The third and final module, which concluded the Microinsurance in Africa Expert Forum series took place in April with around 40 participants joining facilitator Brandon Mathews, of Stonestep and topic expert Michael J. McCord, Chair of the Microinsurance Network and President of the MicroInsurance Centre in an interactive discussion centred on distribution and innovation in Africa.
Using key data collected in 2014, for the Landscape of Microinsurance in Africa report, published by the Microinsurance Network and Munich Re Foundation, in cooperation with Making Finance Work for Africa (MFW4A) and GIZ on behalf of BMZ, carried out by the MicroInsurance Centre and due to be released in the upcoming month(s), the forum delved into the features of different distribution channels, roles in the microinsurance value chain and cracking the distribution challenge. Specialists in these areas, including Martin Kgoale of Hollard, Tughral Ali of MicroEnsure and Isaac Magina of Swiss Re, were called upon to comment on their experiences throughout the Forum.
Range and features of different distribution channels
With four types of microinsurance distribution identified – embedded, compulsory, opt-in/freemium and voluntary – there are evidently a range of distribution channels, with different features and ranges.
As McCord explains, distribution drives microinsurance, without it, the quality of the product is irrelevant. It is therefore important to select the most appropriate distribution channel to suit one’s particular target market. The Africa Landscape report reveals that mass market channels, including mobile network operators (MNOs) are by far the most common for microinsurance distribution in the region. To illustrate, through this channel nearly 18.7 million lives are covered, despite only 57 total products being distributed this way*.
In terms of profitability, as discussed in the Expert Forum on business case, both the revenue and expenses are important components to be analysed for specific distribution channels. It is relevant for insurers in helping them understand where profitable opportunities may lie for outreach in different markets – ultimately, how channels help them make money.
Martin Kgoale, Director of Sales and Distribution at Hollard in South Africa says that in microinsurance, the mass and middle-income earners are migrating towards formalised distribution in terms of preferred channels, but while their income is still low, it remains by-and-large on the informal side.
Hollard’s multitude of channels, both self-owned and partner-owned, consist of virtual and physical platforms, including call centres and blister packs for the former, and retailers for the latter. However, Kgoale explains that retailers are becoming less popular, as they are increasingly disintermediated, meaning the partner deals directly with the customer, consequently representing a threat to their profits, as opposed to income generated were they to go direct.
Most importantly though, Kgoale notes the importance of segmentation of products according to the partner, interaction points, the customer and their intention. The ultimate objective is to try and limit the details, make it the least onerous possible, simple to understand and easy to take up from the customer’s perspective.
Roles and remuneration in microinsurance value chain
Distribution encompasses several parties – each with their roles. Tughral Ali, Head of MicroEnsure Africa, outlines that on the surface, his company works with three distributors: MFIs, banks and telecoms. However, he clarifies that the value chain starts further back with the underwriter, moves on to brokers, solution designers and administrators, then arrives at the distributors, as well as the fourth element, which are often forgotten – retailer/agent.
It is in fact this last component of the value chain that has the highest amount of influence on the customer’s choice, due to his/her daily contact with the consumer. Therefore, the criteria for selecting the distribution channel should come down to mass reach, which provides value in terms of the premiums and the subsequent profits generated for all parties.
Another key factor to account for is communication and understanding. Ali says that relationship-based channels are best, given that having an agent on the ground simplifies communication. However it limits reach. Conversely, with the digital channel, mass reach is facilitated and easily achievable with one SMS, for instance, but the level of understanding is decreased. He maintains that the solution is to find a middle ground – a call centre for example, which can ally good client retention, product understanding and outreach simultaneously.
With channels such as MFIs and MNOs pushing hard for commissions, the way to keep this in check is to increase the size of the pie: As Ali argues this is not a zero sum game. To achieve this, positioning your product in a way that impacts their ARPU (average revenue per user) and reduces their churn is a way to make them more money, whilst subsequently reducing the pressure on commissions.
Furthermore, the dependency on MNOs and airtime as a payment solution will soon be waning. With no current alternative to the Unstructured Supplementary Service Data (USSD) channel, MNOs have high bargaining power. However with the shift to the use of WiFi, smartphones and digital currency, an alternate channel is opening up that will reduce MNOs’ leverage going forward.
The impactful distribution channel
The latest Landscape study reported insurers flagging distribution and the need for improved channels as a critical issue. Isaac Magina, Senior Client Manager Africa at Swiss Re says one of the challenges faced on the African continent is the low distribution, low penetration levels of insurance products in general. This basically means there is an inefficient local infrastructure or understanding of the market, and the responsibility to explain products relies heavily on the distribution channel.
The channel selected depends largely on the product being offered. Magina maintains that a thorough market assessment is the first port of call, given the need for knowing and understanding the market requirements for said product type. It is necessary to get to a level where the target market can embrace a product, whilst balancing how effectively one can reach the target market.
Using agricultural microinsurance products specifically as an example, the question of trust is key. Once you understand the target consumer - exactly what channels rural-based smallholder farmers can trust and what message they’re in tune with - then you opt for an impactful distribution channel. Rural farmers are sceptical when approached by urban brokers, because trust levels are low. Yet a simplified, tailored message touching on examples that relate to the farmers’ daily experiences will have a better chance to stick and sell.
Vertical integration: Channels into insurance?
With a view towards the future for insurers and microinsurance, Israel Muchena posits the concept of distribution channels vertically integrating into insurance, given the minimal inventory and capital and few and surmountable obstacles attached to it.
The chances of vertical integration between microinsurance firms and underwriters, rather than distributors is more likely, according to Tughral Ali of MicroEnsure. Firstly, buying out a distributor is very expensive; secondly distributors may simply have no interest in integrating, as their core business includes several products, not just one; and thirdly the channel’s use is subject to change, depending on market trends: The core of the product, the knowledge base, and the interest in the product continue to lie with the insurers, not the distributors, so the focus should remain there.
*Data derived from subset of 219 products, accounting for 97% of identified premiums and 72% of identified lives covered
Hugo Fulco is Communications Officer at the Microinsurance Network.