Prospects of Life Assurance in the West African Landscape

What is Life Assurance?

Life insurance is a contract between an insurer and a policyholder in which the insurer guarantees payment of a death benefit to named beneficiaries upon the death of the insured. Thus the insurance company promises to pay an individual’s beneficiary a specific amount of money when he or she dies in exchange for periodic payment of premiums.  

Some general benefits of Life Assurance include

Ø  Pay one’s family back for funeral costs

Ø  Help pay mortgage and other financial obligations that a person might leave behind

Ø  Provide income for the individual’s spouse

Ø  Cover other extra expenses the person’s family might have.

Types of Life Assurance

There are generally two types of Life Assurance Products; Term Life Insurance and Permanent Life Insurance. Permanent Life Insurance can be further subdivided into Universal Life and Whole Life Insurance.

1.         Term life insurance – under this policy, the individual purchases a basic term life insurance for a set period, say 20 years, and the insurer pays a lump sum to his or her beneficiaries should he or she die when the policy is in force. This policy becomes less and less expensive across the duration of the policy.

Term life insurance proceeds can be used to replace lost potential income during working years. This can provide a safety net for beneficiaries and can also help ensure the family's financial goals will still be met—goals like paying off a mortgage, keeping a business running, and paying for college.

2.        Universal life insurance - Universal life insurance is a type of permanent life insurance designed to provide lifetime coverage. Universal life insurance policies are flexible and may allow one to raise or lower premium payment or coverage amounts throughout the lifetime. Additionally, due to its lifetime coverage, universal life typically has higher premium payments than term.

Universal life insurance is most often used as part of a flexible estate planning strategy to help preserve wealth to be transferred to beneficiaries. Another common use is long term income replacement, where the need extends beyond working years. Some universal life insurance product designs focus on providing both death benefit coverage and building cash value while others focus on providing guaranteed death benefit coverage.

3.        Whole life insurance – Whole life insurance is designed to provide lifetime coverage. Because of the lifetime coverage period, whole life usually has higher premium payments than term life. Policy premium payments are typically fixed, and, unlike term, whole life has a cash value, which builds up over time and functions as a savings component and may accumulate tax-deferred over time.

Practical uses of Life Insurance

A.        Resource mobilisation for economic growth

Development of insurance markets is strongly associated with economic development. This is because life insurance is an important driver of domestic resource mobilisation for long- term investment, which is a critical goal in sub-Saharan Africa where lack of capital for long-term investment is constraining economic growth.

Life insurance entails long-term and contractual savings by households. These are channeled into stable, long-term investments by insurance providers. This means that the development of life insurance markets is an important element in domestic resource mobilisation.

In addition to these direct effects on domestic resource mobilization, life insurance also contributes to - and benefits from - broader financial sector development. This includes encouraging the deepening of banking, capital markets and regulation.

B.        Employment creation

Life insurance offers important direct benefits at the microeconomic level. Key amongst these is that it creates employment. Direct employment created includes high-skill, high-wage employment. This includes in finance and business support services such as the actuarial, accounting, consulting and legal professions.

C.        Household Welfare

Sub-Saharan African households are vulnerable to shocks. This vulnerability can limit their willingness and ability to take risks in the long and short term and lead to coping strategies that are detrimental to their long-term welfare. This includes withdrawing children from school, selling assets, incurring excessive debt and reducing nutrition. Such responses to shocks - and the risk of shocks that can create risk aversion - undermine microeconomic behaviors that lead to economic growth.

Life insurance can help reduce household vulnerability through three specific paths, namely by facilitating formal savings, insuring against shocks and by complementing public welfare provision.

Facilitating formal savings

Savings by households are currently constrained in West Africa by income and access to formal financial services. Currently, households in the West African zone do save, but do so outside of the formal banking system. Informal savings clubs are more common than formal savings accounts, with 100 million adults using them in sub-Saharan Africa and 34% of savers making only informal savings.

Life Insurance helps to bring savings within the formal financial sector. It does this by providing a formal contractual vehicle for long-term savings by households. This establishes saving as a long- term habit and reinforces for households the security brought by accumulating savings.

Life insurance products have also been designed such that they are tailored to the specific savings goals of customers. These include policies for education, combined health and life insurance and funeral expenses. Specific examples of recent product innovations include policies for school fees, polices that pay sums in the event of severe illness as well as death, those that cover funeral expenses and those that are inflation-indexed.

