CHALLENGES AND OPPORTUNITIES OF MICRO INSURANCE IN NIGERIA AT LEADWAY INSURANCE COMPANY IN NIGERIA
The study aimed at determining the challenges and opportunities of Micro insurance at Leadway insurance company. The study adopted a case study research design and collected primary data using an interview guide. The interviewees comprised of the micro insurance team at head office, operations officer, strategy and development officer, Business development team, marketing executives, sales agents, customers and underwriting officer at leadway insurance company in Nigeria. Before processing the responses, the completed interview guides were edited for completeness and consistency the data was analyzed using content analysis. The study findings revealed that Leadway insurance company faces product design challenges such as failure of the products formed to meet consumer expectations, rationing challenges that result in incursion of significant transaction costs, in terms of intermediating the product and premium collection and also staff productivity and inefficiency in the development of micro insurance. The study recommends that Leadway insurance company should develop high quality products to attract clients to insurance and lastly the study recommends that it would be useful to carry out the same type of research in other insurance companies and across East Africa and beyond and see whether the same results would be replicated.
Low-income households are vulnerable to risks and economic shocks. One way for the poor to protect themselves is through insurance (McCord 2011). By helping lowincome households manage risk, micro insurance can assist them to maintain a sense of financial confidence even in the face of significant vulnerability. If Governments, donors, development agencies and others are serious about combating poverty, insurance has to be one of the weapons in their arsenal (Churchill 2006). Among lowincome populations, risk pooling and informal insurance are not entirely new. Informal risk-sharing schemes have been around for generations, even in some of the most inaccessible places (Churchill 2007). However, these schemes are usually limited in their outreach and the benefits typically cover only a small portion of the loss. A key aspect of the interest in micro insurance is to explore ways of significantly increasing the number of poor households that have access to insurance while enhancing the benefits (McCord, 2011).
Wipf, Kelly and McCord (2011) cite that micro insurance has expanded through community-based and other local initiatives, some promoted by donors. Bilateral and multilateral donors are helpful in providing technical and financial assistance to micro insurers and have promoted the conceptual discussion on micro insurance. The donor community cannot yet rely much on lessons of effective micro insurance promotion and therefore, is still studying effective ways (do’s and don’ts) to promote micro insurance. However, some valuable lessons can be drawn from microfinance, which has a longer history and a broader global react. In fact Makove, (2011) argues that growth and success of microfinance – which was originally seen as the provision of savings, transactions (including remittances) and credit services to low-income households and micro enterprises before the inclusion of micro insurance – has been responsible for creating a delivery channel to help regulated insurers target the lowincome segment in an efficient manner. In some jurisdictions, new rules have motivated commercial insurers to move into the low-income market or informal micro insurers to formalize. At the same time, insurers have also recognized the opportunity in this market segment.
According to Osero (2009), an estimated 32.6million people in Nigeria live on less than $5 per day. Of this group, it is further estimated that 9.6million adults earning between $2 and $5 per day are potential consumers of Micro insurance products.
Existing micro insurance initiatives use links with informal savings societies, Insurance institutions, SACCOs and banks as well as the more traditional methods, such as insurance agents, to distribute products in this market. There have also recently been efforts to use mobile phone technology as a distribution channel, the success of which will emerge in the near future.
In line with Makoves’ (2011) study the current insurance regulatory framework in Nigeria is aimed at traditional insurance providers, with little recognition of cooperative/mutual and micro insurance business as distinct from mainstream insurance business. Micro insurance schemes therefore currently have to comply with the onerous requirements of traditional insurance business. Earlier this year, the Insurance Regulatory Authority commissioned a survey of the country’s micro insurance market as a first step towards policy reform within the legislative and regulatory spheres that will ensure a more suitable framework for micro insurance operations and leadway being a member of the task force has played a critical role in this exercise.
Micro insurance entails delivery of insurance products to participants at base of the pyramid. It is offered to shield clients against specific risks in consideration for premiums matching the possibility of occurrence of the risk (Makove, 2011). Conceptual differences exist between micro Insurance and other forms of insurance since micro-insurance has lesser assets and lower volatile premiums. Although lowincome earners face risks and economic shocks that might be the same as conventional insurance clients, the low-end market is more susceptible due to limitation of resources and knowledge (Churchill, 2006; Maleika and Kuriakose, 2008), are not able to mitigate risks compared to their higher-income participants; and in case of economic loss from perils, they are less equipped to cope with the aftermaths.
