Proposing a Microinsurance Model for Nigeria

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Microinsurance: Proposing a Microinsurance model for Nigeria

By

Aregbesola Soladoye Bsc (Hons)

2nd September 2013

This dissertation is submitted as part of the requirement for the award of Msc in

Insurance and Risk management from Cass Business School London.

Dissertation supervisor: Professor Cherie Chen

AcknowledgementsFirst and foremost I would like to thank God almighty for giving me the ability and

knowledge to finish this paper and complete my masters.

To my parent and other loved ones I would like to say thank you for giving me the

opportunity and support to be able to achieve these great feet, without you it wouldn’t

have been possible.

I will also like to thank my supervisor Professor Cherie Chen for her kind advice on

this paper and sharing her knowledge on other aspects of my MSC course.

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To Sharon Charles, Professor Parsons and other lecturers I would like to thank all of

you for your help and time during my masters here at Cass.

Also not forgetting my colleagues who I met while doing this course thank you all for

your friendship and help.

AbstractThis paper will be suggesting a micro-insurance model which would be suitable for

the Nigerian market. The type of model being looked at in this paper is a model that

would be suitable for delivering Microinsurance in the Nigerian market. There are

different micro-insurance models currently being operated in similar 3 rd world

countries like Nigeria and in Nigeria itself, but are this models appropriate for Nigeria.

Also this paper will take into consideration the structure of the model, the pricing of

policies using the model, distribution method, the type of policy that should be sold

using the model and issues with fraud. The obstacles facing Microinsurance in

Nigeria will be looked at in this paper. Micro-insurance take up is still low in

developing countries but with the appropriate model targeted at the specific needs of

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the low income earners in Nigeria the take up of micro-insurance could grow to meet

the demands of the market.

Executive SummaryThis paper is expected to propose a Microinsurance model that would be appropriate

for the delivery of Microinsurance in Nigeria. It aims to look at the Nigerian

Microinsurance market and the model that would suit such a market. Also other

existing models would be looked at, and the obstacles such models face.

Microinsurance is still dominated by microfinance institutions that provide loans to

low income earners and therefore provide credit life policies to cover their own risk of

the policyholder defaulting on the loans. Which is why credit life policy is the most

demanded policy in Microinsurance and also because it is made compulsory by the

microfinance institutions as a requirement before loans are given out to the

policyholders. This paper also looks at other policies that are commonly sold by

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Microinsurance providers and some of the reasons why they are sold to

policyholders. This paper will also suggest which policy will suit the proposed model.

There are different types of Microinsurance models that are widely used and this

paper will examine them on how effective they are in delivering Microinsurance

products. The models that were identified as being widely used in Microinsurance

were the partner agent, mutual/cooperative/community and independent model. The

partner agent model was seen to be most used in delivering Microinsurance around

the world; the model is a partnership between two or more parties which could be

insurance companies, governments or healthcare agencies to deliver

Microinsurance. The partner agent was seen to have some obstacles associated

with it that would not make it suitable for the Nigerian Microinsurance market. On the

other hand the mutual/cooperative/community model is seen to encourage trust

between the policyholders and Microinsurance providers since the model is owned

by its policyholders. The independent model is discussed in this paper but in a

limited way since it is seen as the least used in a country like Nigeria with fewer

infrastructures and with fewer educated people on insurance, which will make the

model a total failure in the country.

Since partner agent and the mutual models are the most used the proposed model

will be a combination of both models with some characteristics of each model taken

out. This paper will look at the model, and its structure which will contain pricing of

products using the model, the product that would suit the model and so on. The

obstacles Microinsurance face in Nigeria will also be examined in this paper.

To conclude this paper the paper will look at the African market as a whole and a

roundup of major points made in the findings from the research done. Also

recommendations would be made about how Microinsurers can be more effective in

the Nigerian market.

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Table of ContentsAcknowledgements.....................................................................................................3

Abstract.......................................................................................................................4

Executive Summary....................................................................................................5

Table of contents for Figures......................................................................................7

Chapter 1....................................................................................................................8

Aims and objectives....................................................................................................8

Introduction.................................................................................................................9

Data and methodology..............................................................................................10

Chapter 2..................................................................................................................12

Literature Review......................................................................................................12

2.0 What is Microinsurance:........................................................................12

2.1 Microinsurance penetration in Africa and the rest of the world:........13

2.2 Common Microinsurance policies:.......................................................14

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2.3 Microinsurance models:........................................................................16

Chapter 3..................................................................................................................20

Findings.....................................................................................................................20

3.0 What is Microinsurance and its potential in Nigeria............................20

3.1 What are the most demanded policies in Microinsurance..................20

3.2 What types of models are currently being used in other markets?...21

3.3 Which Microinsurance model is suitable for Nigeria..........................24

3.4 What problems do Microinsurers face in Nigeria................................31

The problems faced by Microinsurers in Nigeria are:.........................................31

Chapter 4..................................................................................................................34

Conclusion...........................................................................................................34

Recommendations...............................................................................................37

Bibliography.........................................................................................Error! Bookmark not defined.

Table of contents for Figures Figure 1. Insurance penetration in Africa..................................................................13Figure 2. Microinsurance models in Africa................................................................18Figure 3. Structure of the Partner Mutual model.......................................................26Figure 4. Claims process of the Partner Mutual model.............................................30Figure 5. Microinsurance growth in Africa.................................................................34

Chapter 1

Aims and objectivesThe aim of this paper is to find a suitable Microinsurance model that will benefit both

the institutions offering Microinsurance in Nigeria and the customers who want their

risk covered.

The data analysis will meet the following objectives:

The size of the Nigerian market and its potential

The Microinsurance policies that is available in Nigeria

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The type of Microinsurance model that will suit the Nigerian market.

Obstacles to the Microinsurance model in Nigeria.

To achieve this objectives mentioned above the following questions will be

answered:

1) What is Microinsurance and its potential in Nigeria?

2) What are the most demanded policies in Microinsurance?

3) What types of models are currently being used in other markets?

4) Which Microinsurance model is suitable for Nigeria?

5) What problems do Microinsurers face in Nigeria?

IntroductionNigeria is one of the poorest countries in the world with a population estimated to be

over 170 million people of which an estimated 60% of the population are living in

poverty. The country’s population is growing at a rate of 3% per year with population

expected to rise up to 204 million people by 2025 (BBC, 2013) (CIA, 2013) (Nigeria,

2013). The GDP per capita of the country is estimated at $2700 dollars, with a labour

force of 53.83 million of which 70% in agriculture (both subsistence and commercial),

10% in industry and 20% in services (CIA, 2013). The numbers above suggest

Nigeria is a big market for any company to set up because of the size of the market.

A country like Nigeria with very high percentage of people on low income as many as

102 million people would be a good market for Microinsurance, which is an

insurance mechanism for people who earn low incomes or cannot afford

conventional insurance. Microinsurance seems to be growing in Africa especially

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with it been linked to microfinance, which provide credit to low income earners in

other to help them avoid the poverty trap set by conditions out of there control. In

Nigeria, Microinsurance is still at the early stage of development with little growth

experienced compared to other African countries like Ghana, Senegal, and South

Africa.

