Citation
Kampanje, B. (2014), "PESTEL analysis of Malawi's non-life insurance industry", African Journal of Economic and Management Studies, Vol. 5 No. 1. https://doi.org/10.1108/AJEMS-01-2013-0002
Publisher
:Emerald Group Publishing Limited
PESTEL analysis of Malawi's non-life insurance industry
Article Type: Practitioner viewpoint From: African Journal of Economic and Management Studies, Volume 5, Issue 1
Introduction
Malawi is one of the least developed countries in the world. Its insurance industry remains in infancy despite being in existence for 60 years. It represents less than 1 per cent of country's gross domestic product (GDP) and is divided into the life assurance sector and non-life insurance sector. No single entity is allowed to operate in both sectors. A group of companies can operate in both subsectors but must remain as two separate legal liability companies. The life assurance sector accounts for more than 85 per cent of the insurance industry in terms of assets and premium covers. The life assurance sector is significantly supported by employment and pension acts, which are compulsory, while the non-life insurance sector is usually administered on a voluntary basis. There are stringent rules governing utilisation of funds in the life assurance sector, as the probability of eventualities occurring is usually unpredictable.
There are currently no known deliberate strategies to boost the non-life insurance sector. The current status quo therefore indicates that the insurance industry has little impact on the Malawian economy, with the probable opportunities forgone stated below.
Opportunities forgone due to an inactive non-life insurance sector in Malawi
Significant growth in the non-life insurance sector in Malawi is desirable because a robust insurance sector can be a catalyst of economic growth as it achieves the following:
A spreading of risks, so that investors are confident to undertake bigger projects without fear of putting too many eggs in one basket. Currently, Malawian insurance companies are inactive in the manufacturing and construction sectors issuing very few performance and retention bonds. An individual investor is therefore deterred from obtaining bank loans or issue debentures on the basis that the whole risk of projects is borne by the investor.
The insurance industry provides an objective investment appraisal system because insurers would only be interested in covering risks that are manageable and justifiable. Prospective investors can benefit greatly from consulting insurers before rolling out projects.
Increasing risk awareness and management can assist the Malawian private sector to adopt best practice methods of recouping investments and thereby increase productivity in the economy. Through insurance cover, the private sector can enhance research and development to develop new products based on the quantifiable data, knowing that if losses would occur along the way then insurers could compensate them under Loss of Business Continuity Cover. The insurance industry has the potential to enhance the export capabilities of the Malawian economy if properly structured.
Pooling of resources for ambitious investment projects, such as urban housing projects in Malawi, which is currently under developed due to lack of funding. Funds from the insurance industry could otherwise create non-current assets, which would be insured to guarantee both rental and insurance premium income. The enactment of the Pension Act 2011 was in part meant to provide a buffer of resources for investment projects in the local economy.
PESTEL analysis of the non-life insurance sector in Malawi as a tool to enhance growth
Having noted the opportunities forgone in the Malawian economy because of the fragile non-life insurance industry, a PESTEL analysis study was adopted to evaluate the reasons for the current status and how the sector could be improved. The results of this study are detailed below.
Political factors affecting the insurance industry in Malawi
The Malawian insurance industry does not attract significant political attention. Similarly, the industry has no known political influence. This is evidenced by the low pace in reviewing the insurance regulations in Malawi, which were only reviewed 2010 since the original act of 1957.
Lack of political-will is significantly attributed to enormous the poverty prevalent in the local masses, who rely on the government for most basic necessities such as health, primary education and farm inputs. Consequently, communities work together to assist individuals in need of assistance. Malawi is more of a socialist state than a democratic one, as propagated by the political fraternity. Insurance products are therefore non-existent to the majority of the population.
Compulsory insurance products currently only apply to motor vehicles. Legislature should pass laws to boost insurance business in Malawi by ensuring that various sectors such as tourism and hospitality, education and health are properly insured before offering business services to the general public. Government properties should also be properly insured, which is not currently the case.