Reduced vulnerability to shocks

Life insurance addresses the risk of death, with the insured person often being the main earner. In sub-Saharan Africa, the death of the main income earner has a lower probability (in any given year) than other shocks but its impact is the most severe in terms of loss of household income.

Such vulnerability has a high suitability for private insurance because of the low probability but high loss to individual households. Private sector life insurance is a good way of managing such economic shocks, providing a method to stabilize households in the event of a shock and optimize their welfare by reducing the risk aversion that can adversely affect long-term economic decision- making.

Complementing public welfare provision

Patronage of Life insurance by the middle class act as an important complement to public welfare provisions because it enables households to manage shocks without recourse to public funds.

Social security systems and life insurance penetration are negatively correlated, thus suggesting that people actively choose private insurance when public provision is absent.

This allows scarce resources for public services to be focused on the neediest and most vulnerable households and, over the long-term as the proportion of the population entering the middle classes grows, gradually reduce the reliance on public welfare provision.

ACCELERATING INSURANCE MARKET DEVELOPMENT IN THE WEST AFRICAN ZONE

Financial access, literacy and consumer protection

Consumer demand for insurance products is a requirement for the long-term development of the life insurance market. There is limited knowledge of life insurance products and a lack of trust by consumers in financial institutions. Distribution channels are too narrow and products are not always adequately tailored to domestic consumer preferences. These factors undermine consumer demand for life insurance.

High levels of trust by customers in life insurance providers are important to the take-up of products. This is especially the case because assets are held in trust for customers over the long- term. At the core of such trust is an established track record of sound and reputable private and regulatory institutions.

However, there are immediate initiatives that can be considered in the region to accelerate increases in consumer demand. These include the following:

·           Consumer protection legislation - such as in relation to marketing, premium payments and claims - needs to be in place to ensure clients are treated fairly and to set standards for private institutions. This is particularly important for vulnerable clients, such as those with low levels of financial literacy. Simpler but well-executed consumer protection may be preferable to more sophisticated protection that is difficult to implement in the current sub-Saharan African context. More sophisticated protection can then be gradually introduced as markets and institutions develop.

·           Financial access for life insurance can be increased. The distribution channels like - agency and foreign and domestic institutional partnerships - can rapidly expand financial access to life insurance. Such methods could replicate the successes in Asia where this approach has significantly expanded access to life insurance, including in Vietnam, Indonesia and Malaysia.

·           Mobile distribution has been widely used in sub-Saharan Africa for financial services and has been highly successful in expanding financial access. In life insurance terms, it is expected to be an important complementary service to agent-based distribution. This is because investment decisions at the start and during the period of the insurance contract require personal service in order to select appropriate products for customers and to ensure customers are properly informed about the nature of the product they are buying. Such needs are best met through agency networks because they provide face-to-face advice and ongoing customer service relationships. Mobile platforms are expected to provide other services such as premium payments, investment information and standardized processing and communication.

·           Product innovation that offers life insurance products that are tailored to the financial lives of customers in the West African zone is required. Such innovation is best encouraged through competition between private sector providers. Rapid approval of new products by regulators would also assist in this, such as the use of 'fast track' approval processes.

·           Financial literacy programs help to develop customer knowledge and ensure customers choose suitable products. Such programs have been successful in the region for other insurance products, including agricultural and health programs. Further programs should be supported for life insurance including through partnering with reputable private firms as part of their business development.

PROSPECTS IN GHANA

Growth in Ghana has been underpinned by 

·         rising public awareness about insurance benefits

·         advancements in the regulatory framework

·         expansion of the middle class population

·         acceptance of mobile insurance products - micro insurers collaborate with mobile networks to reduce transaction costs and make products affordable to low-income buyers; made possible by factors such as; government backing which meant coordination of different agencies; supportive legislation; and insurance companies that were prepared to innovate in their distribution, collection and payment methods;

·         bancassurance - more than 20 banks have already been granted licences to offer bancassurance products

·         Group life insurance is about to be made compulsory next year (2020)

In 2017, there was a Total premium of 1.1 bn cedis for Life Assurance, out of a total premium figure of 2.4 bn cedis. In 2018, the total insurance industry experienced a 21% growth in the gross written premium, but the penetration rate reduced from 1.12% to 1%. This rate excludes Pension and Health Insurance which is not regulated by the insurance regulator NIC. The reduction of the penetration rate can is due to the rebasing of the economy (source: NIC 2018 Annual Report).

