers.

More key findings under the report by the i2i Facility titled Behavioural
Interventions for Remittances.

Private equity investment guide and market study

In collaboration with the East African Venture Capital Association (EAVCA) and the International Finance Corporation (IFC), we have developed a Private Equity (PE) Investment Guide with the objective to deepen the understanding of private equity structures among pension fund managers and their trustees to unlock more investments into the asset class. The guide mainly covers three key areas – understanding the asset class and where it sits alongside other asset classes, why and how to invest in PE’s and an overview of the benefits and risks of investing in private equity.

The development of the guide was informed by a market study report that sought to investigate the low uptake of investment by pension schemes. The report cites the knowledge gap on both pension fund and regulatory side and the absence of regulatory oversight of the PE Fund Managers by local regulators as some of the key impediments for Pensions seeking to invest in PE Funds. The study surveyed 18 Pension Schemes from Kenya, Rwanda, Tanzania and Uganda alongside 15 PE General Partners from Ethiopia, Kenya and the Ud Kingdom as well as 3 Pension regulators in Kenya, Uganda and Tanzania.

Across developed markets the pension industry is the backbone of investments, supporting asset classes such as private equity with the patient capital to deploy in growing businesses and there is a need to up skill both regulators and pension fund trustees to foster a greater understanding of the benefits of investing in PE Funds.