New regulatory framework to boost income for Tanzanian insurance companies

While Tanzania’s insurance industry premiums have increased over the past year, elevated competition has affected underwriting profits. An agenda of wholesale regulatory reform may be welcomed by the larger players as a basis for a more sustainable market, but many insurers with lower levels of capitalisation face an uncertain period, as legislation is given an overhaul and more stringent requirements are established. Nevertheless, the country’s considerable population and low insurance penetration rate make it one of the most promising markets in the region over the long term.

History 

The structure and characteristics of Tanzania’s modern insurance sector owe a lot to its history. Like many markets in Africa, for much of the 20th century the Tanzanian insurance landscape was dominated by foreign firms providing coverage to a small pool of clients through branches and agencies.

This scenario was radically altered in 1967 when the government effectively decreed that local policies could only be provided by the state-owned National Insurance Corporation (NIC). Similarly, in 1969 Zanzibar made a decree restricting underwriting business to the state-owned Zanzibar Insurance Corporation. While the nationalisation of the insurance sector brought the underwriting of the nation’s biggest economic assets under domestic control, it was to have deleterious effects over time.

During this period of monopoly the market was slow to develop in terms of products and services, quickly falling behind the more diversified and competitive insurance industries of market-driven counterparts elsewhere in the world.

As a result, in 1996 the Ministry of Finance and Economic Affairs, now called the Ministry of Finance and Planning (MoFP) announced that it would reauthorise the participation of private insurers. While this was an important step, the industry’s expansion was still hampered by the lack of an independent regulator. The Tanzania Insurance Regulatory Act of 2009 established the Tanzania Insurance Regulatory Authority (TIRA) and introduced a framework outlining the duties of insurers, brokers, agents and loss adjusters. The opening of the market and the establishment of a dedicated regulator have resulted in a greatly altered arena. In 2017 the market comprised 31 licensed insurers – including one reinsurer – working with 136 brokers and 575 agents to distribute policies to an increasing number of businesses and individuals.

Today's Market

Today, the insurance market is vibrant, characterised by a collection of large regional insurers and rising levels of competition.

However, despite the large number of insurers licensed to operate, a relatively small number dominate the market. The most recent sector statistics from TIRA show that in terms of gross written premiums (GWP), Tanzania’s “big four” general insurers are Jubilee Insurance, which had GWP of TSh89.7bn ($40.8m) in 2016; Alliance Insurance, with TSh61.6bn ($28m); Heritage Insurance, with TSh48.6bn ($22.1m); and AAR Insurance, with TSh48.2bn ($21.9m). When pooled together, these institutions accounted for 42.4% of the general insurance sector’s total GWP of TSh585.8bn ($266.4m) for the year.

The largest of the five life insurers, South Africa-based Sanlam Life, had GWP of TSh46bn ($20.1m) in 2016, followed by the government-owned NIC Life with TSh13bn ($5.9m), Alliance Life with TSh9.1bn ($4.1m), Jubilee Life with TSh5.1bn ($2.3m) and Metropolitan Life with TSh984m ($448,000). Their combined GWP for the period was TSh74.2bn ($33.7m).

Tanzania’s profile is typical of an emerging market in that it is led by general insurers rather than life insurance and savings activity, which is the case in more mature markets. When taking into account total GWPs for 2016, general insurance is worth nearly eight times more than that of life policies.

Performance

The net premiums of general insurers fell by 0.7% in 2016. However, underwriting income declined by 227% over the year – registering a loss of TSh7.2bn ($3.3m) in monetary terms.

During periods of strong domestic and regional growth the effect of underwriting losses can be mitigated by insurers’ investment strategies, but unfavourable market conditions have made this a challenging task for Tanzania’s insurers. In 2016 life insurers posted a 3% decline in total investment income. For general insurers, the trend was more pronounced, with investment income down by 23.3%.

Market Characteristics

With a population of some 53m, there is significant potential domestically for insurance operations. However, years of market stasis during the era of the state-run monopoly means that there is little public appreciation of the benefits of insurance, resulting in a penetration rate (measured as the contribution to GDP) of just 0.7%, according to TIRA. This has made reaching out to the mass market with new products challenging, so insurers have historically battled for market share of a limited pool of viable clients.

As with other emerging markets, this contest is often centred on price rather than service levels, and in some lines of business companies write at terms below the cost of capital in an effort to boost their premium take. To date, the regulator has not intervened significantly on pricing, other than setting minimum rates for motor and fire.

Another key market characteristic is the modest level of assets held by many participants. This has led to concern regarding the sector’s overall financial capacity, and its ability to insure the sizeable risks emanating from emerging sectors in the economy, such as oil and gas. Insurance regulations of 2009 established a minimum capital requirement of TSh1bn ($455,000) for life and general insurers. As indicated by a schedule that was established by the regulations, this figure rose to TSh1.5bn ($682,000) at the close of 2012, and has risen only by small increments since then, according to a formula based on the rate of inflation. Many in the industry cite the low bar to market entry as the primary cause of the sector’s fragmentation and its lack of financial capacity with regard to large risks.

