There has always been some amount of disparity in insurance service provision and availability between urban and rural dwellers, the rich and poor, literate and illiterate among others. Rural dwellers may not have access to some insurance services as compared to those in the urban centres, and literates may have the upper-hand when it comes to insurance services as compared to illiterates – especially in developing and emerging economies.
This situation is even more compounded by a problem referred to as ‘exclusive insurance’, whereby the excluded persons are often denied basic insurance services from mainstream insurance institutions. This has generally been the situation in most economies, but it is more severe in developing economies due to a myriad of factors…. such as higher economic hardship, lower levels of technological advancement, and untapped economic potentials.
This has resulted in lower insurance penetration, although there are huge growth prospects as a result of expanding economic growth and increasing population size. Mainstream insurance and microinsurance institutions through brick-and-mortar structures have attempted to bring everyone into the insurance web; and in recent times financial technology (fintech) means such as insurance technology (insurtech) and mobile money (MoMo) are being employed in the attempt to ensure inclusive insurance.
However, a large proportion of populations in the world’s economies – especially those in developing and emerging economies – remain excluded from insurance coverage. The global community aims at eradicating this phenomenon to ensure inclusive insurance for all.
Financial Inclusion and the SDGs
Inclusive insurance is accredited as one of the key developmental goals at the global level. Intentional efforts are being made in emerging and developing countries to promote fintech for inclusive insurance reach. This has been core in the Sustainable Development Goals (SDGs-17), wherein financial inclusion has been identified as a key implementation strategy for economic and financial development as well as propelling economic growth and income equality.
Recent empirical pieces of evidence suggest that basic insurance coverage is key to poverty reduction as a risk mitigation approach for financial shocks, thereby enhancing economic conditions of the poor. Financial inclusion includes processes which ensure that access to financial services is available to economically disadvantaged individuals, especially poor people in the formal financial system. Hence, it has been an area of interest gaining global attention in recent years. Several reasons accounted for the various interests developed in the subject of financial inclusion.
It is purported to harness socio-economic conditions among the unreached population in developing countries, especially among women and poor adults. It is an important global strategy for poverty reduction, especially in developing economies. It has also been key in the improvement of social inclusion as well as creating an enabling environment for other social and financial benefits for economic development.
Financial inclusion encompasses a broader area of financial systems such as credit, insurance and savings. Insurance is a major component of the financial services which harness economic growth and development; hence, its significance in the financial system cannot be overemphasised. Insurance enhances economic growth and development by ensuring financial access equality and closing the social gap.
The issue of insurance exclusivity has been one of the major economic challenges, especially in developing countries. In leveraging the social gap between the urban and rural, educated and uneducated, fintech has been pivotal to ensuring financial inclusion in both developed and developing economies. Recent discoveries and innovations in fintech have seen a promising potential to overcome the barriers to financial inclusion – for which mobile technology has been identified as a key driver to ensuring inclusion of the majority uninsured to achieve equality and equitable economic growth.
Several studies reveal a surge in the level of financial inclusion for developing and emerging markets; studies confirmed that Bangladesh achieved higher levels of financial inclusion among women and poor adults through innovative financial systems. In Uganda, social networks have been key in improving the awareness of financial inclusion.
Insurance penetration in general
Generally, the insurance penetration in both developed and developing economies is typically low – although a few countries like Luxemburg achieved an impressive record of 38.8% in 2017 as compared to other countries such as Hong Kong/China with a penetration rate of 17.9%, and Ireland with a record of 13.6%. The situation has not been much better on the African continent. With a staggering total penetration record of 2.98% in 2018, the African insurance market presents a viable potential for growth and expansion. South Africa held the highest penetration record of 16.99%, and remained the continent’s dominant player with over 70% of the total market share in 2017.
The low penetration was not different in Kenya, where it accounted for 2.83% of total market share for the financial sector. Lesotho recorded a penetration rate of 6.69% and Ghana had a staggering record of 3% in 2018. Other key players on the continent include Zimbabwe (4.09%), Namibia (6.69%), Mauritius (4.18%) and Rwanda (1.74%) in 2017. The continent, which is predominantly comprised of emerging economies, presents large opportunities for global investors.
In Ghana, the insurance sector not only provides a hedge against financial risk, but has also been instrumental in socio-economic development. The sector’s penetration rate has rather been low as it contributes only about 3% of the financial sector’s total assets despite the vast prospects for growth and expansion. In 2009, the penetration rate was less than 1%; and as of 2015, only 6% of the adult population had insurance coverage other than healthcare policies.
The situation primarily stems from the fact that insurance was initially designed and targetted at the middle-class (white and blue-collar employees) who operate bank accounts with steady monthly incomes. The informal sector – which is largely comprised of petty traders, artisans and farmers – was neglected. In 2016, the National Insurance Commission (NIC) estimated that an additional adult population of 5.5 million could be reached with innovative insurance technological solutions.
Micro insurance and insurtech in Ghana
To facilitate the inclusive insurance drive in Ghana, insurance service providers have been intentional in exploring the vast opportunities available in the microinsurance space. Micro-insurance has been instrumental not only in achieving financial inclusion in a developing country like Ghana, but also in being a haven for the provision of social interventions. As a poverty alleviation scheme, it offers a financial cushion to the poor in the event of an economic disaster; and as a social intervention it offers protection against financial loss and shocks.