Microinsurance has the potential to grow bigger in Nigeria with the opportunity of

targeting certain products to certain sections of the market; for example 70% of the

Nigerian workforce work in agriculture, Microinsurance could create certain policies

to target low income earners in this industry. According to Chang (2010) “who

observes that although insurance has a low penetration rate of 6% in Nigeria,

statistics indicate that in comparison to the 35 countries considered to be ‘low in

human development, Nigeria actually has a more developed insurance market”

(Acha & Ukpong, 2012). Microinsurance can play an important role in lifting the

people and even the economy of Nigeria from a third world country economy to a

matured economy. Insurance generally has not grown in Nigeria as expected due to

very strong religious beliefs that discourage people from taking insurance and

insurance companies not been trusted by Nigerians who see them has thieves who

would not pay their claims, which then as an impact on Microinsurance take up in the

country. Also the low income earners like market traders, artisans and the informal

sector of the Nigerian economy believe in their own type of cooperatives to provide

insurance for them. For example traders in the South West city of Ibadan in Nigeria

have their own type of cooperative they call Ajor (word for contribution in the Yoruba

language) where they contribute money into a pool and when a trader needs money

for improving their trade or family emergency the pool give them the money and they

pay it back on a later date. These types of systems discourage people from taking

Microinsurance and instead stick to their tried and trusted system.

This paper is looking at what model can be used in Nigeria to sell Microinsurance to

low income earners that would eliminate any of the obstacles been faced by micro-

insurance providers in the country. This paper will look at the market and whether

Microinsurance providers can be successfully in it. Also the paper will look at the

policies suitable for the country.

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The insurance regulatory body in Nigeria known has NAICOM is introducing

guidelines for Microinsurance that would enable the growth of Microinsurance

according to the regulatory body (Duru, 2013). These regulations are needed to

ensure the proposed model can be effective in the delivery of Microinsurance

policies to those who need it most.

Data and methodology To achieve the findings on this paper the study carried out a secondary research

based on secondary data from journals, websites, newspaper articles, and papers

produced by companies in the insurance industry.

Primary research used to be the most favoured method of carrying out research by

various industries. More recently individuals are turning to secondary research to

gather data due to the unreliability of the primary research and also the cost that

comes with doing primary research. According to Kiecolt (1985) “secondary research

is thus gaining a central role in contemporary social research” this shows more

researchers are using secondary research in collecting their data (Kiecolt & Nathan ,

1985). The secondary research is by far the simplest means of collecting

information; all the researcher is doing is finding existing work of other people and

using it in their work. The difference between primary research and secondary

research is that primary research involves both data collection and analysis, while

secondary research requires applying analytical techniques to the data collected by

others (Kiecolt & Nathan , 1985).

Secondary data can be collected for general information needed, or to answer

specific questions (Stacey, 1969). Secondary research is an analysis of the data

collected from the secondary sources. Such a research can be linked to the original

purpose the data was collected for, or may address an issue fairly different from that

which encouraged the original data gathering effort. Secondary research can be

used to complement primary research by answering the questions which have not

being answered by the primary research. Information gotten from secondary

research can be used to formulate new problems that were not previously identified,

for designing new research and for analysing new message (Stacey, 1969).

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The method used for collecting the secondary data was going through documents

and already collected surveys. Documents used for the research included things like

journals, newspaper articles, industry articles, company articles and articles from

global organisations. Documents are written materials that contain a wealth of data

for the researcher and provide data overtime where no similar data exist. Usually

surveys are done when gathering data using primary research but when this data is

collected they can be used by others, which then make it a secondary research tool.

The secondary research led to a large amount of data which is then filtered out by

the researcher to point what they need for their project or report.

Chapter 2

Literature Review 2.0 What is Microinsurance:

There are several definitions of Microinsurance by different scholars and

professionals in the insurance industry. Microinsurance is associated with small

businesses, price sensitive products and markets with inadequate or no

historical data, for example markets in Africa and Asia (Hettich, 2012). This

means Microinsurance policies are sold by the insurer at lower prices,

distributed in an efficient manner, and policy design must be simple for the client

to understand, all this could keep the cost of operation down (Hettich, 2012).

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Microinsurance can also be defined as a simpler version of conventional

insurance for low income earners in developing countries and a means of

alleviating poverty (Express, 2012) Another definition of Microinsurance defines

it as a protection from certain risks, which could be man-made or a natural

disaster paid for by regular premiums specifically designed for low-income

individuals (Churchill, 2006a).

Other professionals see Microinsurance as the insurance used in protection of

low income earning families against perils in exchange for steady premium

payment closely linked to the likelihood and cost of the risk occurring (Nwite &

Ngerebo, 2012). While some professionals see Microinsurance as a product

that is not appropriate for the penniless in the society (the poorest group in the

society), but instead serves the needs of the working poor and the vulnerable

non-poor (MCCORD, STEINMANN, et al., 2013). Majority of the articles all have

something in common they all look at Microinsurance from the view of providing

insurance for low income earners and poor people in developing countries. The

following definitions show Microinsurance is well researched around the world

and it’s a well-known field among professionals of different backgrounds.

However you cannot measure Microinsurance penetration just from the

definitions given above.

2.1 Microinsurance penetration in Africa and the rest of the world:Microinsurance penetration in Africa is growing but despite this high rate of

growth for Africa not all the countries in Africa have experienced the effects

equally (McCord, et al., 2013).

Below in figure 1 is a diagram that shows the percentage of people covered by

Microinsurance in various countries in Africa.

Figure 1 Insurance penetration in Africa

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Source: (McCord, et al., 2013) Insurance penetration in Africa

According to Swiss Re (2010) “Africa is a large untapped market and offers

tremendous growth potentials for Microinsurance” (Swiss Re, 2010), the most

penetrated market in Africa is the South African market this is due to many factors

such as it been the biggest economy on the African continent and also one of the

most advanced countries in Africa. A study by the Microinsurance Innovation Facility

(2010) “put market penetration in Africa to only 2.6% of the population living under

US$2 per day, nevertheless, the number of people in Africa covered by a

Microinsurance policy increased more than 80% between 2005 and 2010, with

annual growth rates at over 10% in some countries” (Hettich, 2012). In other part of

the world Microinsurance is also growing especially in Asia with countries like China,

India, Indonesia, Bangladesh and the Philippines experiencing high growth rates

(Express, 2012), (Jaswal, 2011), (info, 2010).

Asia which is home to around 70% of the world low-income population is the largest

Microinsurance market (Swiss Re, 2010). In India and China Microinsurance cover

almost 60 million lives in 2007; this represents just 3% of low-income individuals

within Asia (Roth, et al., 2007). In Africa there are up to 14.7m Microinsurance

policyholders paying $257m in premiums, representing only 1% of the estimated

potential total premiums of $25bn from 700 million possible clients (Crawford-Ash &

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Pural , 2010). According to one estimate “about 500 million people in the developing

countries have some form of Microinsurance policies” (Chen & Cummins, 2010).

