The key to inclusivity is a Cell Captive

Xolani Nxanga, Managing Executive for Microinsurance at Guardrisk talks to us about the fascinating topic of microinsurance.

Tony: For a substantial portion of our population, microinsurance is really the only insurance option. The question that begs then, is why don’t we see more focus beyond credit life and funeral insurance for people in the microinsurance environment?

Xolani: It is about understanding customer needs. There has been a huge focus on funeral insurance because that is the product that the market understands. But if you think about other risks that people face on a day-to-day basis, like commuting for example, why do we not see commuter insurance, which would cover the client in case of an accident?

It would be ideal if these commuters, for example, were covered during the journey. There must be a concerted effort to understand some of the risks are that customers face and then design the products accordingly. The advent of the microinsurance licence is going to create opportunities for companies like us, together with the cell owners, to start creating products beyond just credit life and funeral insurance. It just boils down to customer intimacy and understanding what some of the challenges are that people face on a day-to-day basis.

Tony: How do we get there? What is the next step for insurers to expand their microinsurance offerings?

Xolani: We should grab the opportunity presented to us by the regulation, because we now have specific regulations around microinsurance. First, these products are supposed to be designed in the most simplistic way that customers can understand, compared to your traditional products.

Some people will not buy these traditional products purely because they are inaccessible because of their complex design. Now with the microinsurance regulations, which has simplified things, we in the industry have no reason to not design products that are simple and accessible to the market.

Tony: How can insurtech solutions be leveraged to increase access in the mass market?

Xolani: Someone was saying that one of the blessings of COVID is that people have become used to interacting via digital means. There is a huge opportunity now, from an insurtech point of view, to start providing insurance products by embedding them when someone is buying, for example, a fridge online. Through insurtech, one can now include an insurance product, like a warranty product for that fridge that they are buying.

So, technology is really coming to the rescue when it comes to this market, because it will help with the cost-effective delivery of these products. Microinsurance is naturally designed for high volume, low value products. Therefore, any opportunity to reduce cost is welcome, because if the products are not priced at a decent price point, we are not going to see a huge take up of the product. In South Africa, insurance is still purchased on price, so we must be sensitive to that, and technology has given us an opportunity to drive down the cost of distribution.

Tony: I suppose this is where cell captive solutions then come in, because you enable those insurtechs or start-ups?

Xolani: In 2017, together with Cenfri (The Centre for Financial Regulation and Inclusion), we did research and found that categorically, cell captives are the ideal way, to not only transform the industry, but to create access for people who previously never had access to an insurance licence. So, at Guardrisk, we have a composite microinsurance licence, which caters for both life and non-life. This provides another opportunity to reduce cost because, if you were to have two separate licences, that would just increase the cost of a cell captive. But the Guardrisk microinsurance licence, it is a perfect opportunity for when you have a loyal customer base to which you can sell products. A microinsurance licence comes with lower minimum regulatory capital requirements and simplified solvency calculation.

The rules have been slightly changed for microinsurance, to make it an accessible licence. This is an opportunity for cell owners that are willing to design bespoke products for their clients, especially those that are close to their clients and understand the needs of their clients.

The transformation aspect of the microinsurance licence is something that we can all be proud of, with the regulator coming to the fore and putting regulation in place that has allowed people who were excluded from mainstream insurance to now own cells or have their own insurance companies.

The cell captive structure has inherent features that set it apart, when you look at what you need to put in place to run a cell versus running your own traditional licence, the cell captive gives you the opportunity, for example, to outsource certain functions which immediately has an impact on the cost of running a cell. Indirectly this has cost implications for how you end up pricing your products. Whereas, if you start your own separate insurance licence, targeting microinsurance products, you need a lot of skills and infrastructure and governance structures that you must bring into that business.

Tony: How does one take advantage of the opportunities presented by the Microinsurance cell captive licence?

Xolani: If you have a captive market where you are already driving sales, let us say, for example, you are already selling people a service, or a product, the cell captive licence could now create another opportunity for you to drive other revenues for your business.

If you have a loan business where you are lending people money, there is an opportunity now to take along insurance credit life. Again, it could be a legal expense product, or it could be an accident and health product. Guardrisk is licensed to underwrite a whole range of life and non-life products for individuals and groups.

Tony: If we look at what we have spoken about now, who is an ideal candidate for a cell captive? Are there certain requirements? How do you evaluate that?

Xolani: The first thing that we normally talk to our clients about is access to clients. It is critical to have access to distribution or access to clients; unless you have this, it is, unfortunately, going to be difficult for you to make a success of the microinsurance licence.

The second point, which is required from a regulatory point of view, is the operational readiness of that business and operational effectiveness.

Ideally, it would be someone who understands insurance because then they understand all the requirements. For example, when it comes to treating customers fairly, or when it comes to

solvency requirements, it is a language that they understand. But also, when it comes to designing products, they will have an intimate understanding of how insurance works and what you can and cannot do.

Ours is really a technical industry, but as Guardrisk, we are here to hold clients’ hands because we have a longstanding relationship with the regulators, we have the skills and we have about 300 cells within Guardrisk. We have the experience to support our clients.

We also have relationships with world-class reinsurers, so can support our clients when it comes to re-insurance. While they may not necessarily understand reinsurance intricacies, we have the expertise. But certainly, the key ingredients are a good broad understanding of insurance, access to clients and operational effectiveness.

Our view is that one should consider a cell captive before committing to a full licence, given the inherent benefits of a microinsurance cell captive licence. Having access to both life and non-life through a Guardrisk Microinsurance cell captive is worth investigating.