Microinsurance: encourages savings, provides employment and ensures asset accumulation. Key among players in the microinsurance space is MicroEnsure; others include Bema Insurance, Star Micro Insurance and MTN AYo. Since 2007, MicroEnsure (ME) – a part of the Micro Insurance Company (MIC Global) – has been instrumental in augmenting government’s effort through the provision of innovative and socially-driven insurance products (policies) for social interventions while responding to the call of financial inclusion.
As a pioneer of microinsurance in Ghana, MicroEnsure has been pivotal and contributed to government’s advocacies for an increase in insurance awareness, growth and penetration in the Ghanaian market through the provision of affordable bancassurance and mobile insurance. With over a decade of experience in microinsurance product design and delivery through partnerships with Micro Financial Institutions (MFIs) and the Telecommunication Companies (Telcos), the company administered the provision of insurance cover for over 3 million Ghanaians with a total claim paid-in count to nearly 4,000 customers and at a value of over GH¢4.7million.
Insurance Technologies included key operational processes from underwriting to claims processes, ensuring effectiveness and efficiency in service delivery to boost customers’ confidence. Premiums were collected through the insured’s MoMo wallet or airtime. In 2010, the company launched Tigo Family Care insurance which provided a safety net for over a 1.2million Ghanaians, as well as Airtel Insurance that also provided insurance cover for over 1million Ghanaians in 2013. These have been beneficial mainly to the low- and middle-income earners who form a majority of the thriving Ghanaian economy.
Perceived impact of the E-levy on insurtech
In November 2021, the government of Ghana announced the Electronic Levy (E-levy) to be implemented in February 2022. The tax which was implemented in Uganda attracted 0.5% on withdrawals, while it was a flat 50 naira fixed rate for all transactions over 10,000 naira in Nigeria. The tax incentivise levy on transactions above GH¢100.00 included transactions on bank transfers, inward remittances, merchant payments and MoMo transactions similar to what was introduced by the Zimbabwean government. The 1.5% tax that was approved in March 2022 was estimated to increase government revenue annually by GH¢6.96billion. After implementation, a revenue of GH¢26.90billion is projected from 2023 to 2025.
Government intends to utilise revenue from the E-levy for specific socio-economic developmental projects – including cyber and digital security enhancements as well as job-creation and improvement of the country’s road network. This revenue projection was based on the country’s total digital transaction of over GH¢500billion in 2020 as compared to GH¢78billion in 2016. Introduction of the E-levy stems from success of the MoMo platform patronage, which experienced an increase in the registered base of about six-fold between 2012 and 2017.
The platform had 47.53 million registered users by November 2021, with an active base of 18.4million users. However, according to the Summary of Economic and Financial Data (May 2022), just ahead of implementing the E-levy in May, active mobile money subscribers fell to 18.6 million in April from 18.9 million the previous month. Furthermore, the mobile money industry lost 4,000 active agents in April, with their total number falling to 454,000 from 458,000 in the last month. All of this was reflected in the value of transactions, which fell by GH¢2.8billion during the period under consideration.
Again, volume was not overlooked as data show that the total number of mobile money transactions decreased by GH¢10million – from GH¢413million in April to GH¢403million in March. Policymakers however anticipated this initial reaction as a 24% drop in MoMo usage was projected for the first quarter of the E-levy implementation. Also, reported data from the Bank of Ghana (BoG) indicated that the telcos lost over 300,000 MoMo subscribers in April before implementation of the E-levy.
Meanwhile, the Ghana Stock Exchange shows that MTN, the MoMo industry’s market leader, saw its share price fall in May following implementation of the new tax. Historically responsible for approximately 80% of market trades, the technology stock has lost 18.9% of its year-to-date (YTD) valuation of GH¢1.11. Currently, it ranks 32 on the Ghana Stock Exchange (GSE) in terms of performance. The decline is consistent with a slump that began about six months ago – around announcement of the levy in November 2021 – and has seen the stock lose 29% of its value in that time. This is especially concerning, given that the stock lost 10% of its value in the four weeks preceding mid-May.
Conclusions
While the E-levy has come to stay, arguments for its introduction have largely been centred on widening the tax net to reach the informal sector, capital mobilisation for government-funded projects, and socio-economic development through job-creation. Several arguments have been presented against its implementation. These are purely based on worsening current economic situations triggered by COVID-19 and the Russia-Ukraine war. However, implementation of the E-levy is not expected to have much impact on insurtech and micro-insurance.
It is anticipated that for the convenience and efficiency of transactions, subscribers will keep their accounts active – though currently available data are not sufficient to back these assertions. Micro-insurance companies are likely to experience a slight decline in customer enrolment and premium collections, as more subscribers are expected to deactivate their MoMo accounts as an initial response.
The narration is further expected to have a positive twist in the long run, as subscribers are expected get used to the E-levy. From a wider perspective, implementation of the E-levy should catalye the design of innovative products to meet shifting consumer preferences and needs. Industry players also want to increase public awareness and education on insurance and related issues.
Authors
David is a Business Analyst and Project Manager with keen research interests in insurance, financial inclusion, business finance, health, and occupational health and safety.
Email: [email protected]
Christian is a Business Administration student at Ashesi University, a Project Manager and an upcoming Data Analyst with a strong passion for accounting, finance and economics, aspiring to become a Chartered Accountant.
Email: [email protected]