Companies like Allianz have established Microinsurance offices in countries like

Colombia, Egypt, and India. According to Allianz “the simplicity of their product has

allowed for them to penetrate the Colombian, Egyptian and Indian markets”

(Marketline, 2012). Microinsurance penetration is still relatively small compared to

the size of the Microinsurance market, more needs to be done for Microinsurance to

fully penetrate the worldwide market. If Microinsurance companies continue to offer

popular policies there is no doubt Microinsurance will experience massive growth.

2.2 Common Microinsurance policies:There are various policies sold by Microinsurance companies and their partners that

provide cover for the policyholder. Some of the most common Microinsurance

policies that are in high demand by policyholders are:

I. Credit life cover is one of the most common Microinsurance policies in the

world, this could be due to the fact that credit life is a compulsory requirement

of obtaining a loan from microfinance institutions and could also be due to

credit life being easy to provide and administer. Credit life cover currently

accounts for around 30% of all policies worldwide (Hettich, 2012). Most low

income earners that take credit from microfinance institutions and do not pay

back due to the death of the breadwinner, have credit life insurance to cover

their risk of not paying their debt thereby freeing the family to use their

remaining income to improve their lives and not spend it on servicing the loan

of the deceased.

II. Health Microinsurance is not that far away from credit life cover in the amount

of people it covers. Most health Microinsurance policies are written by the

insurance companies and distributed by microfinance institutions and health

care agencies (Hettich, 2012). In the Philippines, health Microinsurance is the

highest demanded policy by policyholders because they see the impact it will

have on their lives and the lives of their family members (Crawford-Ash & Pural

, 2010). According to Nobel Peace Prize laureate Muhammad Yunus (2010)

“his Grameen bank provide Microinsurance health to over a million

Bangladeshis” this is as a result of no social welfare programs by the

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governments of developing countries, which makes it easy for Microinsurance

to step into the vacuum created by the lack of social health programs (Houreld,

2010). Majority of the health Microinsurance policies cover consultations,

hospital stay, primary health care, and maternity, it also covers the

policyholder’s family members.

III. Agricultural indexed linked Microinsurance helps poor farmers manage

weather related catastrophic risks, and crop failures. It is hardly subjected to

manipulation like crop insurance which is indemnity based (Chen & Cummins,

2010). Several weather patterns are collected in the index to inform farmers of

any potential natural disasters and when they occur they are compensated

without them needing to proof anything apart from their contracts with the

Microinsurance Company. Throughout Africa, agricultural cover is still limited

which shows there are some core constraints in African insurance, including

limited markets, weak ability to pay and insufficient reinsurer interest, as well

as crowding out by governments (McCord, et al., 2013).

IV. Property Microinsurance is only a fraction of the global Microinsurance market

compared to other types of Microinsurance policies (Hettich, 2012). Some

property Microinsurance policies provide cover for contents of the building,

floods, landslides, fire, assets and livestock. The reason why property

Microinsurance is not as massive in take up as the other policies could be due

to the difficulty in accessing the low income areas and deficient infrastructure

(Afonso & Sepulveda, 2010), (Acha & Ukpong, 2012). In a survey carried out

by Afonso et al (2010) of 100 countries “only 0.7% of the low-income

population had any form of property insurance, and very few countries had any

homeowners’ Microinsurance coverage and only China had up to 77%

property Microinsurance take up” (Afonso & Sepulveda, 2010). This shows

there is still room for improvement in property Microinsurance.

V. Funeral insurance is another very popular Microinsurance product especially in

the African markets. Majority of Africans just have a single breadwinner who

looks after the family financially and if such a person should pass away the

family would have to sell all their properties to plan for his or her burial which

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are usually big events in Africa. Funeral policies provide cover for such risk so

that family members do not have to go bankrupt to pay for burials of their loved

ones. Such policies are highly sold in South Africa, for example South Africa’s

largest private owned insurance company Hollard insurance has partnered

with vendors to sell funeral policies called my funeral card to low income

earners in South Africa (Smith, et al., 2010). Based on the figures provided by

Hollard insurance it is currently working with up to 18,000 registered agents

and the policy is very popular among South Africans with it being one of the

highest sold products (Smith, et al., 2010).

The policies above have been identified has the most common Microinsurance

policies which are in high demand but such policies would require an efficient and

effective model to deliver them to potential policyholders.

2.3 Microinsurance models:Various Microinsurance models are in operation around the world but there are

those that are commonly used in different markets. Some of the most used

models are:

I.Partner agent model: This is a partnership between a Microinsurance providers and

an agent which could be a microfinance company, Nongovernmental

organisations (NGOs), government institutions, insurance company, healthcare

agencies and retailers. The Microinsurance provider market’s and delivers the

products to the potential clients while the agent is responsible for designing and

developing the product, while the claims would be handled by the agent, also

both parties in this model share the burden of risk and the premiums (Acha &

Ukpong, 2012). For example in East Africa there is a partnership between

Microinsurance institutions and Safaricom, they developed a scheme called

MPESA scheme were pay outs are delivered to policy holders directly to their

mobile phones by way of a credit without the need for any physical payment or

for the policy holders to lodge a claim (Hettich, 2012). This model makes it easy

for the Microinsurance provider to gain funds for their own development, for

example hospitals that provide Microinsurance in Kenya get some funds to

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improve the hospitals and even keep some healthcare clinics open (Houreld,

2010).

II.Full service model is where the Microinsurance provider is in charge of everything

from delivering, to marketing and designing of the product, the cost of operation

will also fall since the provider controls everything and it does not have to share

the risk or premium with any other company (Acha & Ukpong, 2012). In a full

service model the Microinsurance provider could select the risk it wants to cover

and the price of premium it want to set, unlike the partner agent where there are

restrictions from the agent. In some developing countries the government is the

one that offers Microinsurance to it citizens, this is a kind of full service model,

which discourages commercial insurers from getting into the market and could

lead to waste of resources by the government due to lack of expertise in the

insurance field. Full service models have failed in most of the developing

countries because most of the providers using this model are not from the

country they are servicing and do not understand the market they are in, the local

insurance companies do not really have the financial power to cover very cheap

risk only multinational companies have such capitals to take on such a venture

(Jaswal, 2011).

III.Mutual based models: The mutual model can be community based one where

members of community form their own Microinsurance Company and serve the

members of their own community or just a pure mutual based model where

policyholders insure each other, profits and losses are shared among members

and each member has a right to a vote (Radermacher & Brinkmann, 2012). The

mutual models are known to be more effective, easy to design, deliver and

market to the clients; while its disadvantage could be the small size and scope of

operations it usually entails (Acha & Ukpong, 2012). For example a large amount

of health mutual Microinsurance are sold in the west and central African countries

because the mutual model is good for easy delivery of the product and the locals

trust the mutual Microinsurers more than insurance companies since they are

part of the company (McCord, et al., 2013).

The mutual model allows for the Microinsurance provider to meet the needs of

each distinct individual community, also there is the advantage of involving the

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community/members in the management and operations of the product while at

the same time educating the community/members on the necessity and functions

of insurance (Acha & Ukpong, 2012). Also associated with mutual models is the

cooperative model of Microinsurance which have very similar characteristics with

community and mutual models but with just a little difference in that cooperatives

can be owned by other cooperatives who are not necessary members of the

Microinsurance cooperative (CGAP WORKING GROUP, 2008).

