By: Sarina de Beer, director: client experience at Ask Afrika
The emerging middle class in Africa is fragile and vulnerable, facing constant risk. Considering this fragility, Africans’ exposure to risk cannot be underestimated and insurance products need to be tailored specifically for this market, rather than just adapting existing models.
An African Development Bank study has shown that about 180-million people – 60% of the African middle class – are still on the brink of poverty. They are vulnerable to exogenous shocks and can easily fall back into poverty. They are also more likely to be affected by global warming, changing weather patterns, drought and other environmental factors.
Insurance industry products therefore need to cater for a very different kind of risk management, in a way that contributes to communities, as opposed to just pushing products for the sake of economic return.
Corporate responsibility is critical in terms of how businesses engage with, market, develop and promote their products. The notion of the middle class conjures up a sense of lifestyle security, particularly in terms of property ownership and income, but the assumption that the middle class lives in comfort needs to be challenged. In Africa, some homes lack the basic amenities associated with households that have a disposable income.
Ask Afrika’s Target Group Index (TGI) research of the African middle class has shown that while most homes have electricity, the supply is unreliable. Some lack a dedicated water supply and depend on communal taps or the bucket system (only 42% have running water inside the home), and only half have a built-in kitchen sink. The absence of basic amenities is often beyond individuals’ control, with poor infrastructure in many cities negatively affecting the standard of living.
Property ownership is a key aspiration, but more people (52%) rent than own their homes. Similarly, car ownership is lower than might be expected – 68% of middle class households do not own a car and rely heavily on public transport.
Although 80% had experienced major unexpected expenses in the past year, they reported that insurance and formal lending, although available, can be difficult to obtain. Consequently, people opt for using savings, or borrow money from family or friends, to deal with emergencies.
There is a big saving culture among the African middle class – not for retirement, but for unforseen circumstances. But while making provision for crises is common in African societies, insurance is not necessarily seen as the solution.
In fact, insurance still has a low penetration as a percentage of gross domestic profit (GDP) in Africa. In South Africa, with its more mature insurance market, the penetration is 9% to 10% of GDP for short-term insurance. In Zambia, short-term insurance penetration is 1.2% of GDP, in Kenya it is 1.6% and in Ghana it is 0.9%.
A comparative study of short-term versus life insurance in Africa has shown that, in South Africa, the uptake of life insurance is about 30% more than short-term insurance.
In the rest of Africa, though, the uptake of short-term insurance is at least 30% more than that of life insurance.
The middle class faces risk on a daily basis, but insurance companies generally don’t offer products that safeguard and manage this risk.
Insurance products need to be tailored to a very different kind of take-up, rather than just trying to adapt existing models to different markets. The Western linear way of thinking and functioning within a formal market does not translate to Africa. A large portion of business in Africa functions within the informal sector, is more family- and community-oriented, and the business model is circular.
Entrepreneurship is common, with no fixed monthly salary. Income fluctuates and is not predictable. Commitment to fixed monthly premiums is not necessarily realistic.
To be consumer-centric, completely different and more circular insurance offerings, aligned with day-to-day life, need to be adopted. One such solution could, for example, be a collective insurance offering.
Life for the middle class in Africa often has ebbs and flows. Insurance products need to cater for this, so another solution could be variable premiums, based on what is affordable at that current moment, almost like a pay-as-you-go type of product offering.
In conclusion, businesses must consider the population and understand what consumers really need. They must also embrace an ethical and social responsibility to make the right changes for the right reasons, and build sustainable business models that are relevant in the African insurance landscape.