Over the past few years, large corporations operating in Africa, have come up with innovative ways of redesigning financial products to cater for an increasing number of individuals unable to obtain services in more traditional ways. One of the most popular financial products has been Microinsurance, a product of the microfinance industry, which has for some time been aggressively marketed as essential – particularly for people in the informal sector – to provide a form of security, enabling people to manage their risks and prevent them from falling into poverty in the event of a crisis.
With the continued rise of mobile phone users in Africa, insurers have a huge opportunity to grow their revenue as they tap into this large consumer base – targeting the population in the middle of the economic pyramid – that does not live on less than $2 a day but cannot afford access to traditional insurance products.
Microinsurance has no doubt been beneficial to some SME’s (small and medium sized enterprises) and may be applauded as an innovative way of reaching a large proportion of people who previously relied on informal ways of managing their risks such as relying on the support of their family or their community. However, the drawbacks of this financial product and the lack of transparency by the companies that offer this mechanism of risk management need to be scrutinised. There have been concerns that microinsurance may not be quite what it seems.
The lack of transparency by some corporations means that more and more unscrupulous insurers are exploiting consumers who are unaccustomed to the concept of insuring their assets and income. There are already some insurers claiming to offer free insurance, who fail to inform consumers that their premiums are linked to product purchases such as mobile phone topup’s.
This deliberate choice by insurers not to disclose the truth to consumers is largely based on the assumption that most consumers will struggle to understand the insurance products being offered. They use marketing tactics that lead consumers to believe they are being offered free insurance. Questions need to be asked with regards to the way in which insurance products are being marketed in an unethical manner.
It may not be a stretch to suggest that because profits in the micro-insurance business are hard to come by as it requires large volumes of insurance contracts to make the business viable, companies are being less open and transparent about their insurance products particularly in some countries where regulation of the industry is not stringent.
While countries like South Africa, have made great strides in the regulation of the insurance industry to ensure customer confidence in the industry, by introducing a “Twin Peak” model of financial regulation aimed at addressing the shortcomings of the regulatory structure, other countries in Africa still have a long way to go.
Better regulatory practices need to be developed to deal with the risks of potential abuse in the insurance business. The regulatory models that currently exist in some countries in Africa are largely ineffective because of the slow law making process and unreliable judicial systems.
Rigorous reform of the insurance legal framework is needed in many countries across the continent as well as the establishment of independent regulatory institutions to ensure consumers are not vulnerable or exploited.