In an extract from his book Real Money, New Frontiers, Mark Napier looks at how Zambia’s MLife established its microinsurance business.

In 2001, Peri-Urban Lusaka Small Enterprise (PULSE) Holdings, one of Zambia‘s larger microfinance institutions (MFIs), approached MLife Insurance Company Zambia (MLife) with a request to develop insurance products for its clients so as to protect its loan portfolio in the event of the death or illness of its clients. MLife, which had traditionally focused on larger clients, saw the opportunity to penetrate the low-income market as a major breakthrough and agreed.

Six years later, MLife was working with five other MFIs, and its microinsurance client base had grown to more than 130,000 clients. Despite the numerous challenges that this sector presents, Agnes Chakonta, deputy general manager of MLife, sees significant potential in the venture.

Microinsurance in Zambia

Zambia is a small country in central Africa covering 752,614 square kilometres. Its population is estimated at 11.9 million, and life expectancy is low – 42 years for both men and women.

The country is a major copper producer, and its economy is based on copper and agriculture. When the price of copper collapsed in 1975, so did the country’s economy, and it moved from being potentially one of the continent’s richest countries at independence in 1964 to one of the world’s poorest. Other factors such as colonial legacy, economic mismanagement, debt, refugees from the Democratic Republic of Congo and diseases such as HIV/AIDS and malaria have all contributed to its economic decline.

Millions of Zambians live below the World Bank poverty threshold of US$1 a day. According to the Central Statistical Office 2000 Census, overall poverty stands at 73%, while extreme poverty is estimated at 58%. Only 18.3% of Zambia’s working population is formally employed, 40% is engaged in the informal sector (small and microbusiness ventures), and the rest is either unemployed (primarily in urban areas) or relies on subsistence agriculture. Only 15% of the adult population has a bank account.

Microinsurance in Zambia is a relatively new industry consisting mainly of credit life and funeral cover for microborrowers and their family members. Credit life schemes pay off the loan amount in the event of the borrower’s death and pay loan installments when the client is ill. Insurance penetration is low in the country – 1% and 1.5%. Although microinsurance falls under the Zambian Department of Pensions and Insurance, no steps have yet been taken to regulate microinsurance in the country.

Most microinsurance is conducted using the partner-agent model. Insurers use MFIs to reach markets they could not reach on their own by capitalising on the client base of the MFI. In turn, the arrangement legally permits the MFI to sell microinsurance to protect its loan portfolios.

Only two of all the regulated private insurers in Zambia – MLife and NICO Insurance – serve the low-income market through partnerships with MFIs.

Madison Insurance Company Zambia

Madison Insurance Company Zambia Ltd started out in 1992 as a subsidiary of Meridian International Bank. The Meridian Group collapsed in 1995, and Madison was acquired in a management buy-out. A new law proclaiming that no composite companies should operate in Zambia after December 2006 prompted Madison to split the existing company into two separate specialist companies earlier in 2006: MLife Insurance Company Zambia Limited and Madison General Insurance Company Zambia Limited.

MLife underwrites individual life insurance policies, group life insurance policies, credit life insurance policies, gratuity policies, funeral expenses insurance policies and personal as well as group pension plans. Before becoming involved in the mircoinsurance arena in 2001, the company focused on the corporate market and the higher end of the individual market.

MLife and microinsurance

MLife offers the two standard microinsurance products, credit life and funeral insurance. It conducts most of its microfinance business through MFIs. Legally the MFIs are the policyholders. In practice, the MFIs act as insurance agents in return for either a fee or profit share.

Product development remains MLife’s responsibility, with minimal input from the MFIs on premium rates and coverage. The MFIs are solely responsible for sales and servicing (the collection of premiums and claim settlements), client education and measuring client satisfaction. Clients live mainly in peri-urban areas and are mostly self-employed, operating small or micro-enterprises.

MLife has partnerships with six of the biggest microfinance institutions in Zambia: PRIDE Zambia, PULSE Holdings, Christian Enterprise Trust of Zambia (CETZAM), the Foundation for International Community Assistance (FINCA), Nkwena and Pan Africa Building Society.

MLife’s first product for PULSE was an adaptation of a credit life policy that it has developed for commercial banks, the Credit Life Assurance Scheme. In 2002, PULSE, through its association with MLife, then introduced a funeral policy called Thandizo, meaning ‘assistance’, which covers the borrower and selected household members.

In 2004, CETZAM also decided to include credit life insurance as part of its product offerings, because NICO, the provider of its funeral policy, did not provide it. PRIDE Zambia and FINCA Zambia came on board soon afterwards. Each of these organisations has made taking out credit life and funeral cover for the principal borrower mandatory with every loan.

