Based in a small town in Western Kenya, Samuel has been a potato farmer all his life. His life revolves around his five children and potato farm.
Currently, his main ambition is to own a small truck to transport his produce and farm inputs to avoid high transportation costs. But as he saves for the truck, he also worries about his children and their education in case something happens to him.
Far from Samuel’s town, 24-year-old Esther lives in Nairobi and works in one of the many beauty parlours in the city’s central business district. She wants to save money and move to her home town, where she hopes to start her own beauty parlour. However, she is afraid that she is one hospitalisation away from losing all her savings.
According to a survey on financial access - FinAccess Household Survey 2019 - more than one-third (36 per cent) of Kenyans, including vulnerable individuals like Samuel and Esther, are exposed to numerous risks such as economic shocks, death, illness, loss of property due to natural disasters and calamities.
This high incidence of shocks underpins the urgent need for risk management solutions for individuals, households and businesses. Formal risk management solutions such as insurance can be a potential solution.
Yet, the FinAccess survey also found that only 2 per cent of Kenyans used insurance as a solution to deal with shocks. These findings highlight the huge gap between risk protection needs and insurance outreach in Kenya and the potential for loss of livelihood in case of a minor disruption like ill health.
So, what is the reason for this huge gap? Digging deeper into insurance penetration in Kenya, there is a huge disparity in insurance uptake among different income segments.
While there is reasonably high usage among the highest income segment (53 per cent), it is quite low among the lower-middle and middle-income segments (16 per cent and 28 per cent respectively).
These two income segments that can be identified as emerging consumers (earning between Sh20,000 and Sh55,000 per month) constitute the highest proportion of Kenya’s population. They are also driving the country’s economy through their economic activities.
However, this segment has stayed away from insurance and still resort to traditional, inadequate risk mitigation mechanisms such as social networks. This means that they remain unprotected against major shocks, while the insurance industry also stays underdeveloped.
It can be argued that a focus on these emerging consumer groups can be the key to unlock insurance potential as they have growing incomes and constitute the highest proportion of the population.
Experience has demonstrated that a three-pronged approach that brings on board the government, industry and community can unlock the huge potential.
First, there is need for public policy interventions to stimulate the insurance sector. Among other initiatives, this can include conducive regulations and government spending to insure vulnerable groups.
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The insurance sector’s important role in developing capital markets and building resilience of households and businesses are the key motivations for the government to intervene.
Second, there is need to tap existing social networks such as harambees that are a form of ex-post risk pooling activity. Harambees are quite prevalent and useful but have been found to be an insufficient risk mitigation measure especially where the calamity strikes in succession. Nonetheless, harambees are built on the principles of community self-help that can be leveraged to transform the nature of community’s contributions.
Finally, and most importantly, the insurance industry itself has to expand its horizons by not just focusing on the limited population of high, higher-middle income individuals, but also realising the potential offered by emerging consumers.
This calls for a shift in the mindset of insurers and a deliberate application of technology and product innovation to offer attractive value proposition to the unreached and turn them into enthusiastic converts.
Insurance firms, for example, are driving this change through their microinsurance business. This unit has shown a profitable market-based model that can protect emerging consumers against shocks, make their businesses and households resilient and enhance their contribution to the country’s growth story.
Though there is still a long way to go before the gap can be narrowed, this goes a long way to demonstrate that strategic partnerships, innovative products and customer-focused processes can shake up the insurance space.
Mr Sharma is the General Manager-Microinsurance at Britam