Race for East Africa’s insurance market heats up

At less than 3%, insurance penetration in Africa is significantly lower compared to other regions globally. The continent’s insurance penetration, measured as premiums as a percentage of GDP, is about half the global average, according to McKinsey. Additionally, premiums per capita in Africa are approximately 11 times lower than the world average.

Despite this, Africa presents an attractive long-term opportunity for insurers due to the rapid expansion of many of its economies and its youthful demographic profile. According to the African Development Bank, the continent is experiencing significant economic growth, with eleven of the world’s 20 fastest-growing economies expected to be African in 2024. This rapid growth means that as African economies develop, insurance penetration will likely increase alongside incomes, presenting opportunities for underwriters.

“Africa is one of the world’s hot regions for insurance. Steady economic growth in most countries combined with a largely underdeveloped insurance sector have positioned the continent as the second-fastest-growing region for insurance globally after Latin America,” notes McKinsey.

Looking beyond South Africa

However, insurers looking to capitalise on the African opportunity need to be strategic about the geographic markets they choose to focus on. South Africa is by far the most advanced and dominant market, accounting for 70% of gross written premiums on the continent, per McKinsey. It is, however, also saturated and highly competitive, meaning that underwriters keen on growth need to cast their nets much wider across the continent.

Pravin Kalpagé, CEO of Hollard International – a subsidiary of the privately held South African insurance group Hollard – acknowledges that this realisation led the firm to adopt a pan-African growth strategy in the early 2000s. Over the past two decades, Hollard International has expanded its footprint across Southern Africa, including Namibia, Mozambique, Zambia, Lesotho, and Botswana. The insurer has also ventured into West Africa, establishing operations in Ghana.

Kalpagé spoke to African Business in Nairobi about the firm’s latest foray into East Africa. This follows their recent acquisition of a 20% stake in Apollo Investments, the parent company of APA Insurance, for an undisclosed amount. APA Insurance is an underwriter in East Africa, offering both general and life insurance services, with a significant presence in Kenya, Uganda, and Tanzania.

Hollard becomes the second international investor in the Kenyan group, following Swiss Re, which acquired a stake in 2014.

“You cannot claim to be a pan-African insurer without a strong foothold in East Africa. The region boasts some of the continent’s fastest-growing economies and a massive population of over 200 million people,” he said.

“It is also on the doorstep of Ethiopia, which is a huge economy. It is not open yet from an insurance point of view, but I think that as that opens up, Kenya (where APA is headquartered) provides a very good platform from which to expand.”

Hollard International has been looking for an East African partner for nearly 14 years, Kalpagé said. “APA ticked so many boxes – it has an established track record, an impressive value proposition with strong broker and customer relationships, and it shares our values around community, reliability and customer-centricity.”

Ashok Shah, group CEO of Apollo Investments, told African Business that the firm’s partnership with Hollard will help accelerate insurance penetration in the region through the introduction of new products in areas where Hollard possesses competitive strengths.

“We’ll have access to substantial new expertise in classes of business such as motor, engineering, marine and other specialist lines of insurance,” he said.

Besides deepening insurance penetration, Shah noted that these new products will also boost the profitability of the firm. APA Insurance earned pre-tax profits of Sh652 million ($5.06m) in 2022, its latest financial reports show. This came on the back of record gross premiums of Sh13.19 billion ($110m) and net claims of Sh6.05 billion ($47m) during the fiscal year.

Micro-insurance for farmers and small businesses

Shah argues that for insurance penetration in Kenya to move from the current 3% to levels closer to South Africa’s 17%, there must be a deliberate focus on micro-insurance or offering covers to low income groups.

This is an area where Kenya possesses a natural advantage due to its already impressive mobile money penetration levels, he observes. By offering tailored insurance products through mobile phones, insurers can significantly reduce costs associated with distribution, lowering premiums and making insurance more attractive to lower income groups.

Shah believes that this approach can boost awareness and uptake of insurance among a population that is still largely unfamiliar with its benefits. “Awareness of insurance among the population of East Africa is not that fantastic.”

Highlighting agriculture as a key area of focus within microinsurance, Shah disclosed that APA, in partnership with Hollard, is introducing tailored solutions for farmers and pastoralists to mitigate climate risks.

“When there is crop failure or no forage for pastoralists, they can take the benefit we provided to purchase feedstock for their animals. If we can insure farmers and they understand the value of insurance, we can get them to sign up for additional covers.”

Shah revealed that APA and Hollard will also collaborate on introducing micro-insurance products for small businesses or MSMEs. “When it comes to MSMEs, Hollard has very great experience here. We will be looking at them and what to learn from them.”

Kalpagé notes that to succeed in providing covers to MSMEs, underwriters must create tailored products that reflect the intricacies of running a small business. A cut-and-paste approach where existing products for large businesses are repurposed for smaller businesses won’t work, he argued.

“MSMEs is an area that people have not cracked. The mistake has been to take insurance that is meant for big companies, try and make it smaller, and then offer it to MSMEs. But their needs are not exactly the same.”

“They’re looking for premium payments on different frequencies, they’re looking for smaller premium payments. If you can really understand their needs and come up with insurance products that meet those needs, then find the right channels through which to distribute them affordably, then I think we can make a significant impact.”

Consolidation heats up

Hollard isn’t the only pan-African or global insurer muscling in on East Africa’s insurance sector. In recent years, there has been a wave of consolidation in the sector, with Jubilee Holdings, for instance, concluding the sale of a majority stake to Allianz SE for Sh10.8 billion ($84m). Similarly, ICEA Lion Insurance Holdings also offloaded a 24.1% stake to private equity firm Leapfrog Investments in 2020 for Sh2.4 billion ($19m).

Experts argue that one major reason why underwriters are pursuing scale is to improve efficiencies and lower the cost of compliance with new financial reporting standards. “The transition to IFRS 17 has led to considerable financial implications for insurers in East Africa. The costs associated with acquiring accounting software, actuarial systems, and hiring personnel have been a major concern. Some insurers have delayed implementation due to the high costs involved, especially for small firms,” notes consultancy Deloitte in a recent report on the region’s insurance sector.