The insurance industry is an old one. It has its roots in various ancient civilisations, with merchants paying excess money in order to cover the risk of their goods being lost or stolen at sea. Crucially, after the Great Fire of London, and several destructive fires in America in the 17th century, a more formalised form of insurance came to be: risk pooling. In today’s world, though, insurance plays a huge role in developing markets, and is a major part of globalisation.
The idea of risk pooling or risk sharing is that if different people can all contribute money (known as premiums) towards one pot in order to cover a certain risk (such as the risk of fire destroying property), then it would be possible to cover riskier individuals (like houses that are more prone to fire) through the contributions of less risky individuals (those with houses less prone to fire).
Risk pooling makes it easier to insure people that are vulnerable to risks through no direct fault of theirs. It is the epicentre of the industry’s social benefit.
Insurance in its simplest form is the transfer of risk from one party to another. This catch-all phrase has different names: indemnification, absolution, and others. These all point towards its central concept: An insurer takes full or partial responsibility for any losses an insured (policy holder) suffers.
A Global Industry
Insuring against certain risks is mandated in many countries in the developed and developing world. This is because some risks are of higher frequency (car accidents) or have disastrous consequences (building collapse) and thus require insurance to fund the costs and to ensure damages are dealt with.
Financially, the effects of certain risks becoming reality can leave businesses bankrupt. In order to manage risk effectively, businesses and individuals purchase insurance in order to transfer the risk of such an event occurring to the insuring firm.
But what product is actually being sold? The product that these firms actually sell is peace of mind – or, in financial terms, indemnity.
This requires these companies to have enough capital to indemnify (compensate for damages) the policy holders. It is clear to see why the insurance industry is amongst the most heavily regulated, since they keep hold of policy holders’ premiums (cash paid to buy protection) and have a contractual duty to indemnify the policyholders when a legitimate loss is suffered.
In the UK, for example, the insurance industry is mostly dual-regulated, which means it is regulated both by the PRA (Prudential Regulatory Authority) and the FCA (Financial Conduct Authority). There are also several statutes (laws and acts) that guide business conduct in the industry.
Insurance: Driving Globalisation
Insurance has played a huge part in globalisation over the centuries. Globalisation has been primarily fostered by trade and the search for new opportunities to sell and buy in new markets. Before the advancement of air travel, shipping was the only order of the day.
This came with its great risks – sinking ships due to poor weather, bad cabins, pirates and thieves – and made shipping an expensive and risky enterprise. Thus the ability to insure these risks for a premium was crucial in the quest for new trading opportunities, which ultimately led to foreign partnerships and the flow of goods and human capital.
Lloyds Coffee House opened by Edward Lloyds in 1688 ushered in a new era in insurance, providing a place where sailors, merchants and ship owners could obtain reliable shipping news and insure themselves. This soon led to the creation of the renowned insurance market: Lloyd’s of London. This is a specialist insurance market in the heart of London’s financial district, where people and companies can purchase specialist insurance for niche risks such as terrorism, mass shooting, cyber-crime, movie rights and body parts.
In terms of sheer size, the US’ industry is by far the largest – and perhaps the most complex too, with insurers requiring permission from the state they operate in. Japan and China are second and third, and other European nations (UK, France and Germany) are right behind.
Insurance in Africa
The scale of the insurance industry is ultimately linked to the well-being of citizens in a nation and region. The more wealth amassed by a group of people, the greater the need to insure these assets. The same goes for trade, whether by air or sea: greater trade between a nation and its partners necessitates adherence to global standards, which inevitably includes insurance for these goods.
It is this prospect of an increased need for insurance from a growing population that makes the African market exciting and a puzzle at the same time.
South Africa, for example, has a mature and developed market, which accounts for about 80% of all insurance premiums in sub-Saharan Africa. More revealing, is its penetration rate (see below) which stands at 15%, a figure that is above the developed world average.
The penetration rate is the total value of premiums as a proportion of GDP. It is a quick and useful metric used to gauge the maturity of the insurance market in a country or region. It tends to be higher in richer, developed nations, as can be seen looking at a list of the highest penetration rates in 2015 below [Source: OECD]:
|Hong Kong, China||20.1%|
Across the Continent
Of the other sub-Saharan nations, Kenya is next in line after South Africa, with a penetration rate of 3%. Nigeria, the region’s second-largest economy, has a paltry penetration rate of just less than 1% of GDP. This represents the failings of the government to institutionalise the need to be insured, and pass the reforms necessary to enable the industry to thrive.
It also creates an opportunity for foreign firms to create a presence in these economies, and gain from the first mover’s advantage. Insurance firms have bought into the emerging trend in the Kenyan insurance market, with the Kenyan government passing laws and regulations for the industry. Big players such as Allianz, Prudential and South Africa’s MMI Holdings have set up shop or bought local insurance markets in the country, too.
Still, the Nigerian market suffers from one most basic problem: insurers have not managed to convince the mass Nigerian population that insurance is a product worth purchasing. Many Nigerians (including those with graduate degrees) still aren’t fully informed on how insurance works and where to purchase it. Awareness and formality remains the most pressing issue in the Nigerian insurance market.