The figure below shows the models that are widely used in Africa:

Figure 2 Microinsurance models in Africa

Source: (McCord, et al., 2013) Microinsurance models in Africa.

The models identified deliver Microinsurance to those who need it and allow for

the policyholders to see the benefits of Microinsurance but the models do not

take way the challenges faced by Microinsurance institutions.

2.4 The benefits and challenges of Microinsurance:The benefits of Microinsurance to companies and other parties involved in

providing Microinsurance services is massive with the population of low income

earners in the world said to be at least estimated to be 60% of the world

population. According to Lloyds (2012) “potential benefits to commercial insurers

of entering the Microinsurance market are immense; not just exposure to huge,

largely untapped markets, but a larger and diversified risk pool, market

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knowledge and 'first mover' advantage in underdeveloped markets” (Hettich,

2012). This shows the first insurer to get into the market could potentially be the

market leader and can gain early profits from the market than other companies

that come later into the market. Microinsurance is one of the innovations

suggested by the World Bank to help reduce poverty for low income earners in

developing countries, by providing risk protection for low income earners they can

gradually lift themselves from poverty and improve their standard of living

(Crawford-Ash & Pural , 2010). Microinsurance could also lead to growth of

certain industries in developing countries. For example farmers that have

agricultural Microinsurance cover could concentrate more on improving their

farming skills since they know their risk are covered by Microinsurance

(Carpenter, 2011).

The challenges Microinsurance institutions face from being the first into a certain

market is the sunk cost which is the irrecoverable cost they spend in setting up

the program and getting clients, this cost would not affect other new entrants into

the market, who would take advantage of the already established link created by

the first entrant (Hettich, 2012). Another challenge faced by Microinsurers is the

implementation of their policies due to very strict government regulations and

also the insistence of some governments seeing Microinsurance as only useful

for alleviating poverty, these places a lot of strain on Microinsurance institutions

(Crawford-Ash & Pural , 2010). There are so many other challenges and

obstacles faced my Microinsurance institutions which would be looked at in this

paper later on.

Chapter 3

Findings 3.0 What is Microinsurance and its potential in Nigeria

As discussed in the literature review the definition of Microinsurance is defined by

different journals that all have different definitions for it but they all have certain

words in common, words like low income earners, poor people, low premium

charges, and developing countries. All this words just confirm that Microinsurance

target market is people who earn very little in the society.

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The potential for Microinsurance in Nigeria is massive; it just needs the right

regulation and infrastructure to deliver it to the people that need it most. Industry

experts in Nigeria argue that the regulator is limiting the growth of Microinsurance

in Nigeria due to over regulation of insurance especially in the case of

Microinsurance were overlapping laws have created barriers to the development

of Microinsurance (Saghana, 2010). With proper regulations for Microinsurance

the potential for both the Microinsurance provider and the potential customer is

huge for a country like Nigeria, the provider is likely to make massive amount of

profit due to the size of the population and the customer is assured of his or her

risk being covered which allows them focus on developing their own business.

The model that will allow for these potentials to be realised will be discussed

below in 4.3.

3.1 What are the most demanded policies in Microinsurance From the research done it was discovered that credit life cover was the most

demanded form of Microinsurance policy by low income earners followed by

health, agriculture, property, funeral cover and accident cover. According to the

ILO (International Labour Organisation) (2012) “the credit life cover is generally

easy to introduce, simple for borrowers to understand, and seen by financial

intermediaries as a support to their core business” (Marketline, 2012). This could

be the reason why it is so popular among low income earners and also some

microfinance institutions make it compulsory for the borrower to have credit life

insurance cover before giving out loans. The main purpose of credit life

Microinsurance is to protect the lenders if the borrower should die and avoid the

debt being a bad debt.

The most demanded policies in Nigeria are pensions, agriculture and property

cover. The reason why the pension is highly demanded is because of lack of

government efficiency in dealing with pensions, this made the private sector to

come into the industry to introduce a pension schemes. Also artisans and market

trader do not have anything to fall back on when they retire from their business

and become sucked into the cycle of poverty, neglect and so on (Nwite &

Ngerebo, 2012). The demand for agriculture and property Microinsurance is also

common in Nigeria like other parts of the world; this could be attributed to the

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human trait of wanting to protect one’s own livelihood and properties from being

damaged.

With the policies identified as the most demanded by policyholders different

methods will be used deliver them to the policyholders some of which would be

looked at before proposing the model that would suit Nigeria.

3.2 What types of models are currently being used in other markets?This main purpose of this paper was to propose a Microinsurance model that will

suit the Nigerian market but before doing that this paper will first look at various

models that are already in use in the Microinsurance industry. Some of the

models that were identified during the research for this paper that were seen as

widely used to deliver Microinsurance to potential policyholders are:

I. Partner agent was identified has the most used model to deliver Microinsurance, it

could be in various forms, from partnership between microfinance institutions or

healthcare agencies and insurance companies to a partnership between

governments and multinational reinsurance companies like Munich Re, Allianz and

Swiss Re (Munich RE, 2013). The partner agent model leads to sharing of ideas

and techniques to better serve the policyholder, which could result in better

product design, improved education of the policyholder and also lead to better

claims payment. By forming a partnership with the local organisations

Microinsurance providers gain insight on how to develop products that will match

the needs of the people in such communities and would encourage them to buy

other forms of Microinsurance products. Partner agent model has the ability to

cover more areas and encourage the growth of Microinsurance than other models

since the partnership is not restricted to one party, they can have partnership with

many organisations, for example an insurance company can have different

partners in Nigeria distributing different products to the potential policyholders in

different communities, this will accelerate the growth of Microinsurance in the

country.

A real life example of a partner agent model currently been operated in South

Africa is between Hollard insurance company and Take it Eezi a vendor network

with branches all over south Africa, to provide funeral insurance cover, which is

called my funeral card to low income earners. The policy is sold using mobile

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phone technology to extend prepaid insurance to individuals around South Africa

(Smith, et al., 2010). The partner agent model does have some flaws which could

lead to it not being very effective in distributing Microinsurance, for instance the

Microinsurance provider is too over reliant on the agents which can have a

negative impact on its operations. For example some African countries banned

some NGOs from operating in their country this would lead to cancellation of some

Microinsurance policies and undermine the progress that has already been made

in getting people to buy the policies by the Microinsurance provider.

II. The mutual/cooperative/community based models were identified as been widely

used to deliver Microinsurance, a large proportion of these models were found to

be in use in India, Bangladesh, the Philippines, West and Central Africa. For

example in India an industry foundation decided to form their own mutual scheme

due to them facing an increase in premiums, the mutual scheme made sure

premiums remained the same and benefits capped, the result of this was the

scheme never ran into a deficit and they had a good claims ratio of 92% (Dror, et

al., 2009). Such a successful scheme will encourage other people to join the

mutual scheme which will improve the growth of Microinsurance in India and other

countries.

