Products Designed to Enhance Insurance Penetration

There is a big market insurance that has not been exploited and strategies need to be devised to access it.  This unreached market is basically made up of the majority who are poor – at the bottom of the pyramid, the middle class, who decline insuring because of its rather negative image.

As a result of this low penetration, the insurance industry in conjunction with government has been putting measures to enhance the uptake of insurance. Some of these measures are briefly elaborated on below.

Banc Assurance

Banc assurance means selling of insurance products through banks branch network. It is a strategy developed by banks and insurance companies to operate in the financial services market in more or less integrated manner.

Banc assurance is a dominant channel in most developed countries. Locally and in the region, this channel is becoming increasingly popular. For example, in the recent past, the Insurance Regulatory Authority IRA has licensed a number of banks to act as agents of insurance companies.

Banc Assurance products.

In first instance a bank sells to its clients, but can also market it to non – customers. The main general insurance products banks sell is;

• Motor Insurance policies to those taking loans to purchase vehicles
• Fire or asset protection policies to those taking loans to buy assets
• Agriculture policies to those taking loans to purchase farm inputs
• Other types of insurance include domestic package and personal accident policies.

Benefits of Banc Assurance to Insurers

An insurer can get the following benefits by distributing its products through banks:

• Avoiding the cost of setting up and maintaining any agency network as this involves not only paying of commissions but also overriding commission to the agency managers
• Tapping into the banks customer base which is ideal for distribution of mass- market products such as motor vehicle policies
• Reducing the need of opening and maintaining many branches
• Establishing a new company to acquire business quickly without the need to build up networks of agents
• The selling of insurance products requires clients to put in trust the company they deal with, an area that banks perform very well.
• Banks have intimate knowledge of their customer financial background and they can leverage on this to sell some insurance products
• Utilizing banks wider network of branches can provide a quick and easy access to many clients throughout the country. E.g. KCB has over 90 branches in the Eastern Africa Region., on the other hand, insurance company with the largest in Kenya has more than 25 branches

Co-operation Agreement with Insurers

The involvement of banks in the insurance may also take several forms such as;

• Simple agreement to distribute the insurance company’s products by the bank
• A strategic alliance where both sides co- operate on product development
• An understanding in sharing of customer information
• Joint venture where the bank may be a shareholder of the insurer and vice versa

Clearly, banc assurance is poised to play a major role in increasing the penetration on insurance in the region.

Micro Insurance

Micro – insurance is the provision of risk protection services to low income people and communities who are often left out of formal insurance bracket. It is the sale of insurance products which are designed to be accessed by the low income population. It serves the poor who are more exposed to risks and are also the most vulnerable to losses and its associated to shocks. Micro – insurance is typified by low premiums and coverage limits. However, it runs in accordance with generally accepted insurance principles

Distribution channels

Micro insurance can be distributed through insurance intermediaries, direct insurers, micro finance institutions, non – governmental organizations, funeral parlors, banks, direct selling, mobile services, mobile banking. Co-operatives etc. the approach is to use many channels as possible to reach the widest no. of people.

Characteristics of Micro Insurance Products

• Policies are simple and have low premiums and low sums insured
• Policy forms if any have simple questions

Challenges

Given the lack of infranstrure in areas where the most of the poor can be found, the costs of collecting contributions filling and processing claims, registering and renewing membership, keeping members informed, recruiting new members can be much higher than that of the informal sector. The challenge is therefore, for insurance companies to provide this insurance at affordable costs as many people as possible.

Takaful

Takaful refers to insurance which complies with the Islamic or Sharia law. Takafu started in Sudan where the first sharia compliant company was established in 1979. Today in Sudan, insurance companies operate in accordance of Sharia Principles. There are three main areas where Takaful differs with the Conventional insurance. These include,

The Uncertainty Nature of the Contract

A basic rule of an Islamic compliant contract is that he parties to the contract must know precisely the terms of the contract which they are entering into. Under current terms of an insurance contract, while the premium paid is known, the main payable is not known and either the insured told how much to be paid. If any how will be arrived at. In addition, it appears like the contract is in favor of the insurer in some key areas. For example, if the insurer decides to terminate the contract, premium will be calculated on pro rata basis, and if the insured decide to terminate the contract, premium is charged on short period rates.

Gambling

Due to the uncertainty nature of the insurance contract, there is an element of gambling. This does not make western insurance gambling, but because of the uncertainty in the contract, one party =may be unjustly enriched at the expense of the other. To address the concern, Takaful provides that, should profits be made, some of it be allocated to policyholders – a practice similar to the payment of bonuses in the life assurance. However, if losses are made, the participants are called upon to make further contributions

Payment of Interest

Insurance companies as a rule, ensure that their investments income is maximized at lowest possible risk. Given the vitality of equity markets, most insurance premiums are deposited in interest bearing investments. The earning of interest is against the Sharia principles as it amounts to the money owner taking proceeds without working. The idea is that lending the money at an interest and paying some of the interest to the money owner amounts to depriving an earning to someone who has worked (the borrower) and paying one who has not worked (the money owner). To counter this approach, the Takaful is bases on brotherhood, solidarity and mutual assistance and aim at providing mutual financial aid and assistance to the participants in case of need. The participants mutually agree to contribute for that purpose.

The Key Principles of Takaful

 The following are the guiding rules of Takaful;

• Participants co- operates among themselves for their common good. – hence it is similar to Co- operative societies and mutual insurance.
• Every participant pays contribution in order to assist those of them who need assistance.
• Insurance contract falls under the donation contract which is intended to divide losses and spread liability according to the community pooling system – hence policyholders own the company.
• The element of certainty is eliminated as far as contribution and compensation are concerned.
• It does not aim at depriving an advantage at the cost of other individual
• The practice allows for charitable donation to surpluses in recognition that the society has enabled to thrive and make the surplus