Botswana’s life insurance sector penetration remains as low as just three percent, and insurance industry players continue to record policy lapses due to constrained household incomes, and ever-increasing competition from newer market players.
The disposable incomes have shrunk, priorities have now become limited. For an industry mostly dominated by life cover segment, the few Thebes local households have is now spent prudently. As it stands, most households would now settle for life cover than accidental covers.
As a result, most local insurance companies, including the so called giants face a common major challenge of contraction in disposable income for Batswana households ÔÇô most who have resorted to seek to reduce monthly financial commitments by cancelling insurance policies.
Yet again, consumers appear to be technically comfortable, in that they do not only expect to interact with their institutions when and how they choose, but also expect to be able to tailor their own products in a bid to meet their precise needs.
As the central bank is currently pursuing an accommodative monetary policy in order to stimulate economic growth; the low interest rate environment continues to dominate the underwriting departments, according to Barclays Botswana Economist, Naledi Madala.
Madala says low economic growth has also resulted in stagnant household income levels, which in turn led to poor demand for various insurable products including houses and cars.
Another major challenge to the insurance industry that she highlighted is the country’s high unemployment rate (estimated at 17.7%). However, “we are positive about economic recovery in Botswana on the back of the rising global diamond demand. The economic recovery should support insurance growth however, the structure of the economy means the insurance sector will remain vulnerable to commodity prices.”
The industry is dominated by the life segment, followed by the non-life segment, and lastly the personal accident and health segment which has a much smaller share.
“Life insurers’ accounts for the largest share of gross written premiums (71 percent of GWP) while non-life (general) insurers’ accounts for the remaining 29 percent. The non-life segment has greater exposure to economic downturns since it is dominated by motor and property insurance, which are heavily directly correlated with overall state of the economy,” Madala indicated.
From the listed insurance giants, Botswana Insurance Holdings Limited (BIHL)’s perspective, it continues to educate consumers about the importance of insurance and how the short-term benefit of a slightly higher cash flow could be eliminated in minutes should something untoward occur while they are un- or under-insured.
From the Group’s annual report of 2017, Group chairperson, Batsho Dambe-Groth mentions that, unfortunately, there is a widespread misconception that reducing or cancelling insurance cover ÔÇô both long-term and short-term ÔÇô is an easy way to ease pressure on household budgets. This she says, naturally it has a knock-on effect, “particularly for Botswana Life, Legal Guard and Botswana Insurance Company (BIC). On the life insurance side, consumers also fail to take into consideration the higher costs of reinstating policies or obtaining cover later when their cash flow improves.”
From Kgori Capital’s perspective, Portfolio Manager, Tshegofatso Tlhong also puts more emphasis that, what is key to understand though as that for many, insurance cover remains something people see as something they are compelled to get ÔÇô a safety net of sorts. Though often assumed to be a grudge purchase, it has fast become a necessity, as people see the need to cover particular risks.
The challenge, however, in tight economic times, “is that the lapse rate for policies is higher, New business growth slows down as more pressing household needs take precedence ÔÇô people perceive other domestic needs as more important, likely more short-term needs. Thus, though customers still realise the need for cover, they want to pay as little for it as possible, and this affects the insurance sector,” she added.
Consumers, though becoming more discerning with each day, are not always fuller cognizant of the important of insurance cover or the variety of solutions and offerings available to them, which is why from observations, insurance companies are now working to show their product and solution bouquets more strongly.
“It forces insurance businesses to innovate more in their route to market, customer engagement and education. Equally important has been the need to ensure more effort towards meeting specific needs of customers, with the one-size-fits-all approach of years passed no longer relevant,” laments Tlhong.
For the industry players, the future of insurance will require new skills and competencies ÔÇô skills such as data analytics and artificial intelligence that are currently in short supply around the world.
This will demand serious investment into ever more sophisticated technology systems, which some indicate that they will have to enable ever increasing levels of self-service so that customers can choose when and how they interact with the service provider.
According to Tlhong, one cannot discount, however, the increasing efforts being made throughout the insurance industry to “disrupt” and yet to at once drive sustainable impact. Insurance, banking and technology are becoming increasingly more integrated, as new platforms and solutions become more viable, more nuanced and more relevant. This is a global trend, as insurance companies are investing in tech platforms for distribution and using data to tailor insurance contracts to customer behaviour.
As competitive as it is, Madala pointed out that research shows that many consumers consider insurance products as a commodity and often cite price as their main reason for buying an insurance policy, “therefore, companies need to offer competitive prices in order to retain their clientele. The digital revolution presents insurance companies with an opportunity to be creative in what they do and how they do it.
Additionally, younger demographics often prefer a more virtual experience . For example, research shows that in China, Malaysia and South Korea, life insurance customers who use mobile channels are more satisfied than customers using other channels.”
Going forward, Tlhong said, “we expect this trend to filter into the local market. Regulation will not only have to catch up to international standards, but also allow room for more innovation within this space. What remains to be seen is how the local insurance industry continues to adapt, and how agile they can be in an ever-changing environment. It is not purely about enhancing the bottom line, as we see with many local firms, for social impact has become a crucial KPI for many businesses, and this is also well worth noting.”
Life insurance penetration in Botswana remains low at just around three percent compared to South Africa at above 11 percent, and Namibia at over five percent.
From the economists’ point of view, the three percent is relatively low penetration rate as indicative of potential opportunities for growth and foreign investment. A steady growth in the sector is therefore anticipated.
South Africa currently contributes for almost 80% of the Sub Saharan Africa‘s premiums and has the highest penetration rate. The region‘s significant population increase, growing middle class and the relatively low penetration of insurance products suggest huge potential for both life and non-life products, points Madala.
The improving global economic outlook is expected to boost the demand for insurance.