MICROCAPITAL STORY: Ghanian Commissioner Charges Insurance Companies to Reach Low-Income Households through Microfinance

AllAfrica.com reported that Josephine Amaoh, Ghanaian commissioner for insurance, has charged insurance companies to explore ways to penetrate the low-income market by offering more appropriate microinsurance products, and by exploring alternative distribution channels, such as microfinance institutions (MFIs). Ms Amaoh presented a paper on “The Implementation of Micro-insurance: The Role and Perspective of The Supervisory Authority” at a West African Insurance Companies Association (WAICA) education conference in Lagos. She said “one major cause of poverty in Sub Saharan Africa is the fact that low income households and markets do not have the same opportunities to finance investments, accumulate capital, and protect their assets… In order to facilitate economic development and alleviate poverty, the financial systems must be made more inclusive by improving access to savings, credit and insurances services to the poor.”

Ms Amaoh observed, “The distribution systems of most insurers are not designed to serve the low income market. The culture and incentives in insurance companies reward and encourage salespersons to focus on larger policies, more profitable clients and discourage salespersons from selling insurance to low income house holds.” Her statements were corroborated by insurance company, Swiss Re’s sigma Report of 2007, which examined the worldwide insurance industry, and indicated that the insurance penetration level was only 1.6 percent in Ghana, 0.64 percent in Nigeria, and 2.47 percent in Kenya.

Ms Amaoh argued, “The contribution of insurance industry to the Gross Domestic Product (GDP) of countries in sub-Saharan Africa is low because most of the people operate in the informal sector as petty traders, artisans, subsistence farmers, fishermen etc. Such people, who ironically happen to be the majority, usually have low education, low and irregular income and therefore do not have access to the regular financial services. The only way to reach out to these people is to use appropriate micro-insurance mechanisms.”

These appropriate mechanisms, she posited, include insurance products that are tailored to the needs of low-income households. They must be designed with appropriate insurable amounts and consideration of the irregular cash flows of those who work in the informal sector. Also, the policy wording should be in very simple language, so it is easily understood by low-income clients who are often illiterate. She also suggested that in order to rapidly penetrate deeper into the low income market, alternative distribution channels must be explored, such as community organizations, retailers, churches, cell phone companies, and MFIs.

Ms Amaoh expressed concern that regulatory barriers could prevent utilization of distribution channels, and stressed the need to strike a balance between regulation and innovation. Regulations should be in place to protect low income clients from two forms of abuse: one, from agents who may mislead them in order to increase sales; and two, to prevent MFIs from forcing clients to purchase insurance when borrowing. She also suggested that a complaint service should be designed with the needs and communication limits of low income clients in mind.

In December, MicroCapital released a story, “Challenges and Unique Solutions to Providing Microinsurance in West Africa,” that discussed the director general of WAICA, Mike Ikupolati’s statements about why penetration of insurance in West Africa is very low: “The challenge of microinsurance in West Africa is many. It is vital to know that our local conditions are unfavorable, premium income is low, administrative costs are relatively high and infrastructure for insurance support is lacking.”

Despite these challenges, we have seen a surge of microinsurance initiatives in Africa as of late. In South Africa, Ms Amaoh said that there has been a wave of innovation in the microinsurance industry as a result of a Financial Sector Charter, in which all financial service providers agreed to voluntarily serve the low-income market.

In August 2008, MicoCapital reported that the International Labor Organization (ILO) launched a Microinsurance Innovation Facility, which aims to offer 40 to 50 grants over five years totaling USD 18 million. It aims to “stimulate new ideas and test innovative approaches to providing better insurance products to low-income households.” The Facility was launched with a USD 34.2 million grant from international philanthropic organization, the Bill and Melinda Gates Foundation. Also in August, MicroCapital released a story on the Co-operative Insurance Company of Kenya (CIC), one of the first beneficiaries of the ILO grants: “Co-operative Insurance Company of Kenya Introduces Microinsurance Products…”

Finally, in January 2009, MicroCapital reported that ACCION, a private non-profit foundation, invested USD 3 million in LeapFrog Investments, an international microinsurance investment firm headquartered in Mauritius worth USD 100 million. The ACCION investment was to be used towards building and replicating a sustainable model for developing and marketing microinsurance services to the poor in Asia and Africa.

By Ryan Hogarth, Research Assistant

Additional Resources:

ACCION: Home

AllAfrica.com: “Nigeria: Insurers Accused of Not Considering Poor People”, by Sola Alabadan.

Bill & Melinda Gates Foundation: Home

Co-operative Insurance Company, Kenya: Home

Ghana News: “Improve Insurance Industry”

LeapFrog Investments: Home

MicroCapital.org article, August 22, 2008: “Co-operative Insurance Company of Kenya Introduces Microinsurance Products through International Labor Organization (ILO) Microinsurance Innovation Facility”

MicroCapital.org article, August 26, 2008: “PRESS RELEASE: International Labor Organization (ILO) Announces Availability of Microinsurance Innovation Grants”

MicroCapital.org article, December 4, 2008: Challenges and Unique Solutions to Providing Microinsurance in West Africa

MicroCapital.org article, January 5, 2009: ACCION Invests $4.2m in Two Microfinance Companies: Mauritius Based Leapfrog Investments Ltd and Swiss Based Paralife, Invests in Initiatives Aimed at Moving Microfinance ‘Beyond Credit’