Want to realise big insurance sales? Go to Gikomba

A second-hand shoes trader at Gikomba Market in Nairobi. FILE PHOTO | NMG  

By GEORGE BODO

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Summary

• Bancassurance is a term used to describe the sale of insurance products through commercial banks. It’s a relationship that can be profitable for both parties.
• Over time, this fixation has rendered price as the primary competitive point, hence incubating such malpractices as under pricing.
• An insurance firm cannot distribute such products through the traditional agency channel, which comes with its own in-built costs.

Last week, I attended a conference on a bancassurance and alternative distribution.

The event provided a platform to discuss product development and explore new and efficient distribution strategies—from a bancassurance perspective.

Bancassurance is a term used to describe the sale of insurance products through commercial banks. It’s a relationship that can be profitable for both parties.

But the discussion I fronted on the product side is what I want to externalise in this instalment.

The discussion itself leaned less on bancassurance, but centred around changing wage demographics and its impacts on product development for insurance firms.

Data from the Kenya National Bureau of Statistics (KNBS) showed that in 2015, there were 2.5 million employed persons in the formal sector.

Out of this number, only three per cent (or around 72,000 persons) had earnings above Sh100,000. That’s not a typo. I don’t think this figure might have changed much in 2016.

This is a very stark statistics. It’s not any different in our East Africa neighbours—Uganda and Tanzania.

In Uganda, data from Uganda Bureau of Statistics shows that the median wage in 2014 was just around Sh453 ($44).

In Tanzania, data from the country’s statistics bureau showed the economically active population in the country’s formal sector stood at around 2.7 million in 2015 (most of whom are in the public sector)—out of which only three per cent earned Sh103,000 ($1,000) and above.

The problem is that, with this kind of grim statistics, insurers are still churning out products geared to the collared-earners, a pool that is drying by the day.

But despite the pool gradually thinning, insurance firms have continued to emphasise on it.

Over time, this fixation has rendered price as the primary competitive point, hence incubating such malpractices as underpricing.

The truth is that the informal market is the next growth story for insurance sector. The economy doesn’t look like it’s about to start churning out more collared jobs either. So, two key themes stand out.

First, the informal sector is the next growth driver. In fact, Karatina, Gikomba or Kibuye market traders (and similar segments) are your next goldmine in as far as premium growth is concerned.

This means that product development needs to take a bottom-up approach as opposed to the current scenario where insurance firms design products in the boardroom by imagining client needs (I mean I have personally experienced this phenomenon).

Additionally, insurance firms must adapt to their clients’ cash flow cycles.

Today, the insurance firm still insists on regular payment of premiums on a monthly cycle; failure to catch up renders you into default. This often can’t work for clients with erratic cash flows. In fact, the informal segment demands greater flexibility in terms of adaptation.

Commercial banks have done a good job on this front. They are able to flip it around and capitulate to a client’s cycle.

Second, how product is distributed to this segment has to take the leanest approach.

An insurance firm cannot distribute such products through the traditional agency channel, which comes with its own in-built costs.

The mobile phone now becomes an important tool in this distribution re-engineering.

The mobile phone also offers product bundling opportunities between its owners, the telcos, and insurance firms.