African insurance

An industry in flux

September 2015

The African insurance context

You are about to be disrupted

Deloitte – A partner in execution

The secret sauce is governance not creativity

Table of Contents:

The African insurance context

© 2015 Deloitte Touche Tohmatsu Limited

African

Insurance Trap

A range of negative drivers have inhibited insurance penetration in major African markets, resulting in‏sub-scale operations and limited customer value being offered to the market

Regulatory

requirements

Limited

channels to

market

Lack of skills

& technology

Low levels of

operating

capital

3rd Party distribution costs Expense ratio

Claims ratio

Mistrust –

lack of

compensation

Affordability

Low levels of

financial

literacy

Poor access to

insurers

Insurers that are able to break this cycle are likely to address un/under-serviced market opportunities

Better

Reported barriers

to usage

Inhibitors to

business growth

Better

Better

Understanding the drivers of low insurance penetration in Africa, 2009-11

41%

27%

34%

78%

0.0% 25.0% 50.0% 75.0%

Kenya

Tanzania

Uganda

South Africa

23%

40%

43%

10%

0.0% 25.0% 50.0%

Kenya

Tanzania

Uganda

South Africa

6.1%

3.4%

11.7%

4%

0.0% 5.0% 10.0% 15.0%

Kenya

Tanzania

Uganda

South Africa

The African insurance trap – pre 2010

• Growth story long talked about

• Recent events and announcements suggest finally upon us

− Kenyan companies started making acquisitions in neighbouring East African countries

− Old Mutual - $500m set aside for Africa

− Sanlam - $300m set aside for Africa and SE Asia

− MMI relatively recent acquisition in Kenya, promise of more to come

− Liberty actively pursuing opportunities

− Entry of Prudential and AXA into the African markets

5

The African century

6

11.6%

5.5%

4.0%

1.9%

1.0% 0.9%

0.5% 0.4%0.2% 0.1% 0.1% 0.1%

South Africa Namibia Mauritius Botswana Kenya Malawi Ghana Zambia Nigeria Tanzania Uganda Ethiopia

Global average 3.7%

BRIC average 1.9%

Yet low levels of penetration persist

7

There has been rapid growth since 2000

8

65

117

146

208221

261

2007 2008 2009 2010 2011 2012

94108

144

177

219 219

277

2006 2007 2008 2009 2010 2011 2012

Nigeria

Kenya

This growth is evident in key markets

9

Kenya Nigeria

0 2 000 000 4 000 000 6 000 000 8 000 000

0-4

05-09

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75-79

80-84

85-89

90+

Ag

e g

rou

p

Demography suggests a strong future for African consumerism

10

8.4

9.5

40.0

34.1

Port Harcourt

Ibadan

Lagos

Kenya

Nominal GDP, 2011, US$bn

Urbanisation is occurring at an unprecedented rate

11

Trends affecting all African countries

Continuous technological

breakthroughs are leading to

an explosion of social

networking and self-directed

buying and service behaviours

TECHNOLOGY AND PARTNERING

FINDING AND DEVELOPING TALENT

How does an insurer find talent skilled

enough to comply with new regulations,

technologies and data requirements?REGULATION

Continuous regulatory change

both globally and locally.

How‏will‏insurers‏“always”‏be‏

compliant?

More advanced use of

numerous forms of data is

needed and many insurers are

not mature

CLIMATE AND SOCIAL

RELATED ISSUES

Increasingly insurers will need to

manage the risks associated with

global flooding, drought and

disasters as well as epidemics

such as Ebola

INFORMATION AND DATA

How can insurers achieve

effective data fluency?

CUSTOMER EXPERIENCE

Truly owning the customer

experience and differentiating in a

price sensitive and commoditised

grudge purchase market in a world

of new entrants and direct

distribution channels

STRATEGIC

POSTURE

CHOOSE WHERE TO PLAY?

• New growth markets

• Customer, product, infrastructure

• Differentiation is required to win

• Shape. Lead. Follow.

11

Kenya Insurance Industry - Premiums

© 2015 Deloitte Touche Tohmatsu Limited

The expected double digit growth of the Kenyan insurance market will be driven by

innovations in products and channels, and demand-led growth.

Note: 1 GWP: Gross Written Premiums

Source: BMI Kenya Insurance Report ,Q4 2015 , Accessed 4th August 2015

Total Gross Life and Non-life Written Premiums, in Kenya, 2009-19 Forecast Life and Non-life GWP1

The Kenyan Insurance market is

forecast to grow (nominally) at 10%

between 2015-2019f

Non-life Insurance is expected to

remain the largest product line; with a

higher growth forecast compared to

Life Insurance at 12% and 5%

respectively

Supply-Side Drivers of Growth

Introducing innovative products

– E.g. Inclusive (Micro) Insurance,

Agricultural Insurance

Leveraging new channels

– E.g. Mobile M-PESA platform

Demand-Side Drivers of Growth

Projected growth in population and

working age group

Rising income levels

Foreign Investment, with Nairobi a

hub for East African expansion

Forecasts

65%65%

66%66%

66%64%

65%66%

68%69%

71%

35%

35%

34%

34%

34%

36%

35%

34%

32%

31%

29%

-

50.0

100.0

150.0

200.0

250.0

300.0

2009 2010 2011 2012 2013 2014 2015f 2016f 2017f 2018f 2019f

Billio

ns, K

ES

+10%

+21%

Gross Non-Life Premiums Written

Gross Life Premiums Written

Inflation rate averaged

about 9% p.a. between

2009-2014; implying real

growth of about 12% p.a.

