Partner Organization: Cenfri

Insurance supervisors’ responses to COVID-19

The importance of insurance has been amplified in the face of the Covid-19 pandemic

The Covid-19 pandemic constitutes one of the largest shocks to the African continent in recent times; in 2020, GDP contracted by 2.1% across Africa, costing the region at least $115 billion and pushing 30 million Africans into extreme poverty (AFDB, 2021; World Bank, 2020). Beyond this negative impact, the pandemic has also amplified the importance of the insurance sector’s role in the development of and support of the resilience of businesses and individuals. Insurance can help manage risks and transfer funds to individuals and businesses when unexpected crises like Covid-19 hit, and it can aid in economic recovery by enabling capital to flow into investments and lending practices.

Covid-19 disrupted and exacerbated weaknesses within the insurance sector

Despite being part of the solution, the insurance sector itself has also been affected by the pandemic. Research conducted by FSD Africa, Cenfri and the Oanisation of Eastern and Southern African Insurers (OESAI) in mid-2020 found that the pandemic affected insurers’ operations, negatively impacting their ability to launch new products, conclude new sales, collect premiums, service existing customers and process and pay claims.

The operations of insurance regulators were also significantly disrupted

In seeking to fulfil their core mandates of market stability, consumer protection and (in some cases) insurance market development, insurance regulators across sub-Saharan Africa (SSA) have had to perform a balancing act between offering regulated entities regulatory relief during a challenging time and monitoring vulnerabilities in the market closely. Research conducted in 2020 by FSD Africa and Cenfri found that different regulators chose to prioritise different sides of this trade-off. Some insurance regulators eased up on their usual regulatory requirements in an attempt to enable regulated entities to enhance their capacity to respond to Covid-19. Oers placed greater emphasis on the set of issues arising from the pandemic, such as the potential for the face-to-face nature of insurance business in their markets to spread the virus. Despite these challenges, the research also found that opportunities emerged for regulators to enhance market efficiency and stability through digitalisation and careful market consolidation, as well as improve the efficiency of their reporting and supervision processes through new solutions, such as regulatory technology (regtech) and supervisory technology (suptech).

Assessment of long-term impacts to identify how to build back better

Covid-19 is far from over. A year on from when the previous study was conducted, our current research takes stock of the ongoing impacts through a future-looking perspective, to assess which regulatory responses have (or have not) been effective and to identify what the imperatives and opportunities for regulators are to support stable, sustainable and growing insurance markets. The aim of this research is to shed light on the actions needed to ensure the resilience and stability of African insurance markets in the medium- to long-term, while also encouraging market development, growth and inclusion. Furthermore, understanding which regulatory responses to the pandemic were most and least effective can provide important guidance for regulatory authorities on how to respond to the next systemic crisis – be it a pandemic, a significant cyber incident, a major natural disaster or widespread political protests or riots.

Impact of Covid-19 on the insurance sector – Ghana, Malawi and Zimbabwe

COVID-19 and the social distancing measures implemented by many governments have adversely affected insurance sectors and their customers around the world.

These infographics summarise the impact of COVID-19 on the insurance sectors of Ghana, Malawi and Zimbabwe and the response by regulators and insurers within each of these countries.

The infographics are informed by semi-structured interviews with insurance providers and the respective insurance regulators, a quantitative study and extensive desktop research.

How are insurance regulators in sub-Saharan Africa being affected by, and responding to, COVID-19?

COVID-19 has had – and continues to have – a major effect on all parts of society.

The insurance sector has been placed under the spotlight as providers and regulators grapple with finding a balance between stepping up and providing respite to policyholders through claims and the need to maintain prudential soundness. 

This note outlines our key learnings on the impact of COVID-19 on insurance markets across sub-Saharan Africa (SSA) as it relates specifically to insurance regulators. We focused on the following pertinent questions:

And engaged with:

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. 

Never waste a crisis – how sub-Saharan African insurers are being affected by, and are responding to, COVID-19

COVID-19 containment and mitigation measures in sub-Saharan Africa (SSA) have restricted the movement of people, goods and services. This has affected insurers’ operations, which, to a large extent, have traditionally required physical engagement. It is also affecting insurers’ ability to launch new products, conclude new sales, collect premiums, service existing customers and process and pay claims.

Moreover, the economic crisis triggered by the pandemic is affecting premium and investment income, and balance sheets are put under strain. While the pandemic has exacerbated pre-existing weaknesses of the insurance sector in SSA, it also provides an opportunity for insurers and regulators to become better equipped to embrace and adopt innovation and develop their insurance markets.