The poor face two types of risks namely; idiosyncratic (specific to the household) and covariate (common to all). To combat these risks, they have traditionally used risk pooling (for instance funeral and burial societies), income support (for instance credit arrangements and transfers) and informal insurance or risk-sharing schemes such as grain storage, savings, asset accumulation and loans from friends and relatives (Bhattamishra and Barrett, 2008; Tadesse and Brans, 2012). However, the prevalent forms of risk management (in kind savings, self-insurance, mutual insurance) which were appropriate earlier are no longer adequate and feasible (Pierro and Desai, 2007; Giesbert and Steiner, 2012) as they are limited in outreach and the benefits typically cover a small portion of the loss, offer limited protection, low returns for households, and are prone to breakdown during emergencies. Formal insurance instruments can offer superior risk management alternatives, provided poor households can access these services (Maleika and Kuriakose, 2008).
According to Roth et al; (2005) micro insurance covers a variety of different risks, including illnesses, accidental injuries, and death and property loss basically any risk that is insurable, and is designed to be appropriate in terms of affordability and accessibility to low-income households. They can be offered as a single risk product or as a bundled risk product. Coverage can also be provided on an individual or group basis. Organisations providing micro insurance are micro insurers, although they assume many different forms. Micro insurance risk carriers include small communitybased schemes, mutual, cooperatives, or joint stock companies. They may be forprofit or not-for-profit. Not all micro insurers are regulated by the insurance law.
In line with Roth, McCord and Liber (2007), the legal set-up of a particular jurisdiction, some fall under other laws and authorities such as the cooperatives or health providers, others may be unregulated practice; the risk carriers often form linkages with a range of players in order to reach out to the low-income market. It is also important for insurance supervisors to realise that most features of insurance largely apply to micro insurance as well, such as actuarial, accounting, auditing, policy documentation, reinsurance, monitoring performance indicators, technical management (enrolment, claims, processing), contracting with health care providers
One key difference between micro insurance and other insurance is how it is made accessible to the low income market. The core issue for micro insurance is simplicity.
How does one develop a product and its related processes simply enough that people can understand them? Given the huge volumes of small policies, can the administration of premiums and claims be done as efficiently and inexpensively as possible? Innovations are a key to finding solutions to these challenges (Churchill, 2007). Micro insurance institutions and instruments have developed rapidly over the last decade, with policies covering tens of millions at the base of the economic pyramid. Ranging from simple policies providing life or health insurance to complex policies covering catastrophic risks for small landholders, it is a market with proven potential that demands closer attention (Patel, 2002).
Today, many emerging market jurisdictions are addressing the issue of widening the reach of insurance services to those segments of the population that have remained uninsured or under-insured. A central element in the promotion of inclusive financial systems is the development of micro insurance – the protection of low-income people against specific perils in exchange for regular premium payments proportionate to the likelihood and cost of the risk involved – while continuing to foster a safe and sound financial system (Churchill 2007).
The main players in the Nigerian insurance industry are: insurance companies, reinsurance companies, insurance brokers, insurance agents and the risk managers. The statute regulating the industry is the insurance Act; Laws of Nigeria, Chapter 487. The office of the commissioner of insurance was established under its provisions to strengthen the government regulation under the Ministry of Finance. There is also self-regulation of insurance by the Association of Nigeria Insurers (AKI). The professional body of the industry is the Insurance Institute of Nigeria (IIK), which deals mainly with training and professional education. Recently there was formed the Insurance Regulatory Authority (IRA) mandated to supervise and regulate the insurance industry players. According to the AKI Insurance Industry Report for the year 2011, there were 45 operating insurance companies as at the end of 2011. 22 companies wrote non-life insurance business only, 9 wrote life insurance business only while 14 were composite (both life and non-life). There were 141 licensed insurance brokers, 14 medical insurance providers (MIPs) and 3,668 insurance agents. Other licensed players included 105 investigators, 75 motor assessors, and 21 loss adjusters, 2 claims settling agents, 8 risk managers and 23 insurance surveyors.