As it is widely known that mutuals are run by the members and as such the

members trust and believe in the scheme and see it has their own unlike if

Microinsurance was provided by using another model. The mutual model as the

advantage of developing, designing, and marketing products that meet the needs

of its members and it is effective in distributing the products to its members than

other Microinsurance models (Acha & Ukpong, 2012).

In West Africa there are mutual health organisations that provide health

Microinsurance to their members where the members contribute to the scheme

financially and they elect voluntary managers to manage the scheme, to keep

premiums low they had to limit the benefits their members get, this had a negative

impact on the scheme with dropout rates very high (CGAP WORKING GROUP,

2008).

This shows the mutual/cooperative/community models have to be priced well

because they are small in size, so any mistake or mismanagement could lead to

the closure of the scheme. The good thing about mutual, cooperative and

22

community based schemes is that they are easy to set up and do not require large

amount of capital to function.

III. Full service models as defined earlier is controlled and owned fully by an insurance

company or a Microinsurance provider. The earliest form of Microinsurance policy

that was sold in Africa was in Uganda where the Microinsurance society developed

a commercial viable policy in 1995 which showed that commercial insurers can

distribute Microinsurance (Marketline, 2012).

The full service model could also be used by the government to develop products

to meet the needs of the very poor in the society, the government will fund and

control what premiums are charged to the people, for example the Nigerian

government setting up the pension agency to provide pension services to people

at reduced premiums (Pension, 2013). The full service model is the most

vulnerable to customer dissatisfaction, the customer can switch or dropout of the

contract. This could be due to not understanding what the customers want unlike

mutual model that finds it easy to educate their client on the needs of

Microinsurance. The full service model is also exposed to holding on to very large

risk and has no way of sharing it like the partner agent model does, holding on

high risk could lead to the bankruptcy of the firm if they get very high claims (Acha

& Ukpong, 2012). The full service model has the disadvantage of been seen has a

big corporation which does not have the interest of the low income earners and it’s

just after making money for its shareholders, this will erode the trust of the low

income earners ( Berend, 2013).

It could be argued that from the analysis done the partner agent model and the

mutual/cooperative/community model are better than the full service model. Both

the partner agent model and the mutual model will be looked at to propose a

model for the Nigerian market.

3.3 Which Microinsurance model is suitable for NigeriaLooking at the model that will suit Nigeria one must take into consideration the

size of the country, population of the country, infrastructural development,

regulations, education of its citizens and the possibility of making a profit in that

country. Nigeria is a big country with an estimated size of 923,768 sq. km, and a

23

population estimated to be 170 million with diverse cultures and religions (CIA,

2013), (BBC, 2013), (Nigeria, 2013). The author of this paper who is a Nigerian

identified that the infrastructure in Nigeria is still very poor but still in the

developmental stage and over the years the government and the private sector

have been working to develop the communication infrastructure for example

mobile telecommunication is very developed in Nigeria with the country having

the highest number of mobile phone users in Africa at 93 million people as at

2011 (BBC, 2011). The literacy level in Nigeria is averaged at 61.3% compared to

other countries on the African continent (Mundi, 2012). Which means the

proposed model will not need to put much resources into educating people on the

need to have insurance but with that said Nigeria is a deeply religious country

and the model will have to take this into consideration.

The National insurance Commission (NAICOM) which is the insurance regulatory

body in Nigeria currently has no specific regulation concerning Microinsurance

but has regulations that cover all aspect of insurance, though recently NIACOM is

planning on releasing guidelines on Microinsurance that will foster its growth in

Nigeria, the regulation is expected to be in force in by 2014 (Duru, 2013). The

objective of the guideline is to make it easy for cooperation between

Microinsurance providers and agents, to ensure proper delivery of

Microinsurance policies that will benefit those at the low income level. Some

experts in Nigeria already believe that there is duplication of laws across the

sector that has restricted the growth of Microinsurance in Nigeria, the solution the

insurance experts proposed for Microinsurance to grow in Nigeria is that the

regulatory environment need to be positive and flexible (Saghana, 2010).

The model:Based on the information gotten from the research about Microinsurance and the

Nigerian market, this paper will suggest a combination of both mutual model and

partner agent model to serve the Nigerian market. The combination of both

models will bring about increased expertise in underwriting the risk and an

improvement in the relationship between the clients and Microinsurance

providers. The partner agent side of the model will bring together insurance

companies with vast expertise in the field of insurance to underwrite the risk and

the mutual side will provide information on the market. It could be called the

24

Partner Mutual model where the partner works with the mutual organisations in

delivering Microinsurance. This model can even provide an easy route to gain

reinsurance by the Microinsurance providers since the partner could be a

reinsurance company or an insurance company with expertise in the reinsurance

market, which the mutual does not have. There is a need for structure if the

model is going to be successful. The structure would entail various needs of the

model, things like premium and risk sharing.

The structure of the model: The partner in this case would be an insurance company or a reinsurance

company that will do the underwriting of the risk, while the mutual would deliver

the policy to its members. The premiums would be shared based on an agreed

proportion, for example could be 60-40 Percent share depending on the size of

the risk. The profit could also be shared in a similar way like the risk is being

shared. The management of the company that would be formed by the mutual

and the partner (the insurance or reinsurance company) will consist of members

of the mutual with some staffs of the partnering company. Majority of the staffs

from the partnering company would be underwriters and claim handlers who are

experts in handling such technical aspects of insurance while the mutual side of

the business would handle the marketing, distribution, registration of new

members and building relationships with members. An example of the structure

is shown in the figure below:

Figure 3 Structure of the Partner Mutual model

25

The type of structure the model will follow has been looked at now to explain how the

Microinsurance products would be priced in the model.

Pricing products in the model: Pricing the policies that would be sold in a country like Nigeria doesn’t have to be

complex but simple because there is less historical or individualised risk data and

the market is very sensitive (Hettich, 2012). Pricing a product in Microinsurance

has to be done with care so as not to price out the low income earners. Some

Microinsurers subsidize their premiums and hope it will not be too expensive for

the low income earners to pay but this could expose the Microinsurer to risk of

insolvency, unsustainable business models and lack of capital to meet claims

(Biener, 2013). To avoid under-pricing or overpricing the Microinsurance policies

the pricing would have to be a joint decision by the partner and the members of

the mutual this will make the price widely acceptable by the mutual members and

would not lead to the members not trusting the partner. For the provider to stay

afloat it must charge prices that cover the risk they have accepted. The national

minimum wage stated by law in Nigeria is 73.13 pounds which is only earned by

those in the formal sector of the economy (ILO, 2011). For this set of people the

price could be set at 5 pounds per policy which is just 1230.50 Naira per month

26

(the Nigerian currency) and is just 6.84% of their total wage in a month. As

discussed above it is well known that Nigeria has got a lot of people in the

informal sector who earn way lower than the minimum wage this set of people

would be priced differently from the rest of the policyholders in the partner mutual

model (Swiss Re, 2010). These methods of pricing will ensure profitability for the

Microinsurance provider. The right product would be needed to suit the pricing

strategy identified for the model.

