Campaign: Remittance and integrity

R3Lab innovation and regulatory portrait – Uganda update

Innovation is key to increasing insurance penetration in Africa. Despite recent improvements, insurance penetration across sub-Saharan African (SSA) markets remains low, at 2.78%, compared with the global average of 7.3% (Signe, 2021). Innovation is needed to change this picture: to enhance the value proposition of insurance, a new take is required on systems, product design, distribution and claims. Yet, while there is no lack of innovation on the continent[1], foundational challenges relating to, among others, infrastructure, partnerships, skills, payment streams, seed funding and behavioural barriers to adoption continue to inhibit the achievement of the required scale of innovation (Cenfri, 2021).

Need to balance risks with the rewards of innovation. While not all aspects of the enabling environment are within the regulator’s control, more and more regulatory authorities have an implicit or explicit market development mandate under which they actively work to promote innovation (A2ii, 2020). With innovation also comes risks. The reality of these risks implies that, for a market to benefit from the rewards of innovation, insurance regulators need to strike a balance between fostering an enabling environment for innovations to thrive, while also protecting the market against any undue risks that may be associated with market development. Indeed, proactive and proportionate management of the risks arising from innovation is core to maintaining the sustainability of innovation. Striking this balance aligns with the principle of proportionality in the face of digital innovation as put forth by the IAIS[2]. To maintain a conducive but safe environment for innovations to thrive, supervisory responses need to evolve and adapt to the changing realities of innovative industries.

[1]        For example, as shown by Cenfri’s insurtech tracker database.

[2]        The use of digital technology in inclusive insurance, IAIS (2018).

Regulating for innovation in Africa – Cross-country synthesis note

This document outlines the findings across a series of studies commissioned by FSD Africa on the state of insurance innovation and regulation in eight countries in Sub-Saharan Africa (SSA): Ethiopia, Ghana, Kenya, Malawi, Nigeria, Rwanda, Uganda and Zimbabwe. It aims to inform regulatory authorities across the continent in the quest for balancing the mandate for market development and innovation with that of consumer protection.

 Innovation snapshot

Cross-cutting challenges to market development highlight untapped market potential. Across the study countries, low insurance penetration rates persist. Though the share of life insurance premiums in total premiums is growing, the market is for the most part still dominated by non-life insurance, and compulsory insurance plays a strong role. The result is that the voluntary retail insurance market still reaches a limited number of policyholders, and that large population segments such as rural inhabitants, informal sector workers and MSMEs remain un- or underserved. This indicates substantial untapped market potential in all the study countries.

More – and different – innovation needed. While innovation is present in all the study countries, each country is at a different stage along the innovation journey, depending on its unique country and market context. Some insurers have started to digitalise their processes and client engagement journey, and COVID-19 has provided an added impetus to do so. Some are implementing or pursuing alternative distribution partnerships, and some are doing market research to help target new market segments such as MSMEs. Partnerships with insurtech firms are emerging to help streamline internal systems and processes. On the whole, however, the cross-country innovation assessment shows that innovation is not yet entrenched in the fabric of the market or leveraged to reach underserved target market segments at scale.

 Key constraints to innovation

Various elements of the enabling environment or ecosystem shape the current innovation picture.

Insurance innovation portrait – Ethiopia

This report sketches an insurance innovation portrait for Ethiopia. It forms part of an eight-country study to determine what regulators can do to unlock innovation at scale and meet key insurance needs in sub-Saharan Africa.

Sector expansion and development defined by 1990s liberalisation. The insurance sector in Ethiopia has been shaped by the financial sector liberalisation and market reforms that took place in the early 1990s. These reforms dismantled the state-driven monopoly, opened the market for privately owned insurance companies to enter, and encouraged assistance from international development donors to support the growth of the insurance sector. As of 2021, the insurance market comprises 18 insurance providers, including a reinsurance company, and caters for an estimated 1.2 million insurance policyholders (Stakeholder consultations, 2022)[1].

Insurance sector remaining underdeveloped with limited retail reach. While market liberalisation prompted enhanced competition, this has yet to translate into broader and deeper access to insurance. Ethiopia continues to have one of the smallest insurance markets in SSA in terms of penetration rates, with premiums largely concentrated in general insurance and primarily driven by compulsory lines such as third-party motor vehicle insurance. While life business in Ethiopia holds about 5% of the market share, this figure is relatively miniscule compared to non-life business, thus signalling an underdeveloped voluntary retail market. With historically underserved segments such as farmers and MSMEs still without insurance, a clear need continues to exist for significant and accelerated market development to take place in Ethiopia.