Non-Life

Within general insurance, compulsory motor coverage accounts for the largest share of GWP, at 34.3%. Competition in this segment is intense, and despite the existence of a minimum rate, not all insurers adhere to it. As is the case throughout the continent, it is also considered vulnerable to fraudulent claims, though the arrival of claims investigators – such as the Dubai-based Greves Group – in the country is assisting in countering this problem.

Health is the second-largest general insurance segment at 20.4%. Tanzania has not put a universal health coverage scheme in place, but the government plays a large and growing role in the market through the National Health Insurance Fund (NHIF). The fund was established in 1999 as a compulsory health insurance scheme for employees of the central government, and it has subsequently expanded to include councillors, police officers, prison and immigration staff, and fire and rescue personnel.

There are plans to widen the scope of the NHIF further. Consequently, all parastatal institutions and companies with any percentage of government ownership have been asked to transfer their health insurance business to the scheme, and by December 2016 the fund covered 21% of Tanzanians, according to the Ministry of Health. The ministry has also outlined plans to make the NHIF mandatory for all Tanzanians, although that calls into question the role the private sector can play in the health care arena.

Other significant non-life lines of insurance include fire, accident and engineering, while oil and gas project coverage also offers potential. In 2016 oil and gas cover accounted for just 1.4% of total GWP, but the discovery of 2.17trn cu feet (tcf) of possible gas deposits that year, which brought the nation’s total estimated recoverable gas reserves to more than 57 tcf, promises to bring significant growth potential in this area (see Energy chapter).

Life Lines

The life insurance business in Tanzania remains at an early stage of development. Average salaries in the country are among the lowest in the region, according to the IMF, and for the many subsistence-income households formal insurance is not a priority. Traditionally, family and community groups have operated as informal insurers. In many cases these initiatives have evolved into well-structured organisations – including elected committees, defined benefits, written rules and bookkeeping – offering premium-based cover in areas such as funeral costs and personal injury.

These organisations remain small and fragmented. Although their activities have not been comprehensively documented, a study of Tanzania’s informal insurance activity in 2006 showed the average membership of such groups to be 24 individuals.

The low premiums charged and limited payouts on offer mean that this segment is currently competing with the more formalised micro-insurance offerings that have been enabled by the rising mobile phone penetration rate in the country.

Conventional insurance companies have, however, made inroads into the life segment. NIC has acted as an important pioneer in this regard. Established in 1963, it operates 24 branches across the country, offering a wide range of life products – including education, savings and pension schemes.

The four private sector players that have followed NIC into this part of the market have built their business around group life products rather than individual policies. In 2016 some 76.3% of the aggregate long-term assurance portfolio mix was made up of group life products, with the contribution of individual life cover standing at 23.1% and other life lines accounting for the remaining 0.6%.

In the long term, the increasing awareness of insurance and the emergence of a middle class are likely to be the two most powerful drivers of life insurance in Tanzania. In the shorter term, the absence of government incentives to purchase life cover means that the ratio of group to individual policies is not likely to see any significant change.

Underwriting

The question of the quality of underwriting has, however, become prominent in recent years. In August 2016 the president of the Tanzania Insurance Brokers Association (TIBA), Mohammed Jaffer, warned that a lack of actuarial studies had resulted in inefficient pricing by underwriters. The University of Dar es Salaam offers an undergraduate programme in actuarial sciences, which has channelled graduates into the insurance and banking sectors, but in 2016 TIRA stated that a shortage of qualified insurance professionals, including in the area of actuarial science, continues to undermine the quality of underwriting in the sector.

The high cost of a comprehensive actuarial study, estimated at TSh100m ($45,000) by TIBA, also acts as a disincentive to the proper study of the occurrence of risks like accidents and business failures. Engineering coverage is one area where pricing competition has eroded insurers’ premium take: in 2016 the loss ratio in this segment stood at 71%, behind marine at 77% and health at 78%. Individual firms also posted high loss ratios for their aggregate premiums, with five showing levels of over 70% in the year.

Regulation

The insurance sector is faced with a central challenge: while both general and life insurers are increasing their written premiums, fierce competition and weak underwriting are diminishing the kind of income growth that might otherwise be expected in an expanding market.

The government is working to address this. A draft national insurance policy, first circulated in 2014, acknowledges that the supply of insurance services exceeds demand and has resulted in “cut-throat competition”. The MoFP’s insurance policy aims to respond by creating new business opportunities for the sector, as well as increasing public awareness, promoting innovative products, enhancing consumer protection, and introducing a new regulatory framework and supervisory structure.