This note takes stock of the impacts of the pandemic on insurers, based on interviews with 34 insurers, insurtechs, reinsurers and insurance and broker associations across 18 markets, looking at the impacts on operations, impacts across the insurance product cycle, balance sheet impacts and the regulatory engagements and responses. The report identifies key opportunities for insurance and regulators.

The pandemic and the accompanying safety measures have affected the way insurers operate, the insurance product cycle, the potential reputation of insurers due to COVID-19 exclusions, as well impacting balance sheets that will likely result in liquidity constraints. There has been varied engagement from regulators; with some being very proactive in their communication surrounding the pandemic while others have been slow to respond and have created feelings of uncertainty in the insurance sector.

While the pandemic has exacerbated pre-existing weaknesses of the insurance sector in SSA, the consultations for this study indicate that it also provides an opportunity for insurers and regulators to become better equipped to embrace and adopt innovation and develop their insurance markets. Some of the opportunities identified in the report are that the forced digitisation of insurers can help them enhance their efficiency as well adopt the remote on-boarding of customers, and COVID-19 has created an imperative for regulators to address the barriers to digitisation as well as proactively encouraging innovation in the sector.

To read about the other opportunities identified, please download the full report.

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.

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.

Regulating for innovation

Innovation has the ability to create opportunities, improve inefficiencies, increase competition, drive scale and improve the reach and value of financial products and services. However, innovation also comes with risk, and due to the novel nature of innovation, it is often not fully accommodated in current regulatory frameworks.

Given that innovation brings with it both benefits and risks, it is the regulator’s role to proactively consider the trade-offs between the two, which requires the regulator to balance its mandate to develop the market with its mandate to protect consumers.

The first note explored approaches to regulating for responsible market innovation, with particular focus on the test-and-learn approach as well as the concept of the regulatory sandbox, underpinned by it. Drawing on case study country examples, it explores the potential benefits, prerequisites and considerations required by regulators to effectively implement approaches to encouraging innovation in their markets.

This focus note unpacks the range of tools available to financial sector regulators to regulate for innovation in the changing financial services landscape. It serves as a toolkit for regulators on how they can better encourage and facilitate innovation in their markets, whilst protecting consumers thereby fulfilling both market development and consumer protection mandates.

This “living” framework has its genesis in insurance; however, its applicability spans the entire financial sector, striving to guide decision makers regardless of the jurisdiction’s divisions of roles, or the regulatory and supervisory model in place.

Read the report here.

The potential of the cell captive structure for sub-Saharan Africa

Our partner for our Risk, Remittances and Integrity Programme – Cenfri, produced a study that explores the potential role of cell captives in the development of insurance markets in sub-Saharan Africa (SSA).

What is cell captive insurance?

Cell captive insurance is a relatively new concept that grew out of the captive insurance concept. Captive insurance is a model where a corporate entity self-insures its own assets by setting up its own dedicated insurance license. The cell captive concept follows a hub-and-spoke model whereby one central licensed insurer (referred to as the “sponsor” or “promoter”) forms ring-fenced cells issued to other organisations (referred to as the “cell owners”) for the insurance of the cell owner’s own assets or the insurable risks of its client or membership base.

The cell captive insurer is accountable for all regulatory compliance and holds the insurance license that covers the business of all the cells. The cell captive structure thus emerged as a way entity to access the benefits of captive insurance without setting up its own insurance company. Cell captives have been one of the most important steps in the evolution of the captive insurance space and have become an integral component of the self-insurance market in many of the established captive domiciles.

A cell captive in practice

In Ghana, a recent insurance diagnostic study by Cenfri (2018) showed that certain sectors of the economy (such as oil and gas or the energy sector) are unable to fully access appropriate insurance policies from the local insurance industry due to the market’s lack of capacity to cover large, specialised risks. This situation is likely to continue with the expected increase in the growth of the Ghanaian oil and gas sector. At the same time, local content requirements imply added costs and procedures for local corporates to access foreign cover. Cell captive arrangements could, in principle, address this constraint by allowing corporates to capitalise a cell accounto self-insure their risks via a cell captive arrangement, tailoring the coverage to meet their specific needs. Should this be the case, the cell captive arrangement would be hosted by a local insurer licensed for this purpose, with centralised reinsurance arrangements as appropriate, and would serve to crowd in capital from the large players in the extractive industries for each cell.