The Life Sector grew by 8% from GH¢ 2.89 billion in 2017 to GH¢ 3.12 billion in 2018; while the Non – life Sector grew by 28% to end 2018 at GH¢ 2.38 billion, from GH¢ 1.86 billion in 2017.

Due to the budding mobile insurance sector, a steady rise has been seen in the insurance sales owing to the trust of the general public in the mobile operators. The insurance industry is looking at forming alliances between the masses and the network providers because the MNO have been and still the catalyst for the growth of Micro insurance in the companies that are involved in its operations.

Also, bancassurance is another booming business of the Insurance sector in Ghana. The insurers and banks are actively teaming up in partnerships to offer a wide range of competitive and innovative products. Bancassurance has always been considered optimistic opportunity when it comes to helping the insurance industry owing to customers’ trust in banks and their competitive marketing strategies. A growing number of insurers and banks have joined forces to offer policies through banking windows.

Another very important part of this sector is Microinsurance which has received an increased attention in the recent years. It has been considered as one of the most viable ‘alternative financial product’ that is delivered to the unserved and underserved market and the most vulnerable and marginalised sector. The affordability of MI products, ease of purchase and high speed of claim settlement are among the positive considerations why MI is a viable business line.

Mobile phone penetration rate is over 100%. The growth experienced in microinsurance in the country has been primarily driven by the use of mobile phones as a distribution channel. The combination of a young, tech-savvy population offers a fertile market to sell insurance. Online and Mobile phone offers a useful avenue to distribute products.

The Life industry depends on the economic growth as it is expected that the increased wealth would trigger demand for life products. Products are typically centred on group life covers. The Group Life Insurance is a wonderful opportunity to increase insurance penetration in Ghana, mainly because a single employer can purchase a policy cover for a number of employees.

Opportunities

Technology

Technology has already made significant impact on the Ghanaian insurance industry. The advent of mobile phone as a distribution channel has helped greatly in the uptake of microinsurance. However, there are a number of other emerging technologies that will further change the manner by which insurance is transacted in Ghana. Some of these emerging technologies are Artificial Intelligence, Big Data, Internet of Things, Cloud Computing and Block Chain.

The research and development activities of industry should consider how it can use these emerging technologies to reduce cost and provide better coverage and services to policyholders.

Recapitalisation

There were 24 Life Assurance Companies as of 2018. This figure may  reduce when the New Minimum Capital requirement takes effect in June 2021. The objective of the new MCR is to improve the financial capacity and liquidity.

Table 1.1 Previous and new Minimum Capital Requirements for different regulated entities

Entity	Previous MCR	New MCR
Insurance companies (Life & Non-Life)	GH¢ 15 million	GH¢ 50 million
Reinsurance companies	GH¢ 40 million	GH¢ 125 million
Insurance Broking companies Loss Adjusters	GH¢ 300,000	GH¢ 500,000
Reinsurance Broking companies	GH¢ 1 million	GH¢ 1 million

GAMBIA

The Gambia’s insurance industry comprises 11 insurance companies.  Nine (9) of the insurance companies including a Takaful/Islamic operator are general insurers (operating in non-life), The wo Life companies operating in The Gambia are foreign owned.

NIGERIA

The Nigerian insurance industry lags far behind the country’s other financial industries. The insurance penetration for 2018 was a paltry 0.31%. In real terms, total industry Non-Life Gross Premiums declined at a 10-year compound average growth rate (CAGR) of 5.0% 2008-18e, while Life Gross Premiums grew at a 10-year CAGR of 7.0% over the same period. The growth in the Life business has depended on the emergence of mandatory Group Life policies for employers in the formal sector. The total 2018 insurance premiums are reported at N400bn (US$1.1b) as compared to nominal GDP of N129.1 trn.

Taking the total Gross Premiums of Nigeria's Non-Life and Life insurance industries together, these fell at an inflation-adjusted 10-year CAGR of 1.4% 2008-18.

New Minimum Capital Regulation

There are currently 59 insurance firms operating in Nigeria, but this number may reduce by June 2020 when the new minimum capital requirement regulation takes effect.

