The second module of the Microinsurance in Africa Expert Forum series took place at the end of March, with around 50 participants joining facilitator Bert Opdebeeck, Microinsurance Programme Coordinator at BRS, the Belgian Raiffeisen Foundation, and topic expert Michael J. McCord, Chair of the Microinsurance Network and President of the MicroInsurance Centre, in an interactive presentation and discussion on the business case for microinsurance in the African region.
An in-depth exploration of the 2014 data collected in the soon-to-be-released 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 and carried out by the MicroInsurance Centre, provides key insights into the matter.
Claims, administrative expenses, and commissions are three significant components that require specific attention in order to comprehensively analyse the profitability and business case for microinsurance products.
The significance of claims
The claims ratio, that is the number of claims over the number of premium, is an important indicator for insurers as it speaks to the sustainability and profitability of a product: if too low then the product is probably of too little value to customers leading to low renewal ratio and product unsustainability, if too high then the product profitability will be put to the test.
A target claims ratio should first be established. The Landscape results show that 44% of products have claim ratios of less than 20%, based on claims data reported for over 200 products, which McCord argues is indicative of institutions recognising the importance of focusing on this. Subsequently, with the growth and expansion of said institutions, the claims ratios will increase.
What are the reasons for low claim ratios?
The novelty of a product appears to be contributing to low traction and exposes a trend: 38% of products launched in the last two years had “Low” (below 20% threshold) claims ratio, whilst just 18% of products with claims ratios above 20% were less than two years old. Premiums are often heavily loaded in early calculations as insurers are trying to figure things out. Age is therefore an important indicator according to McCord.
Other factors leading to low claim ratios include high claims rejection rate, due to initial anxiety by insurers, and/or a lack of clarity and understanding of products by the clients, benefits being too low to make the claims worthwhile, or claims processing technology being too complex from a client point of view.
Setting targets and methods of actively managing claims ratios are practices adopted at KGA Life in South Africa. Alex Kühnast, the organisation’s CEO highlights that this is done on a per product and per distribution channel basis with a range of techniques including actuarial and industry experience (for accurate pricing), and fraud detection and reinsurance (for management purposes).
Factoring in administrative costs
Forgetting to take into account the full admin expenses - direct and indirect– is often the reason many insurers with low claims ratio believe they are profitable, when in fact they may not be. McCord cautions that these expenses must be tracked separately. In so doing, insurers can assess profitability much more easily.
Agnes Chakonta, of MLife in Zambia echoes these thoughts, and pinpoints how her organisation tracks the performance of their two business lines – credit life and funeral insurance - isolating expenses in each portfolio.
With 24% of Landscape respondents, reporting an admin ratio of more than 50% (based on expense data reported for 147 products), McCord says the aim should be to target the 0-20% range. The reduction of expenses through the use of technology for payments is a way of achieving this. These efforts are evident when comparing the 2011 study data to the 2014 figures, with an increase in the use, not only of mobile phones, but also of POS devices and magnetic stripe cards for premium collection and claims payments.
What about commissions?
The third component to be considered are the commissions. With insurance institutions doing less and distribution channels doing more, commissions are increasing. This is a challenge to profitability because admin expenses and claims still need to be paid. All three components added equate to the combined ratio.
40% of institutions reported combined ratios of 0-60%, which translates to an admirable profit of at least 40%, while 69% had combined ratios of less than or equal to 100% based on KPIs reported for 135 products. The other 31%, with a combined ratio of more than 100% are then losing money on their microinsurance products.
So where do the issues lie for specific products?
Small scale and ‘young products’ would seem to be a good starting point to identifying the issues: The average number of lives insured for products with combined ratios of over 100% was nearly 43,000 out of close to 153,000 lives overall, whilst the aggregate combined ratio of products launched from 2012 onwards is 109%, compared to 85% for those launched prior to 2012, indicating a high correlation between the two factors.
Israel Muchena from Africa Re ponders over the question of benchmarking claims ratios, and says significantly higher claims ratios are needed, especially when entering a new market and trying to persuade new clients to purchase a particular product. On the other hand, he posits that the claims ratio can’t be too high, because of the insurer’s need to balance for financial viability. Benchmarks are very important for both insurance and microinsurance, he says. From the supplier’s point of view, it ensures the financial soundness of the insurance sector and from the demand side, it ensures the delivery of valuable products. However, Muchena warns that if claims are too low and excessive money is going to intermediaries, insurance penetration rates will remain low in Africa.
Bert Opdebeeck sees the presented results as a strong indicator that a business case can be made for microinsurance as a business in Africa, and believes the discussion should indeed be furthered towards benchmarking.
Hugo Fulco is the Communications Officer at the Microinsurance Network.