At present, cell captives, have yet to be extensively explored or implemented across the SSA region. Cell captive innovations in SSA are largely concentrated in S.Africa, Mauritius, Namibia and Seychelles.  An example from S. Africa is the SA Taxi which is a company that provides credit to finance the purchase of minibus taxis. SA Taxi decided to branch out into the provision of insurance cover to its clients. It wanted autonomy in the design of its offering to fit the realities of its particular customer base but lacked in-house insurance experience and expertise and therefore acquired a cell with trong>Guardrisk, the largest South African cell captive insurer, rather than set up its own insurance license.

Read more on how cell captives could stimulate insurance markets in sub Saharan Africa here.

Building resilience against flooding in urban areas

Posted on by Kihingu Inc

Flooding in urban areas across Africa is on the rise. The continent needs to implement risk-management techniques to ensure its cities are resilient to climate change and the devastation it can cause. This article explores possible ways Africa can build resilience against flooding in urban areas.

Across Africa the annual wet season sees our news reports and social media feeds “flooded” with images of commuters wading through rain and sewerage to get home, cars washed off roads and businesses and livelihoods floating on busy streets. Then, the cleanup begins, the news forgets, people rebuild and, before long, the process repeats.

But it shouldn’t be this way and if we don’t act now the situation will only get worse.

Take Lagos in Nigeria as an example: annual flooding in Lagos has risen in severity over recent years, as climate change progresses. In 2018 alone, flooding caused $4 billion worth of damage, costing around 4.1% of Lagos State’s GDP. The city struggles to manage and recover from these floods, which not only causes disruption to business and social activity but also threatens to eventually make the city unlivable.

Lagos is not alone. More than 70 urban areas face significant flood risks, with 171 million people in sub-Saharan Africa exposed to the dangers of flooding.

In 2019, over 1,000 people were displaced, with roads and bridges destroyed after several days of constant rain in Dar es Salaam. The same happened in 2017 and 2018. In August, at least seven people died after floodwater inundated Addis Ababa

While people will routinely think about taking out insurance for their cars and to cover their health needs, too often they don’t insure against risks like floods. In 2019, SwissRe estimated that 91% ($1 billion) of losses from climate risks in Africa were uninsured.

We need to better manage risk to make our cities more resilient to climate change and the devastation it can cause.

But where do we start? Using Lagos as an example, we combined data, interviews, and models to see how flood risk in the city could be better managed and identified five key takeaways for improvement.

Number one, while flooding happens regularly, most public agencies and private businesses can’t quantify the risk. This includes insurance companies who often struggle to determine their own clients’ exposure. Or think of it this way; how do you know how high to build the bridge, when you don’t know how high the river flows when it floods? When we know this, we can build investment cases for resilient infrastructure and bespoke insurance products.

Which links closely to our second finding: the lack of usable consistent data. Too often data is missing or fragmented. When we lack data, we lose the ability to accurately model risks and impacts. And when we do have data, there is a need for more collaboration between stakeholders to ensure it is used meaningfully.

Third, trust is critical. Throughout the world, consumers can be sceptical of insurance companies and the same is true here. Innovative insurers are looking to address this through deliberately seeking out opportunities to offer clients real value. This also means that insurance companies should move beyond just policy sales, and instead become advisers who can better help clients understand and manage the exposure of their business or property.

Fourth, from flood sensors to satellite-based early warning systems, technology can have a profound impact on how we identify and respond to immediate threats. Partnerships are needed to develop and realise these opportunities, and this requires strong leadership from the local business community and public administration. The insurance industry, and indeed the broader financial sector in Nigeria, have a crucial role in developing local innovation and collaboration, and in leveraging the readiness of African and global reinsurers and experts to provide finance and support.

But as always, even the best data and innovations can only go so far. Leadership is critical. Insurers can step up by adjusting their corporate strategies, but they also need partners with whom to act. In Lagos, institutions such as the Lagos Resilience Office, the Financial Centre for Sustainability Lagos and the Lagos Business School could provide tangible solutions as well as practical advice. Alongside this, agencies such as UKAid funded FSD Africa and other global experts can facilitate support and investment for this process.

Lagos is just one example, but many of the findings offer insights for cities across the continent. With flooding likely to get worse, it is critical to act now to help our cities and communities withstand the flood.

Insurers have a big role to play, and many institutions, including FSD Africa, are ready to partner with innovators to develop new solutions. It’s vital this work is prioritised – to safeguard development gains made in recent years, boost sustainability and protect livelihoods.

This opinion piece was originally published in ESI Africa on 03 October 2021.