Limited innovation observed beyond donor-led pilots. The low uptake of formal insurance, yet popular use of informal risk-pooling mechanisms such as edirs, suggests latent consumer demand that could be tapped through value-driven market innovation. However, while a few product innovations have been developed, these have not been successful at better serving the excluded. For example: international donors have entered into partnerships with incumbent insurers to pilot agriculture index-based insurance to cover farmer risks, but capacity constraints have undermined long-term sustainability. Furthermore, while insurance players are working to digitalise their service offerings and to partner with alternative distribution partners like MNOs, limited success has been observed to date due to the high level of risk aversion and weak capacity of Ethiopian insurers.

An increasingly enabling environment but with constraints remaining. The big innovation gaps left in the market suggest room for incumbents, new entrants and insurtechs to better serve Ethiopian individuals and businesses to increase insurance uptake. Yet, an assessment of the innovation-enabling ecosystem shows that, while some factors bode well for innovation, key elements continue to constrain market development:

  • Expanding and increasingly competitive payment and ICT sectors, respectively, provide scope for more efficient and alternative distribution channels, such as via mobile money; but poor electricity access and reliability exacerbate weak digital connectedness, thereby hampering the scope for viable insurance distribution through digital channels.

Severe skills shortages prevail in terms of both insurance-specific skills (e.g. actuarial skills) and basic STEM qualifications, despite numerous state initiatives. While the local start-up ecosystem is expanding, a focus on insurtech development remains to be seen.

  • Insurtechs struggle to outcompete paytechs for seed capital, while incumbent players lack financial resources to invest in product development due to conservative boards, weak access to capital and the unavailability of requisite skills.
  • There is a strong demand for informal risk mitigation tools, but low trust, limited awareness and low incomes limit uptake of formal insurance.
  • Alternative distribution channels, such as MNOs, are yet to be explored, while others remain inaccessible due to regulatory barriers such as constraints on bancassurance.
  • The regulatory framework does not yet provide clear guidance regarding digitalised insurance, microinsurance and leveraging alternative distribution channels. More broadly, the remaining restrictions on foreign participation limit the scope for innovation.
  • While the Insurance Supervisory Directorate (ISD) supports market development, its lack of independence from the National Bank of Ethiopia hinders its ability to prioritise innovation, adjust supervisory frameworks for greater flexibility and engage more proactively with market players.

[1]        This figure does not include community health insurance policyholders.

Insurance innovation portrait – Kenya

This report sketches an insurance innovation portrait for Kenya, as part of an eight-country study to determine what regulators can do to unlock innovation at scale to meet key insurance needs in sub-Saharan Africa.

A large and diverse market. Kenya has the fourth largest insurance market penetration in Africa. The market spans 56 insurance companies, 5 reinsurance companies, 12,708 intermediaries and 376 insurance service providers skewed towards the general insurance market. Compulsory lines, such as third-party motor insurance, play a prominent role in the market, as does corporate-based general, life and health insurance.

Limited retail reach. The National Hospital Insurance Fund reaches 23.4 million Kenyans. Beyond that, retail insurance market reach is limited, especially for rural women and MSMEs.

Numerous innovation efforts, but not yet paying off at scale. The insurance uptake gap signals an innovation gap and trap. Kenya has a history of a drive for inclusive insurance innovation, with numerous microinsurance, index insurance and m-insurance pilots over the years. More recently, there has been increased emphasis on the role of insurtechs to drive insurance digitalisation. Overall, however, the market remains conservative, and innovation is not yet part of the core market fabric. New tech players among other factors[1] struggle to access funding and secure viable partnerships, while insurers remain subject to distribution and premium collection challenges in reaching beyond the high-end retail and urban market.

A largely enabling environment, but gaps remain. An assessment of the innovation enabling ecosystem shows that:

  • The underlying electricity and mobile network infrastructure is a boon for innovation in Kenya, but challenges in deepening and modernising financial market infrastructure remain.
  • Access to technical insurance and science, technology, engineering and mathematics (STEM) skills remains a constraint to innovation.
  • Insurance awareness and trust need to be built further.
  • Effective partnership formation remains a key challenge, especially for new players (i.e. insurtechs) seeking a foothold in the market.
  • The regulatory environment is largely enabling. There is a growing regulatory focus on access, usage and quality of insurance services. Recent introductions of a microinsurance licence category and provisions for remote/digital distribution are also a case in point.
  • The Insurance Regulatory Authority (IRA) has taken positive strides in enabling insurance innovation through proactive industry engagements, accelerator programmes and a regulatory sandbox, and has streamlined its internal processes to be more responsive, strategically, to innovation.

[1]        Other challenges faced by new tech players include innovative business solutions especially in product development, use of massive data sets available, underwriting, pricing risk and distribution of insurance products.