According to projections disclosed by the Insurers Association of Zambia (IAZ), the sector is set to grow by 19% in 2016, compared to 17% in 2015 and 2014. Market premiums are estimated to reach ZMK2.5 billion, with general insurance premiums contributing ZMK1.7 billion and life premiums contributing ZMKK864 million. According to the IAS, for the first time in over a decade general insurance premiums have grown at a faster rate than life insurance premiums, at 23%, compared to 14% in 2015, while life insurance premiums growth was only at 12%, down from 14% in 2015. Compared to the African average of 3.5%, the contribution of Zambia’s insurance premiums to the GDP is at a dismal 1.2%, suggesting a level of ZMK7 billion for the premiums to catch up with Africa’s average.
The First Steps Towards Consolidation
According to the Pensions and Insurance Authority, as of August 31, 2016, the industry included 34 players, two reinsurance brokers, and over 220 insurance agents. Low barriers to entry allowed a growing number of players in a sector that has been growing at a slower rate than the GDP, resulting in an extremely competitive environment and an industry with a low capacity to absorb medium risk in terms of net retention rate. The Executive Director of the IAZ disclosed the resulting premium leakage in the country, stating that large numbers of insurance policies have been placed outside Zambia in the form of reinsurance premiums, contrary to Section 120 of the 1997 Insurance Act. According to IAZ estimates, between 2009 and 2015, Zambia lost over USD1.5 billion in premiums, from the import and export of goods into and out of the country. The need to reinternalize these premiums led the government to revise the minimum capital requirements in the industry and in October 2015, Finance Minister Alexander Chikwanda on signed Statutory Instrument 71 of 2015, which will be implemented across the sector as of October 2, 2017. According to the new law, insurance companies’ minimum required capital increased from ZMK1 million to ZMK10 million for short-term insurers, and from ZMK1 million to ZMK12 million for long-term insurers. For reinsurers it increased from ZMK1 million to ZMK20 million, and for brokers from ZMK40,000 to ZMK100,000. With the current exchange rate, the new minimum capital translates to about USD900,000 and USD1 million for short-term and long-term insurers, respectively, while those for reinsurers and brokers are about USD1.8 million and USD9,000, respectively. Apart from resulting in the retention of funds within the country, this new measure is set to trigger a new wave of mergers and acquisitions where bigger players will absorb smaller ones and consolidate their capital base so as to be able to absorb risk.
Big Players Moving In
Another major development in the sector was the entry of Prudential Plc into Zambia in 2016. With almost 170 years of operations, Prudential is one of the world’s leading financial services groups, with 24 million customers worldwide and assets under management of around USD750 billion. Managing Director Krishnaswamy Rajagopal stated that “Zambia in particular is an attractive insurance market, with a combination of low insurance penetration levels, a young and growing population, and a rapidly expanding middle class… Life insurance penetration in Zambia is less than 1%, so there is plenty of scope for the market to develop rapidly. The size of the potential target market for mainstream insurance is roughly 600,000-700,000 people, but this does not include the informal sector where the majority of Zambians are employed.”
VAT is Removed
The VAT on insurance premiums, which had been introduced in 2011, had negatively impacted the industry, as it had caused administrative difficulties for the insurers, as well as levied a cost for the final consumer. After a long period of lobbying by the industry for the removal of the 16% VAT on short-term insurance policies, the government heard the plea and the tax was lifted as of January 2016, to be replaced by a 3% levy. On the one hand insurance was made more affordable, while on the other, although it presented no cost to the insurer, it still was an administrative burden that came to be greatly reduced under a levy system.
A changing Panorama
An important sectoral trend that was underlined by Prudential’s Rajagopal was the increasing weight of life insurance: “We are also seeing the industry is changing rapidly—in 2010 there were four or five life insurance companies in Zambia, and today we have about 12 or 13, mostly international or regional players, although there is some room for consolidation. This makes life insurance the fastest-growing insurance line in Zambia.”
The structure of the industry is also highly dependent on the evolution of the economic activity in general. The CEO of Hollard Insurance Paul Nkhoma stated that the company grew by 30% in Zambia in 2016, a growth he attributed to the company’s well-distributed network of insurance brokers that boosted the company’s market share. He also revealed his observations of the evolving structure of the industry: “At Hollard, we break down our business into corporate, commercial, and individual sub-fields. Recently, we have witnessed a shift in the overall success of these markets, with the corporate space being our traditional biggest source of business. An increased number of SMEs as well as a more influential middle-income sector have filtered into that commercial space, and because of this we plan to focus our attentions there in the near future. That said, we also look to penetrate the life insurance market.”
Innovative ways to reach a remote and uninformed population Microinsurance
As the majority of the population is employed in the informal sector, the insurance industry needs to develop products that are all inclusive and not just adapted to the formally active population. Microinsurance is one of the tools that will provide appropriate insurance services to the low-income segment. However this proves to be a challenging process. According to the FSDA’s 2016 microinsurance report, “Microinsurance products are complex; they require significant investment in research and development, as well as non-traditional distribution partnerships to reach a commercially viable scale. Consequently, it is difficult for any single player, acting individually, to develop the market.”
Still, the distribution of microinsurance has gained a wider access since 2009, when it was mainly distributed by microfinance institutions (MFIs). Today, various distribution channels are being used, such as banks, mobile network operators, workers unions, the post office, microenterprise associations, and community-based agents.
According to Rajagopal, technology holds great potential when it comes to more standardized products: “The take-up of technology in the insurance sector is at a nascent stage in Zambia. While it is a vital part of the insurance back-office, as a tool for interacting with potential customers, it tends to favour more standardised products over life insurance. Life insurance typically requires a conversation between the company and the client to understand the client’s needs and the suitability of the product. We are supportive of technology that makes insurance more comprehensible, where customers can get the product that is right for them and their circumstances. We will continue to assess the Zambian market, evaluating the ways in which technology can be harnessed to improve customer relations.”
A Large Network
Familiar with operating in a heavily rural population, Zambia’s former state monopoly ZSIC has a different strategy regarding the scope of its target group, as stated by Managing Director Charles Nakhoze: “In addition, unlike our competitors, which remained focused on large towns, we developed a larger distribution strategy, especially for our agricultural insurance and motor insurance products. By spreading ourselves across all districts, we have established business in areas that our competitors are not able to reach.”
The Finscope 2015 survey revealed that 42.6% of Zambian adults have not heard about insurance. With this reality in mind, the Insurers Association of Zambia (IAZ) was tasked with organising the third annual Insurance week, which took place September 14-18, 2015. Activities were carried out in various cities including Livingstone, Chipata, Kasama, Kitwe, Ndola, Solwezi, Mongu, Kabwe, and Lusaka.
The IAZ announced that the Ministry of Finance has indicated that the long-awaited new Insurance Act will be enacted within 2017. This move is a revision of the 2013 Insurance Bill, which is seen to be a progressive document paving the way for improved governance for the sector, recognition of microinsurance as a separate insurance category, and the expansion of intermediary service providers. Investor confidence is strong and the industry is hopeful of growth potential that Zambia represents, as it is participating into policymaking mechanisms with the government and sector institutions to refine and upgrade a sector that will contribute to the overall economic stability of the country.