Product suitable for the model:Credit life product would be a suitable product for this model in Nigeria because it

can improve the lives of low income earners while at the same time cover the risk

of microfinance institutions who can loan out more money to the citizens of

Nigeria. When loans are taken from microfinance institutions that make credit life

cover compulsory this would result in the borrower moving out of the poverty trap

by allowing the individual to focus on his or her business and not worry about

their loan if they do not have the ability to pay back the loans. Also if the borrower

should die the individual’s family would not have to sell their property or land to

pay back the loan thereby allowing them to carry on with their lives (Chen &

Cummins, 2010). Credit life can help create an insurance culture among low

income earners through understanding of Microinsurance and the experiences

they get from using Microinsurance, this experience could be gained from how

fast their claims were settled, to the customer service they received from the

Microinsurance provider, and the overall claims experience (Wipf, et al., 2011).

The problem credit life product will face in Nigeria:

Firstly Nigeria is a country that has two systems when it comes to its religious law

for example in Northern Nigeria the sharia system operates so any credit life

product in the north will have to take into consideration the sharia laws, this will

increase operational cost with providing two systems in one country. This will

deter foreign companies with expertise in insurance from venturing into Nigeria.

The solution to this could be set by the new regulatory guidelines NAICOM is

about to introduce on Microinsurance (Duru, 2013).

Secondly there is the problem of fraud especially when the insured know they

cannot pay back their loans for example they can fake their own death so that the

insurance company can meet the claims and pay the microfinance institution the

27

insured’s loan, especially in a country like Nigeria where corruption is wide

spread such fraud cases will be very high. For this problem to be solved the

Microinsurer need to put in place certain conditions before claims are met but the

Microinsurer need to be careful in implementing such policies so as not to

alienate the policyholders and lead to mistrust between both parties.

Thirdly marketing the product could be very difficult especially in a country like

Nigeria where the population is made up of diverse groups. The product must be

marketed in such a way to meet the needs of various groups in Nigeria. The

Microinsurer could use integrated marketing communication to communicate with

its target audience. Integrated marketing communications (IMC), involves an

organisation bring together different promotional features and other marketing

actions in order to communicate more effectively with its target audience (Ebren,

et al., 2004). By using IMC the cost of marketing would be reduced compared to

using other forms of media alone.

The model would need a proper distribution method to compliment the price and

the product so that the model can be successful.

Distribution method: For a model like the partner mutual model the best way to

distribute Microinsurance would be to use the direct distribution method. The

direct method of distribution is distributing Microinsurance directly to the

customers without using middle men (Sault, 2013). Members of the mutual are

also part of the organisation that run the Microinsurance firm so it would be very

beneficial to distribute the product using direct distribution techniques as this will

improve the relationship and trust between the clients and the company. Using

the direct method to distribute Microinsurance the company can achieve low cost

of operation since the middle men like brokers, agents, affinities, and aggregators

are not involved in the process of distributing Microinsurance. This will make the

cost of operating the business to fall. For a country like Nigeria the direct sales

would be less successful using the internet it would be better to use mobile

phones to connect directly to the customers. The reason for using mobile phones

is that more Nigerians are using the mobile phones than the internet. This could

be done by using text messages to send the price of the premium and the policy

wording can be sent to the policyholder via their mutual organisation. By selling

the Microinsurance policies directly the firm using the partner mutual model will

28

have a very strong brand that will not be eroded unlike if they had used affinity or

aggregators to distribute their products. By using other means to distribute their

products it might be miss-sold or given less priority by the distributor but with

them using direct distribution method they are in control of every aspect of selling

and marketing their products. Direct distribution method offers the best

opportunity for Microinsurance growth in Nigeria but as Microinsurance continue

to grow it might not be feasible to use only direct distribution methods other

methods can be introduced to distribute Microinsurance.

With the product, price and distribution method established the next part that

would affect the success of the model is the claim process. The claim process is

very important in Microinsurance it can promote or tarnish the image of the

Microinsurer depending on how the process is handled.

Claims Process: According to Samantha James (2013) “the best way for clients

to measure the value of insurance or Microinsurance on their lives is during the

claims process” that’s when they would know if they have gotten the value for

their money/premiums (James, 2013). The claims process is very important in

Microinsurance because if the policyholder should have a bad experience when

doing their claims they could cancel their policy and distrust anything insurance

forever unlike conventional insurance where the clients could switch to other

insurance providers in Microinsurance that rarely occur. For the claims process to

be successful in Microinsurance, the Microinsurance provider would need to

make the process simple to understand and make sure compensations are paid

swiftly. For a model like the partner mutual model the claims process will require

good communication between the partners and the mutual organisation to settle

the claims of their members on time without over compensating the policyholder.

The communication would have started from the inception of the policy to the day

the claims are settled so that all the facts about the policy would be known to all

parties involved and this would result in the claims process being very efficient

and satisfying the need of the policyholder. The claim process would involve the

policyholder notifying the mutual organisation within certain days of the incident

occurring, and then the mutual will inform their partner to work on processing the

claims which would be given a timeline too so as not to delay the compensation.

The compensation would then be paid by the mutual part of the model to the

29

policyholder if the claims are found to be genuine. The diagram below describes

the claim process between the parties mentioned above:

Figure 4 Claims process of the Partner Mutual model

The claim process needs to be done properly so has to avoid dispute between

the Microinsurer and the policyholder.

Fraud/exaggerated claims: dealing with fraud and exaggerated claims would

have to be treated differently in Microinsurance than in conventional insurance.

For Microinsurance which is operating with the partner mutual model cancelling

the policy outright like it never existed because the policyholder lied or

exaggerated the claims would not be advisable. This will not be good for building

trust with the current and potential policyholders. The best way to handle

exaggerated claims in Microinsurance with the partner mutual model is to reduce

the amount the individual will get in compensation and educate the clients more

on why fraud, moral hazard and exaggerated claims are not acceptable in

Microinsurance. The mutual side of the model will deal with educating its

members on such acts and why they are not good for Microinsurance.

30

Reinsurance: With the partner mutual model access to reinsurance could be

made easy, since the partner would be a reinsurance or insurance company that

has knowledge of the reinsurance market. The partner could get reinsurance in

bulk for the risk that the model is covering and negotiate better deals than let’s

say a mutual company can obtain on its own. This paper would suggest a

separate reinsurance market should be created for Microinsurance so that their

type of needs can be met. Microinsurance companies would not be able to meet

the demands of reinsurance companies if conditions for conventional insurance

are set for Microinsurance providers. The Microinsurance providers are better off

going for treaty reinsurance which covers all their risk no matter how large it is

than using facultative reinsurance which looks at the risk individually.

Reinsurance is very important in ensuring the model is successful in delivering

Microinsurance to the clients.

The model has taken into consideration price, product, distribution process,

claims process and reinsurance all this would ensure the success of the model.

The model cannot solve all the problems faced by Microinsurance in Nigeria that

can only be solved with the help of all the stakeholders in Microinsurance sector

in Nigeria.

