Calling all insurance fintechs: South Africa has hung out a welcome sign for micro-insurers

Banking via cell phone has spread faster than most people thought possible. It is Africa’s latest success story, with companies like Kenya’s M-Pesa at the forefront of technology evolution with a user base of more than 37 million.

In South Africa, the regulator – promoted by the country’s Treasury department – would like to replicate the success of other African countries and has recently lowered some requirements to start a new business in the micro-insurance market.

One goal of South Africa’s Insurance Act, which came into effect on July 1, 2018, was to enable wider access to insurance products for people with low incomes by ensuring that the products are simple, unbundled, and that companies granted a license have broad distribution plans.

Regulation allows insurance providers to offer both life and non-life insurance products via cell phones using USSD technology. This is making it possible for companies to sign customers for property & casualty insurance and for more profitable life insurance.

A wide open market

Despite these lofty ambitions and wholesale reform to regulation, as of early 2020, few companies are offering micro-insurance in South Africa, outside of funeral insurance.

Insurers in other African countries have and continue to experiment with micro-insurance. Usually, it is sold as an add-on to other financial products distributed via cell phone with most of these products focusing on primary risk such as livestock and crop, health, funeral and life insurance. This is not the case in South Africa where there appears to be a vast and under-served market.

If you are considering placing an application to the South African Prudential Authority to begin offering micro-insurance, there are some things your company will need to keep in mind.

As an auditor and advisor to fintech companies in South Africa, I have put together some of my tips for getting your license application right to tap into this market.

The application requirements include “standard” financial requirements but also those that are specific to South Africa. For instance, the business model your company proposes must be one that leads to more financial inclusion, and it must describe plans for corporate social initiatives.

Here’s one point of advice: Even if your company is a startup, you need to show the prudential authority your experience in insurance, for a license to be granted.

Get key persons and owners in place in your company

Companies that want in on the market need a board of directors, an auditor, and an actuary with insurance industry experience. These people don’t need to be on staff full-time, but they need to demonstrate the right experience. This is important because the people in these jobs will have a wider scope of work than usual, due to the small size of the company.

And, along with demonstrating your lines of business, the expertise of your partners will be another proof point that your company is actually an insurance company.

Develop your business plans

Now it’s time to refine your micro-insurance business plan.

The prudential authority wants to know that your company will be profitable from the beginning, and if it’s not, that you have adequate capital (4 million rand) to secure your liabilities and insurance claims. As part of its efforts to strike a balance between enabling a new market and ensuring that the market is stable, the government has worked out different methods for allowing companies to build up their capital over several years.

If you plan to do more aggressive investing than just cash and money market with your company’s capital (for instance in bonds or equities), make sure to address this in your business plan. This includes making plans to bring an investment advisor on board. If you take this route, prepare to show even more capital due to the additional risk.

It is important for a prospective insurer to develop a systematic plan on micro insurance operations. According to the Microinsurance Network, the minimum topics that should be included are:

• Product idea and business goals
• Marketplace and competition
• Product development and pricing
• Marketing and distribution
• Form of company and organizational aspects
• Financial planning
• Risk assessment

In your business plan, you’ll need to show the business models that your actuary has helped you calculate.

Bringing it all together

It’s important to be realistic about your business plan and have a clear idea about how you will distribute your product and scale that distribution, for instance with the help of partners.

One thing that will set a successful micro-insurer apart will be the ability to use technology to reach prospective clients and collect premiums. In my view, the fewer bricks-n-mortar stores your company has, the more likely it is to succeed. Similarly, the fewer people you have involved, the better it will go; you cannot build a micro-insurance business based on the old model of agents and clients.

And keep in mind that we have seen in Africa that the most successful fintech start-ups are those that are almost entirely reliant on cell phones.

As you put your plans together, remember that The Prudential Authority is not just trying to kickstart the insurance industry via micro-insurance, it is trying to transform the industry.

In your company’s license application, you’ll need to show your plan for contributing to that transformation, for instance through corporate social initiatives and hiring practices. This means for starters that you’ll need to show how you will serve and employ previously disadvantaged people.

All in all, remember, one point about doing business in South Africa.

Sometimes my colleagues and I put it this way: “South Africa is a developing country with developed-market regulations.”