In particular, the policy focuses on the re-examination of the limited requirements for compulsory insurance and the slow uptake of bancassurance as an alternative means of insurance distribution. It also addresses issues like micro-insurance, Islamic insurance (or takaful) and agriculture insurance. Much of this work will be carried out by TIRA, which, since its establishment in 2009, has been implementing the precepts of the Insurance Act of that same year.

TIRA is already using a risk-based supervision model, and is working to comply fully with the standards set by the International Association of Insurance Supervisors. While a risk-based capital (RBC) framework has yet to be adopted, TIRA has signalled its intention to do so – possibly as early as 2018. A shift from the current compliance-based model to an RBC system is likely to have a sizeable effect on the sector.

The experience of neighbouring Kenya, which introduced an RBC system in 2015, suggests that minimum capital requirements in Tanzania will rise. While a more robust solvency regime would represent a useful advance in terms of sector sustainability, the smaller of Tanzania’s 31 insurers may face difficulties raising sufficient capital to maintain their licences. Consolidation or market exits are therefore possibilities over the medium term. In the meantime, TIRA has already started to formulate regulations on takaful and is in the process of implementing a national micro-insurance strategy.

Another issue which may be tackled by a change to the insurance law is that of outstanding broker payments. According to TIRA, approximately TSh85.9bn ($39.1m) of late premiums was due to insurers at the end of 2016, which represented a 23.24% increase on the previous year. The new law may allow direct payments from customers to insurance companies, bypassing brokers and thereby avoiding what has become a troublesome payment bottleneck.

Distribution

Regulatory change has the potential to establish the sector on a more sustainable footing. However, insurers can also address the problem of intense competition themselves.

In terms of distribution channels, brokers have for many years dominated the market. In 2016 they accounted for 57% of total written premiums, and in three general insurance lines their contribution was over 70%. However, brokers do not have much of a footprint in rural areas where there is significant scope to raise penetration. Moving beyond this model and the high commissions that are associated with it has become a priority for some insurers, but with the regulatory system still developing, some of the usual alternatives – such as bancassurance – are not as feasible as in other comparable markets.

Mobile insurance is a more promising prospect. With an internet penetration rate of 83% in 2017 according to telecoms research firm BuddeComm, mobile payment platforms are transforming even the simplest handsets into a new distribution channel. This is a very significant market development for a country where only 8% of adults have a full-service formal bank account (see analysis).

Insurers are now able to team up with telecoms companies to offer low-cost coverage in areas such as life, personal accident and health to the large segment of the population that previously lacked access to the financial services sector. The efficiency of mobile platforms allows insurers to establish premiums at levels as low as $1 per month, and these micro-insurance products can be purchased on even the simplest mobile handset using a USSD code.

This corner of the Tanzanian insurance market is developing rapidly and a number of different approaches have been adopted by industry players in attempts to tap it. For example, both Golden Crescent Assurance (GCA) and Heritage Insurance have trialled (although later cancelled) loyalty systems, and teamed up with telecoms companies to offer their voice and data subscribers free insurance cover. Other providers – such as MO Insurance, formerly GCA – have adopted an airtime deduction approach, by which customers can pay for insurance products using pre-paid mobile credit. Heritage Insurance and the NIC have also attempted to make inroads into the market by offering cover via mobile money platforms.

All of these initiatives have been multi-party ventures involving a mobile network operator, an underwriter (a domestic or regional insurance company) and a technology service provider. From an industry perspective, this latter group has acted as a useful catalyst for change in terms of concept development.

In Tanzania’s case, technology service providers have entered the market from elsewhere on the continent (such as South Africa’s Liberty) or from the advanced markets of Europe (such as the Sweden-based MILVIK/BIMA), bringing together local telecoms companies and insurers to deliver new products to the market (see analysis).

Outlook

The growth of Tanzania’s insurance sector is linked to the broader expansion of the economy. With expected GDP growth of 6.8% for 2018, the nation’s insurers are well placed to continue expanding their premium take. However, an ongoing process of reform centred on pruning government spending represents a downside risk to both economic growth and the sector’s ability to increase premiums (see Economy chapter).

Insurers also face the challenge of expanding premiums without further diminishing their underwriting income, which stiff competition will continue to place under pressure. On the regulatory front, the MoFP intends to reform the market in pursuit of its goal of a 3% insurance penetration ratio by 2019. The measures it takes in order to do so will therefore occupy the sector over the medium term.

Yet more regulatory change may come from TIRA’s cooperation with other sector regulators in the EAC. A draft insurance EAC policy aims to form the basis of increased synchronisation across the region and, if implemented, would be expected to considerably alter Tanzania’s regulatory landscape.

Better news for domestic insurers, however, comes from TIRA’s attempts to establish a requirement for government assets to be insured locally, in addition to its work with the Bank of Tanzania to completely overhaul the regulations governing bancassurance.