3.4 What problems do Microinsurers face in Nigeria The problems faced by Microinsurers in Nigeria are:

I. Regulations that are not specific to Microinsurance tend to hamper the growth of

Microinsurance. The current regulations in Nigeria are set for conventional

insurance which do not suit Microinsurance. Some of those regulations in

Nigeria that would restrict the growth of Microinsurance in its development has

to do with the capitalisation, solvency capital requirement and foreign

investments/ownership. For Microinsurance to develop in Nigeria separate

regulations considering all that has been mentioned would have to be changed

and in terms of solvency and capitalisation they would need to be scaled down

for Microinsurance.

II. Government pressure on using Microinsurance to reduce poverty restricts the

Microinsurer from being flexible in designing, pricing and distributing

Microinsurance products (Swiss Re, 2010). Government involvement in

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Microinsurance tends to slow down the growth and innovation in

Microinsurance, which would have progressed well if left to the insurance

industry. If the government wants to reduce poverty with Microinsurance there is

a better way of doing it, they could form a public private partnership (PPP) with

the private sector to provide Microinsurance, the government can work with

insurance companies to provide Microinsurance products by either funding it

fully or subsiding the premiums (Swiss Re, 2010). PPP allows governments to

regulate private sector involvement to improve effectiveness and efficiency in

the delivery of Microinsurance products, it also significantly reduces government

expenditure and administrative expenses required to establish and sustain

comprehensive social security scheme and finally the PPP encourages

investment by the private sector in infrastructures, such as the setting up of

healthcare facilities and enhancing service quality (Swiss Re, 2010).

III. Another problem could be the amount of people the Microinsurer would have to

cover to make enough money to cover the risk they have accepted especially if

the pricing is very low and they decided to go for adverse selection which could

affect their solvency (Crawford-Ash & Pural , 2010). Unlike conventional

insurance where the insurer could be in a niche market and sell policies that will

cover their cost, a Microinsurer cannot operate in such a way due to its

customers who are low income earners and it charges low premiums which

result in having to target the mass market to cover it cost. By outsourcing some

of its operations to other companies, a Microinsurer can solve the problem of it

having to target the mass market this will reduce the cost of operations and

allow the Microinsurer to deal with other parts of the business without requiring

to cover very large risks to maintain its cost of operation.

IV. Corruption is a major problem in Nigeria which affects every single sector of the

economy this could prevent the smooth operation of the model in delivering

Microinsurance policy to the low income earners. Corrupt practices in Nigeria

could also encourage low income earners to engage in illegal activities like

money laundering and moral hazard to make more money from the Microinsurer

that could lead to bankruptcy of the system (Nwite & Ngerebo, 2012). The

regulatory body in Nigeria and the private sector could set up a body to monitor

32

fraud in the insurance industry so as to reduce such crimes, for example the

Nigerian companies and regulatory body NAICOM could copy the British

insurance fraud bureau to set up their own anti-fraud agency which would allow

members of the public to also help in identifying fraud and corruption in the

industry.

V. Lack of information and public awareness, most Nigerian do not have any idea

about insurance or its meaning and how it can change their lives. The level of

awareness is so low that people in Nigeria are not even aware that they can

obtain social insurance for their pension, disability and so on. The government

of Nigeria, the regulatory body NAICOM and insurance companies need to

educate the citizens of the country on the importance of insurance. This will not

only benefit the citizens but also the insurance industry and the government. By

providing more information about insurance and Microinsurance people will be

more educated and learn to trust insurers in general, also insurance could

contribute to the GDP of Nigeria due to improvement in public awareness.

VI. Affordability of the Microinsurance policies could be another problem

Microinsurers could face in Nigeria (Provention consortium, 2005). There are

various costs associated with insurance cost like handling contracts,

distribution, and claims assessment, the problem for Microinsurance is how to

manage this cost while at the same time making the Microinsurance product

affordable to its target audience. With a country like Nigeria that has up to 70%

of her people in poverty the problem of affordability is very high, majority of this

people leave below $1 per day. The solution to this could be government

subsiding Microinsurance or international donors and even those at lower risk

can help subsidise Microinsurance for the poor in the society (Provention

consortium, 2005).

33

Chapter 4 Conclusion

Based on the research and findings several conclusions can be made about

Microinsurance in Nigeria and how effective the proposed model would be in the

delivery of Microinsurance to the Nigerian citizens. Microinsurance and insurance in

general has very low penetration in Nigeria with less than 1% of the population of the

country covered by Microinsurance (McCord, et al., 2013). From the research it can

also be concluded that compared to other African countries the growth of

Microinsurance in Nigeria is around the standard growth rate of Microinsurance in

Africa.

Figure 5 Microinsurance growth in Africa

Source: (McCord, et al., 2013) Contributions to overall growth from 2008 to 2011.

The potential for Microinsurance to grow in Nigeria was also identified by this paper,

with a population that is the largest in Africa and one of the largest in the world the

market is big enough for any Microinsurer to make profit, but the market has got

various obstacles that will limit the growth of Microinsurance. Such obstacles will

deter foreign companies from operating in Nigeria and could slow down innovation

by local insurance companies. According to NAICOM (2013) “there are at least 112

34

million potential Microinsurance customers in Nigeria, adding that it has begun the

process of fine-tuning a policy framework for Microinsurance services designed to

cater for the low income earners and vulnerable poor of the rural areas” (Uyoatta,

2013). This shows the regulator knows it has to step up to improve the market, this

would send a strong signal to foreign companies that want to invent in Nigeria that

the regulator is ready to clean up the market to make it easier for insurance to be

well distributed in Nigeria. With the regulator fining tuning the regulations in

Microinsurance and insurance this could also improve the relationship between

customers and the insurance industry. Microinsurance is expected to grow in Nigeria

as the economy of the country is one of the fastest growing economies in the world

(BBC, 2011). This paper predicts more citizens of Nigeria will be able to obtain more

insurance due to the efforts of the regulator and the insurance industry in educating

the people of Nigeria on the importance of insurance on changing their lives.

The global market for Microinsurance is targeted at Africa, Latin America and Asian

countries because these are countries with large amount of low income earners and

the economies of majority of countries in these regions are still developing. The

growth of Microinsurance in Asia and Latin America is higher than Africa. Most

countries in Asia had Microinsurance introduced to their market by microfinance

institutions that gave out loans to low income earners and want to protect

themselves from bad debts. The Asian Microinsurance market is one of the most

developed markets with countries like India, Philippines and China having massive

Microinsurance penetration than other countries.

From the paper it can be concluded that the South African market is the biggest

Microinsurance market in Africa. The reasons for such growth in South Africa were

concluded to be the economic strength of South Africa (the biggest in Africa) and the

high level of education among its citizens compared to other African countries. It can

also be concluded that other African countries are also experiencing growth in the

Microinsurance market be it at a slow growth rate, countries like Ghana, Tanzania

and Nigeria are experiencing Microinsurance growth (McCord, et al., 2013). The

economic growth in these emerging markets would be given a boost by the uptake of

Microinsurance which would encourage risk taking and give local investors’

confidence to build on what they already have. The availability of Microinsurance will

35

encourage more low income earners to make savings instead of spending all their

earnings (Swiss Re, 2010).