Economic factors affecting the insurance industry in Malawi
Malawi has an agro-based economy. The mining industry has started to pick up, but its real impact will not be noted until perhaps 2035. The importance of the agricultural sector contribution to the country's GDP is grossly understated, as manufacturing, wholesale and retail trade as well as manufacturing sectors heavily rely on it.
The agricultural sector
The Malawian agricultural sector has two distinct subsectors. The smallholder agricultural subsector is characterised by low productivity and profitability as it is operated mostly on a subsistence basis with limited insurance products. Insurance products such as index-based insurance, and climate change insurance schemes, have been piloted in Malawi. The absorption rate is, however, too low, and only linked to a few farmers who access credit from microfinance lending institutions.
The Government of Malawi should encourage commercialisation of smallholder agriculture, which can be backed up by new innovative products suitable for the local environment after a thorough understanding and acquisition of the business dynamics localised to Malawian needs and not based on international models.
There are very few local Malawians involved in commercial agriculture. Large-scale agricultural activities are undertaken by foreign-owned entities, which normally seek offshore insurance schemes. The local insurance industry has little penetration in this market. Local insurers can lobby government to access a portion of this insurance business for growth and experience.
The manufacturing sector
The manufacturing industry is tilted towards agriculture, as noted above. It comprises production of cane sugar, semi-processed tobacco, semi-processed cotton and tea for both local and export markets. All the major players in this sector are foreign-owned entities, which arrange insurance covers at group or regional level. This means that local insurers have little share in this sector. Offshore insurance schemes are either used due to group policies or the inadequate capital bases of local insurance companies to underwrite substantial insurable risks.
Local insurers should lobby government to acquire more business from manufacturers through joint ventures with foreign counterparts where policy issues determine the choice of insurer and should encourage the syndication of insurance deals to cover substantial insurance schemes.
Information and communication
Telecommunication is growing rapidly in Malawi as more people embrace cell-phone usage. Money transfers, payment of utility bills and commodity exchange deals are increasingly being concluded through cell-phone network providers. E-commerce is thus thriving in Malawi. The business risks amongst several parties are quite enormous. There is, however, little insurance penetration in this area. The Government of Malawi acknowledged that telecommunication services have at times been hampered by vandalism, which is a clear indication that telecommunication providers are under insured.
The Government of Malawi and industry players must properly evaluate potential risks in this sector and devise insurance schemes for protecting consumers and service providers alike.
Transportation and storage services
Malawi experiences a substantial trade imbalance. Malawi's imports are significantly higher than exports both in quantity and monetary value. This is further exacerbated by the fact that it a landlocked country with substantial transport costs to reach the sea coasts of Tanzania or Mozambique, its neighbouring countries. Most of the exports are concluded on free on board (FOB), while most of the imports are under cost insurance freight. The local insurers lose out on international trade as imports are covered by offshore insurers through CIF arrangements, while exports are also covered by offshore insurers under FOB because the buyers arrange their own insurance covers outside Malawi.
Local insurers should lobby exporters to adopt CIF as one way of empowering them. Local insurers can also benefit greatly from imports if they can arrange to share import insurance cover with foreign suppliers.
Electricity, gas and water
The Government of Malawi owns the sole electricity supplier, the Electricity Supply Commission of Malawi. It is also the owner of all the water boards in Malawi. In the absence of strong legislation towards insuring the government's assets in Malawi, the insurance business is likely to stagnate. Insurers can lobby the Government of Malawi to partially cover its assets in an effort to mitigate some probable losses and minimise prolonged disruption of basic services. This should be a long-term objective for insurers in Malawi.
The financial industry
The Malawian financial industry comprises commercial banks, non-bank microfinance institutions, savings and credit cooperatives, insurance companies and informal providers. Other subsectors include foreign exchange bureaus, investment companies, investment trusts, fund/portfolio managers, securities firms/brokers and leasing houses. The banking industry is the major player in the financial industry in Malawi and currently does not have a depositor insurance scheme.
