Prior to the impact of COVID-19, the African insurance market was expected to grow at compound annual growth rates (CAGRs) of 7% per annum between 2020 and 2025, better than Asia’s 6%. Recently published financial results across the continent indicate that these projections are likely to take a knock over the next three years.
Nevertheless, the African insurance market’s immaturity points to significant scope for growth. Africa’s insurance industry is valued at about $68bn in terms of GWP and is the eighth largest in the world—although this is not equally distributed across the continent. Markets are inconsistent in terms of size, mix, growth, and degree of consolidation, with 91% of premiums concentrated in just 10 countries. South Africa, the largest and most established insurance market, accounts for 70% of total premiums.
Outside of South Africa, McKinsey sees six primary insurance regions in Africa. In the Southern Africa region, 54% of premiums are for life insurance. Non-life insurance, however, plays a larger role in anglophone West Africa, North Africa, East Africa, and even more so in francophone Africa.
The level of maturity in these six regions is low, relative to global reference countries, as measured by insurance density (premium per capita). While most African countries have experienced double-digit insurance growth in CAGR in local currency over the last five years, this has mostly been driven by economic growth, rather than deepening market penetration. Levels of insurance penetration in Africa are half the world average measured as a percentage of GDP, and premiums per capita are 11-fold lower than the world average. This points to significant scope for growth.
Sources of growth
The bulk of the growth in Africa is likely to come from pensions and individual life insurance— which is the fastest growth line of business on the continent, although starting from a smaller base compared to non-life insurance. While motor insurance is the largest contributor to non-life insurance—driven by requirements for a compulsory minimum level of insurance, often third-party liability in countries like Morocco, Kenya, Nigeria, and Egypt—accident insurance, health insurance, and property insurance have all shown faster growth in recent years.
The prospects for growth in commercial lines are also good.
Across the continent, distribution channels also vary by region as well as between life and non-life products. Brokers and agents remain the most prominent channels, although direct sales and bancassurance have increased their share. For example, in the Ghanaian life insurance market, the bancassurance share of premiums has almost doubled from 7% in 2015 to 13% in 2019.
McKinsey's analysis highlights five trends that will be pivotal in determining how the sector evolves in a post-pandemic world.
With the exception of Morocco, where there has been a big investment in agent networks, and Ghana where insurance growth is catching up to GDP, growth in Africa’s insurance sector is being driven primarily by economic growth rather than deepening market penetration. And where penetration is occurring, it is mostly accompanied by structural reforms. Market liberalisation and deregulation, the enforcement of compulsory insurance, increased access through wider distribution, public-private partnerships, and regulation to support innovation and access have all been shown to build consumer trust and develop more resilient insurance industries with better-protected populations in comparable markets.
For example, the Pension Reform Act of 2014 in Nigeria has benefited both consumers and the insurance industry alike, leading to a 70% growth in the sale of pension products in that country between 2012 and 2017.
Similarly, private-public partnerships between insurers and governments, such as a scheme to subsidise agricultural insurance in Turkey, have played a key role in expanding the industry in some regions and ensuring that consumers who need it have access to relevant insurance products.
The shift to digital channels in Africa is well underway, and with that comes greater expectations of service delivery. While a number of insurers are starting to digitise customer journeys, significant opportunities still exist to accelerate this in many markets. To meet the rising demand for digital solutions, Insurtechs have been quick to step in. For example, Naked, a fully digital player focused on motor and home insurance in South Africa, is offering competitive prices to customers by reducing its operational costs through automation—boasting a three-minute process to get a quote and to sign up. It also introduced differentiating features that could be activated through their mobile app—for example, CoverPause allows customers to reduce premiums for days they were not driving.
The COVID-19 pandemic has accelerated this trend, by driving demand for digital and remote channels, and McKinsey expects this to continue beyond the crisis. It is likely that online and mobile banking usage in several African countries will show a net increase of between 20% and 40% post-crisis and that the use of mobile payments will significantly increase, especially in those regions where mobile use is currently below average.
Competition among players has already led to significant innovation and disruption in the African insurance market, with insurers leveraging technology to target specific segments or services and cut costs. Innovative partnerships between insurers and online platforms are also becoming more commonplace. This trend is expected to accelerate. In some instances, African countries may even leapfrog more developed markets.
In East Africa, for example, Blue Wave in Kenya is servicing the mass market, making microinsurance products accessible via mobile phone. Founded in 2019 with $300,000 in seed funding, Blue Wave generates revenue by collecting administration fees from every subscriber and a commission from each premium. The company partners with insurers and aggregators such as mobile network operators, as well as banks and microfinance institutions, to sell its products. It also leverages a mobile-based payments solution to reach customers. Solutions are offered in multiple languages, using simple terms, clear explanations, and avoid jargon to facilitate easy access.
Several African governments are strengthening regulatory and capital requirements of insurance companies to ensure their solvency and sustainability. This is expected to help create stronger and larger companies as well as boost job creation and capability building in the industry. Such reforms are also crucial to building consumer trust and public awareness, which lay the groundwork for governments to achieve a transformation agenda.
For example, countries in the West African Economic and Monetary Union (WAEMU) require the insurers of Conférence Interafricaine des Marchés d’Assurances (CIMA) to maintain a minimum capital requirement of FCFA3bn ($5.5m) for mutual companies (up from 800m) and FCFA5bn for limited-liability insurance companies (up from FCFA1bn).
In Tunisia, a new insurance code has been implemented to give the General Insurance Committee (CGA) greater public authority, ensuring better governance of insurance companies and modernising the legal framework for life insurance, among other imperatives.
To meet these new capital requirements, a consolidation of smaller players is expected, especially in markets for non-life insurance, which remain very local and fragmented. Fragmentation is still seen in many larger markets too. For example, the top five non-life players in Kenya and Nigeria account for 38% and 39% of the market, respectively. Foreign players also may be attracted into the market to capitalise on the strong growth opportunities available, as these policies open the door for mergers and acquisitions.
In the past six years, established insurers have tended to diversify across the continent. And expansion is likely to continue with further investment in Africa. While regional players will possibly benefit from greater integration as a result of expansion, for international players such as Sanlam, Allianz, Old Mutual, and AXA, the primary goal is to capture long-term growth. Sanlam, for example, has, through the purchase of Saham, gained a foothold in more than half of all African countries, and a top five position in six markets outside of South Africa, while Allianz has made acquisitions in Morocco, Nigeria, and, more recently, Kenya. French multinational AXA has a presence in nine African countries, while Old Mutual has a presence in 13 African markets.
These trends highlight that Africa is an attractive growth prospect for both regional insurers and multinationals looking to enter the market.