Insurers who target Microinsurance as one of their products or as a line of their

business are certain to make huge profits based on the size of the market which is

estimated at 4 billion clients of which 2.4 billion have commercial viability (Wiechers,

2001). By designing products that meet the needs of low income earners the

insurers can achieve profit while at the same time empowering the people to move

out of poverty.

From the research and findings certain Microinsurance product were identified as the

most common products, products like credit life, health, agriculture and property

policies. As identified some of the products were made compulsory by microfinance

institutions (credit life products) and by the governments of different countries

(property Microinsurance). As Microinsurance continue to grow more products could

be added to the existing ones to cover more risk, low income earners are exposed to

and by the year 2020 there would be up to 1 billion people around the world covered

by Microinsurance that’s more than double the amount of people that are being

covered in 2012 (Nyman, 2013).

Microinsurance models were also looked at, some of which were identified to be the

most widely used in the delivery of Microinsurance policies. The most widely used

was the partner agent model which brings together Microinsurance providers and

agents in the delivery of Microinsurance. The partner agent model is very efficient at

allowing quick delivery of Microinsurance policies to the policyholder, the example of

the South African insurance company mentioned above alight this advantage of the

partner agent model. The partner agent model is also associated with numerous

challenges that were mentioned in the paper but the one that stood out was lack of

trust by policyholders and it’s also very prone to fraud by the agents. Another model

found to be used often by Microinsurance providers is the

mutual/cooperative/community model which was seen to relate easily to the

customer. The mutual model did encourage policyholder participation which leads to

policyholders trusting the provider since he or she is part of the company, the major

drawback for such a model is the number of people it needs to cover its cost of

operations since most mutuals are small organisations with few members.

36

To solve the problems associated with both models above this paper decided to

introduce its own model which was actually a combination of both models above. It

was concluded that the model will link Microinsurance providers with mutual

organisations like the Ajor organisations in South West Nigeria which are informal

organisations to provide Microinsurance. This will give the mutual’s the

professionalism and technical knowhow of insurance and the partners the market to

design their products that meet the needs of a target group. Such a model will have

its various challenges like the other models discussed. For example one of the

challenges the model could face can be the breakdown of communication between

the partner and the mutual which would have serious consequences for

policyholders. Based on the research done and what this paper has written about it

can be concluded that Microinsurance can be distributed in various ways which can

make the system efficient or inefficient based on the level of trust the clients have for

the Microinsurance provider.

Recommendations

Regulation: Regulations of Microinsurance in Nigeria were identified to be non-

existent but are being developed by the regulator. It was also identified that

Nigeria has got over lapping laws in the insurance industry that are inhibiting

the development and design of Microinsurance products. For the first time in

Nigeria the regulatory agency NAICOM is going to produce a set of guidelines

for the operation and delivery of Microinsurance in Nigeria which would be

introduced in 2014 (Duru, 2013). The aim of the guideline according to the

regulator is to remove barriers to entry into the Microinsurance sector (Uyoatta,

2013). From the studies carried out it would be advisable that the new

regulations been designed for Microinsurance in Nigeria should be developed

with other stakeholders and not by the regulatory body alone, this will make

the guideline to meet the needs of various stakeholders in the Microinsurance

industry. According to Simon Akaayar (2013) lecturer at the university of Lagos

in his presentation on “Legal and Regulatory Issues Facing Microinsurance

Business in Nigeria” he “stated that legal and regulatory principles and

standard must be set in such a way that it will assist in identifying the entities

that need to be regulated and provide the rationale for insurance supervisors

37

to differentiate Microinsurance regulated under insurance law or other laws or

unregulated at all” (Businessday Nigeria, 2013). The regulation on

Microinsurance has to be flexible, easy to understand by the stakeholders in

the industry, covers all aspect of Microinsurance and identify roles of the

different stakeholders in the industry. If the recommendations on regulations

are met the industry would achieve some level of growth in Nigeria.

Government role: it was observed that government role in Microinsurance is

important in the aspect of the delivery and operation of the Microinsurance

programme especially for poverty eradication and education of its citizens on

the importance of insurance. For Microinsurance to be well accepted in Nigeria

the government has to play a role in its development. The government can

subsidies the premiums of the very poor in the society so as to encourage the

commercial insurers to cover them. This will reduce the risk of the

Microinsurers and encourage more policies to be designed by providers of

Microinsurance. A bit of caution needs to be taken by government so has not

to make the Microinsurance sector over dependent on the government for its

existence, the government should leave some aspect of Microinsurance to

commercial insurers and other providers of Microinsurance, for example the

government does not need to subsidies all the low income earners in its

country there should be a certain limit on the people who can benefit from the

subsidy.

Education and awareness: Majority of the low income earners do not have a

clue of what Microinsurance is and how it can change their lives, especially in

rural areas where education is limited to just a few people. There are various

ways to educate the people on the need to have Microinsurance, the

government and insurance companies can use the mass media to educate

people on Microinsurance. Majority of the low income earners listen to the

radio for their information, the radio would be a good avenue to create

awareness for people on the need to have insurance. The private sector could

work with radio stations to create programmes on the need of insurance,

through interviewing insurance experts and those that have benefited from

38

having Microinsurance in their lives. Also drama shows on the radio could also

be used to narrate, describe and educate people on Microinsurance this plays

are better understood if they were done in the language of the natives of the

area or community. In the very poor rural areas in Nigeria the education of

people would have to be done using the local chiefs who are trusted by their

communities to explain the need of Microinsurance, also the use of stage

actors and actresses to dramatize the need for Microinsurance would be very

helpful in promoting the idea of Microinsurance.

Technology: With the advancement in technology around the world especially

mobile phone technology, Microinsurance providers in Nigeria can make use

of such technology to distribute their products. In some countries this is

already happening were mobile phone technology are used to distribute

Microinsurance. For example in Kenya, South Africa and other East African

countries technology is being used to send pay-outs to the policy holders using

their mobile phones by the way of a credit without the need for physical

payment and removes the need for the policy holder to log in a claim, the

scheme in Kenya is called M-PESA (Hettich, 2012). The scheme removes the

need to have an agent or broker when settling the claims which would have

increased the cost of operations to the Microinsurer or the policyholder. The M-

PESA scheme also allows the policy holder to purchase a policy by scanning a

bar code using their mobile phone camera which would automatically register

the policy via the network provider in this case Safaricom and sends the

confirmation to the policyholder through text messaging (Hettich, 2012). The

Nigerian market is a suitable market for mobile phone technology to sell

Microinsurance policies and manage claims, with the country having the

highest number of mobile phone subscription in Africa with an estimated over

90 million of its population having a mobile phone. The use of the mobile

phone could reduce the cost of operation for Microinsurers which would lead to

even lower price of premiums since no middle man is needed in the

transaction. It could also enhance the relationship between the Microinsurance

provider and the insured due to the insured dealing directly with the

Microinsurer. The technology would also prevent fraud by preventing claimants

from claiming more than they are expected to get for their loss. For

39

Microinsurance to be sustainable in Nigeria it will have to embrace technology

not just in the delivery of products but also in running its operations.

40

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