Profit distribution

MFI’s partners are compensated for their sales and service functions in one of two ways: and administration fee or profit sharing. The profit-sharing scheme works as follows: MLife deducts 30% of the premiums to cover its administrations costs; it then pays out claims and finally shares the balance evenly between itself and the MFI. The profit share is calculated at the end of each financial year and any losses are for MLife’s account. Only two of the six MFIs have opted for the profit-sharing arrangement. The others receive a fixed fee of 10% of the premiums collected. MLife prefers the fee approach because it is slightly easier to administer and at present more profitable to MLife, says Chakonta.

Challenges

This market is not without its challenges. Research conducted for CGAP, for example, has shown that MFI management, loan officers and their clients do not understand the products sufficiently. Credit officers are recruited to sell and manage the MFIs’ core business – credit – and not for their knowledge of, or experience in, insurance. Therefore, the MFI loan officers do not give insurance products the focus they need. Few MFI clients really understand microinsurance, and many perceive it as a cost and not as a beneficial product. This is exacerbated by the fact that insurance is mandatory with a loan. Left as a voluntary purchase, most of the target market would not buy insurance. According to Chakonta this is understandable as every cent spent on insurance in reality can be a contribution to the next meal.

The MFIs do train the credit officers on the insurance products, and occasionally invite MLife to provide this training. However, the training is limited to information about the product features. Chakonta stresses that, as a consequence, MLife has become more involved with training, but the high turnover of loan officers means that keeping the MFI staff well trained remains a major problem.

The lack of information technology within the MFIs also makes the complicated paperwork of registering new clients and processing claims more onerous. Chakonta explains that MLife does not have up-to-date information on its microinsurance clients, as paperwork takes as long as five months to reach the company. This in turn affects the settlement of claims. In addition, settlements are delayed if the documentation provided by the MFIs is insufficient or incomplete.

In an attempt to shorten the claim period, some MFIs have opted to pay upfront and claim from MLife afterwards, as long as the documentation is correct. For its part, MLife has accommodated clients in rural areas by, for example, replacing the requirement of seeing a death certificate with written confirmation of the death from three public officials.

The MFIs have their own difficulties. For example, the client base of PULSE dropped from 3,063 in 2001 to only 1,945 towards the end of 2004. Research in 2002 by an independent company revealed high delinquency and default, low client retention, HIV/AIDS, fraud and high staff turnover. PULSE subsequently underwent a major restructuring that included product refinement, product diversification, policy changes, and institutional and staff changes. However, this drop in the number of PULSE clients damaged the growth of MLife’s microinsurance business at the time.

Looking to the future

Despite the challenges, this venture benefits all parties. The MFIs benefit because microinsurance lowers their credit risk and increases their profitability through the administration fee or profit share. In addition they are able to provide their customers with an extra service.

Clients and their families benefit by having their loans covered or a funeral policy in the event of death. As most MFIs issue loans through group lending using mutual guarantees, they expect the group to repay that member’s debts in the event of death or illness. Microinsurance is crucial for keeping groups together and helping them continue after a member’s death. Moreover, before insurance was introduced, the MFIs excluded potential borrowers suspected of being HIV positive. However, now that a group loan is covered by insurance, MFIs seemed less concerned about excluding members who might be HIV positive as long as they appear physically healthy.

For MLife, which recognised the opportunity in the low-income market in 2001, the venture has shown promise and contributes as much as 22% to the company’s overall income. Moreover, since 2002, the microinsurance arm of the business had grown by more than 300%. ‘Although we have done reasonably well,’ says Chakonta, ‘we still need more volume,’ adding that MLife is determined to tackle the issues in order to make the business grow.

One way in which MLife is considering expanding the business is by offering microinsurance through commercial credit providers, which are growing much faster than the NGO MFIs. Direct selling, using cellphone technology for example, is not an option at this point, because MLife does not have direct access to potential end users. Moreover, most of the target market still does not have access to a cellphone. As a result, MLife is continuing to work with groups only. That said, because the MFIs have now started moving into rural areas, MLife products are now covering a wider area as well.

Finally, as this model has been successfully implemented with most of the teething problems sorted out, MLife believes it could be replicated in other countries where MFI penetration is higher than in Zambia.

Mark Napier was until March 2009 the chief executive officer of FinMark Trust, a non-profit South African trust dedicated to making financial markets work for the poor in Africa. He now works as an independent consultant. This article is an extract from Napier’s book Real Money, New Frontiers, published by Juta and Company Ltd and sponsored by FinMark Trust, the Department for International Development, and the Development Bank of Southern Africa.