Table 1.2

Class of business	Existing Capital Requirement	New Capital Requirement
Composite Insurers	5 billion naira	18 billion naira
Non-Life Insurers	3 billion naira	10 billion naira
Life Insurers	2 billion naira	8 billion naira

Source: Nigeria’s National Insurance Commission (NAICOM); Recent naira/ US dollar exchange rate is N360/US$1, So N10bn is US$27.8m, for example.

The new minimum capital regulation, as can be seen from the Table 1.2 above, sets a challenging deadline for the industry with significant implications for mergers, acquisitions and capital raising. However, higher capitalisation increases underwriting capacity and the potential exists to roll-out a much bigger industry than currently exists. As stated, Nigeria’s insurance penetration, at 0.31%, is less than one tenth of that of India (with similar GDP per capita) which suggests significant un-tapped potential.

Experience from other markets, particularly in Asia, suggest three remedies. First, government and regulators – not only insurance regulators but bank and telecom regulators, – need to cooperate. Second, the roll-out of micro-insurance with the development aim of financial inclusion, is key to familiarising and educating the market. Third, technology plays a key role in partnerships and distribution.

One phenomenon which augurs wells for the future rapid growth of the industry is the fact that the same companies which have enjoyed success in Asia, and rate the region as their key growth zone, are also investors in Nigeria. Axa bought Mansard Insurance in 2014 and Allianz bought Ensure in 2018; they are among six global insurance companies, including Prudential of the UK, present in Nigeria.

Economies of scale are needed

It is not surprising that the Nigerian insurance industry lacks profitability. One effect of lack of growth is that companies are unable to create economies of scale for their front and back office operations. When growth opportunities arrived, the Life Insurers made the mistake of computing their premiums down to unsustainable levels in the rush to increase customer numbers, prompting the regulator to intervene with a new minimum premium level in 2018.

While lack of growth leads to excessive costs, low profitability creates another problem, namely lack of investment in technology. Without the prospect of a much larger customer base it may be difficult to persuade companies to invest. NAICOM’s reforms, therefore, are very significant, as the industry is being forced to raise capital.

Looking to micro-insurance

The definition of microinsurance is essentially the same as that of regular insurance, except for the target market: low-income people. Rolling out micro-insurance products as a matter of national policy has created mass awareness of insurance in other countries. Mass awareness has been associated with expansion of the insurance industry as a whole and rising insurance penetration. Such policies have been implemented successfully in many countries, notably India and Ghana.

The technology already exists

The distribution channels for rolling out insurance in Nigeria are already in place, but perhaps, grossly underemployed. In recent years the issuing of bank verification numbers (BVN) and SIM card registration have created significant levels of personal data. The technological platforms and the customer data exist to service tens of millions.

Potential Demographic Threat

Over 40% of Nigerians are below 15 years, as compared to a global proportion of 26%. This, combined with a rising unemployment rate, means there is a high dependency on the working population which obviously affects savings. With a low ratio of working population to non-working population (who are recipients of social benefits),  there is reduction in tax revenue and increased spending on social benefits which affect the ability of the middle class (about 20% of the population) to invest in life insurance.

LIBERIA

New Capital Requirements for Liberian Insurance Companies

The Central Bank of Liberia (CBL) says that the ongoing implementation of the capital requirements for all licensed insurance companies operating in Liberia remains on course in line with regulation issued in 2015 and amended in 2016.

The regulation sets the capital requirement for each class of insurance business, and requires each insurance company to maintain a minimum capital requirement based on the category of insurance activity being undertaken by a company.

Table 1.3

Class of Business	Reviewed Minimum Paid-Up Share Capital
Life Insurance Business	$750,000
General Insurance Business	$1.5 million
Reinsurance Business	$5 million

The implementation of the regulation, which began September 30, 2016, is being executed in stages, on a quarterly basis, over a period of three years to allow for flexibility. The recapitalization should have taken effect in April 2019 but due to circumstances only known to the government it did not come on

Conclusion

Life insurance has the potential to both mobilize domestic savings and investment and to create employment and enhance household welfare, thereby helping to drive economic growth and development at a crucial time in sub-Saharan Africa.

Dr. Aaron Issa Anafure is the author of this article.
He is the Chief Executive Officer of
Quality Life Assurance Company (QLAC) Ghana