Local insurers can grow quite rapidly if the monetary authorities in Malawi could call for depository insurance as one way of protecting depositors’ money in the banking sector. The insurers should lobby the central bank to seriously consider introducing depositors’ insurance cover, which can revolutionise the insurance sector in Malawi.
Wholesale and retail trade
This is one of the most significant sectors in Malawi and is second in rank to the agricultural sector.
The insurance penetration in this sector is, however, quite low, attributed to an absence of tailor-made insurance products for small and medium enterprises, lack of enthusiasm by SMEs in covering their risks because of poor working capital management and some religious beliefs that consider insurance as an evil practice. Insurance companies can increase the market share in this sector through intensive advertising and public relations as means of promoting the insurance products.
Social factors affecting the insurance industry in Malawi
As noted above, most Malawians are poor and heavily dependent on the government and society to provide for their daily needs. The situation is, however, not too desperate for Malawi as insurers could develop products suitable for the poor masses to better cope with health, funeral expenses and other livelihood risks (weather and livestock).
Local insurers receive substantial insurance premiums from motor vehicle insurance schemes from middle and upper class societies. The downside of motor vehicle insurance is that there are a lot of criminals who are interested in defrauding the insurance scheme through false or overstated insurance claims. There have been high-profile cases of insurance fraud in Malawi, for which the insurers blamed various quarters – including lawyers, the police and loss assessors – as part of the syndicate. An increase in the incidence of motor vehicle insurance fraud has had a direct consequence of increasing insurance premiums, which is detrimental to the insured.
The insurance industry has also been very wary with insuring minibus operators in Malawi, who ply passenger vehicle service business. The insurance premium for this subsector continues to skyrocket as most minibuses are involved in road accidents due to over speeding, careless driving and social blacklisting. Very few insurers are interested to offer comprehensive cover to this niche in view of past history.
Technological matters affecting the insurance industry in Malawi
The Malawian insurance industry is technologically inert, as insurers insist on personal transactions. This is radically different from other countries such as the Republic of South Africa where telephonic transactions are more common. The local insurers should take opportunity of the thriving e-commerce business in Malawi through cell phones to offer some products online so that traders can protect their ware regardless of wherever they are and minimise potential risk losses.
Legal matters affecting the insurance industry in Malawi
The recent enactment of the Insurance Act (2010) and Financial Service Act (2010) brought some significant changes in the insurance business. The capitalisation and solvency levels of insurers were significantly increased and more corporate governance principles were introduced. Perhaps the most significant change brought by the Insurance Act (2010) was that insurance contracts can no longer be offered to the insured on a credit basis in excess of 90 days. This was done to increase the liquidity in the local insurance industry, which was previously struggling to settle claims promptly as it was owed more money in the form of premiums settled on a long-term basis. The drawback of early payment of premiums means that counterparties either abandon insuring some assets because of inadequate funding or opt to reduce the insured amount. The insurance industry has experienced a knock in insurance premium income but things are likely to improve in the medium- and long-term when the economy is fully acclimatised to the new arrangement.
International Financial Reporting Standard (IFRS 4), issued by International Accounting Standard Board and adopted by local regulator, will come into effect on 1 January 2015. The new accounting standard is more stringent in nature and likely to affect the income recognition and balance sheets of Malawian insurers. Local insurers should brace themselves for tougher regulations, which might affect growth prospects. Local insurers should therefore voluntarily adopt IFRS 4 at an early date to avoid sudden shocks in 2015.
Conclusion and recommendations
The Malawian non-life insurance sector can grow tremendously if it can develop tailor-made products befitting Malawi's environment or modifying universal insurance products to increase accessibility of insurance products to the local masses as highlighted in this PESTEL study. The Government of Malawi is the biggest player in the Malawian economy and should set up an insurance company to administer insurance contracts for its various departments and use it as a special purpose vehicle for pooling funds for long-term projects. Alternatively, insurers should lobby the government for joint ventures or other financial partnerships to insure government assets as means of boosting the insurance industry asset base so that it can contribute effectively in improving country's economy.
Brian Kampanje
Blantyre International University, Blantyre, Malawi