The industry recorded gross written premium of Kshs 91.60 billion compared to Kshs 79.06 billion in 2010, representing a growth of 15.9%. The gross written premium for non-life insurance was Ksh 60.67 billion (2010: Ksh 52.35 billion) while that for life insurance was Ksh 30.93 billion (2010: Kshs 26.71 billion). Non-Life insurance premium grew by 15.9% while life insurance premium and contributions from deposit administration and investment/unit linked contracts grew by 15.8%. The industry has consistently recorded growth over the last eight years. The industry’s annual performance therefore exceeded the overall economic growth of 4.4% recorded in 2011.
The insurance penetration is estimated at 3.02%, which compares well with the emerging markets average of 2.7%. The introduction of new products in the market and the significant improvement in service delivery platforms being experienced in the insurance industry will no doubt propel the insurance industry to a higher level of growth. This is underpinned by the huge potential of untapped insurance market in the country coupled by the ongoing efforts by the Government in strengthening the regulatory environment of the financial services sector, which include the review of the Insurance Act and the importance placed on insurance services under Vision 2030. On its part, the Association of Nigeria Insurers continues to play a key role in the development of the insurance industry through implementation of strategies and initiatives geared towards achieving higher insurance awareness and penetration. For the last ten years, the Insurance Industry has grown at an average rate of 15%. In
2011, the industry wrote a gross premium of 91.6 billion compared to 79 billion in 2010. Year 2010, was however exceptional as the industry recorded 23% growth, the highest rate of growth recorded in recent times.
Roth, et al (2005) argues that in emerging markets, a low percentage of the population uses conventional insurance services compared to developed jurisdictions. Since neither government schemes nor informal insurance schemes effectively cope with this gap, the majority of the population lacks access to insurance protection. The distribution frontier does not usually extend to the millions of economically active persons working in the formal and even less, in the informal economy. The consequences of insurance rationing for the economy as a whole might be significant: destruction of wealth; reduced productivity and economic growth; loss of investments in human resources through education; shortened productive life; overburdened state health care facilities (Beck and Demirgc-Kunt, 2008). However, as Wipf and Garand (2007) to understand clearly how to develop new business models for micro insurance, it is necessary to assess why the current insurance business models do not reach the poor. Although the insurance industry is beginning to notice the vast underserved market of low-income households, insurers have encountered numerous obstacles that need to be overcome if they are to offer micro insurance on a large scale.
Besides the problems associated with high transaction costs and inappropriate distribution systems, the products generally available from insurers are not designed to meet the specific characteristics of the low-income market, particularly the irregular cash flows of households with breadwinners in the informal economy (Hoddinott and Quisumbing, 2003). It is generally assumed that low-income men and women are more vulnerable to risks than the not-so-poor; however, insurers generally do not have data to interpret the vulnerabilities of the poor. To address such a problem, insurers may build in a hefty margin for error and then make adjustments once the claims experience starts rolling in (Johnston and Morduch, 2008).
Locally studies that have been carried out on the insurance sector include: Mirie
(1989) did marketing of insurance services, Abdullahi (2000) did a study of the strategic responses by Nigerian insurance companies following liberalization, Wairegi (2004) did a study on the strategic response by life insurance companies in Nigeria to changes in their environment and Muthoni (2008) did a study on the viability of accessing health insurance on the urban poor through community based organization, the case of Kibera slums. There is therefore a research gap that needs to be filled by carrying out an investigation into the barriers hindering micro insurance development and address the research question: what are the challenges facing Micro Insurance development at Leadway insurance company in Nigeria?
The study aimed at determining the challenges and opportunitiesof Micro insurance at Leadway insurance company in Nigeria.
To the operating insurance firms in Nigeria, the study findings would be of great importance because it would identify the challenges facing these insurance firm’s in development of Micro insurance and suggest ways to tackle this hindrances.
To the current and potential scholars in the business field more especially those who have interest in Micro insurance, the findings from this study would provide information to expand the one already that exists. The findings would also be of critical importance to those who have got interest of further studying the field because the researcher intends to give suggestions for further studies.
Insurance as a sector to contributing to the country’s economy cannot be overlooked by the government and other policy making agencies. The findings from this study would therefore be of importance because they would have the capacity of being used to formulate positive national policies which are relevant and sensitive to the forces influencing the insurance sector in Nigeria.