Kenya Insurance Industry – Key Ratios

Profitability in Non-life Insurance has risen due to rising investment income and lower

claims; within Life, retention rates have improved surpassing expense and commission.

ratios

The relative cost of managing life

policies has decreased from 20% to 18%

between 2009 to 2013

The proportion of premiums retained by

intermediaries has slightly decreased,

with the commission ratio decreasing from

9% to 8% between 2009 to 2013

Perc

en

tag

e

Life Insurance Key Ratios, 2009-2013Non-life Insurance Key Ratios, 2009-2013

Perc

en

tag

e

The profitability of Non-life insurance has

slightly increased since 2009, with the

combined ratio falling from 98% to 94% in 2012

This has been driven by higher investment

income, and relatively lower claims, as

indicated by the claims ratio

Incurred claims ratio

Net commission ratio

Management expense ratio

Combined ratio

Investment income ratio

Operating ratio

-

20

40

60

80

100

2009 2010 2011 2012 2013

Expense ratio

Commissions ratio

Retention ratio

85%

95%

0%

20%

40%

2009 2010 2011 2012 2013

100

20

0

Kenya Insurance Industry – Non-Life Insurance Product Mix

Source: BMI Kenya Insurance Report ,Q4 2015

Forecasts

0

35

70

105

140

175

Non-life Product Mix

26%

21%

3%

18%

2014

Bil

lio

nK

en

yan

Sh

illin

gs

2019f

177

31%

101

39%

25%

14%

4%

18%

2012

72

42%

19%

12%5%

23%

In 2014, 82% of General Insurance

product mix was comprised of Motor

Vehicle, Health, Property and

Transport Insurance

Motor vehicle insurance is the largest

single subsector, constituting 39% of

the General market in 2014. However,

with development and growth of other

products, its proportion slightly

decreases from 42% in 2012

– Commercial Motor Insurance

accounted for ~60% total Motor

Vehicle Insurance over the period

Between 2012-2014, Health Insurance

grew by 7% increasing from 19% of

total general spend in 2012 to 26% in

2014

Between 2014-2019f the product mix

of the General market is expected to

remain relatively stable, however, the

proportion accounted for, by motor

insurance will further decrease as

health and property insurance

increase considerably

Motor vehicle insurance

Property insurance

Health Insurance

Transport insurance

Other insurance The market is poised for

continued future

growth, similar to those

witnessed historically

Non-life Insurance Product Mix, in Kenya, 2012-19

In the non-life insurance space, motor vehicle continues to be the largest segment

(at 39% of total), whilst health shows the fastest growth to reach 26% by 2019

Kenya Insurance Industry – Life Insurance Product Mix

In Life, Ordinary Life is the largest product at 36%1, with Endowment contributing

74% of this; Pension has experienced the fastest growth of 27% CAGR since 2010

Note: 1 As at 2014; 2 Other consists of Term Assurance and Whole Life policies.

Source: AKI 2014

Life Insurance Product Mix, in Kenya, 2008-2013

74% 12%7%

7%

There has been a

notable increase in the

annuity business,

which has contributed

to the growth of Group

Life premiums

Endowment products

account for 74% of

Ordinary Life

Insurance, with

education policies as

the dominant product

category

Group Pension cover

constitutes 64% of

Pension Cover, due to

the high cost associated

with traditional Group

Retirement Benefit

schemes

Other(2)Endowment AnnuityUnit Linked

64% 28% 8%

43% 28% 28%1%

Last expenseAnnuitiesCreditGroup Life

Billio

n, K

en

yan

Sh

illi

ng

s

PersonalGroup Umbrella Scheme

Pensions

Group Life

Ordinary Life

42%(11.1)

38%(16.7)

36%(20.5)

25%(6.5)

25%(11.1)

32%(18.3)

34%(9.0)

37%(16.2)

32%(18.2)

0.0

20.0

40.0

60.0

2010 2013 2014

Ordinary Life Group Life Pension

26.7

44.0

57.0

You are about to be disrupted

African insurance

An industry in flux

July 2015

Change is the new normal

Innovating at the edge of chaos‏

Todays global and African context creates a burning platform for incumbents

© 2015 Deloitte Touche Tohmatsu Limited

These days

we just call

them swans

Any industry

can be

disrupted,

quickly and

without

warning

Unprecedented

opportunity

The

breakdown of

trust

The social

revolution

Let’s start with a question?

© 2015 Deloitte Touche Tohmatsu Limited

If you had $1 to invest

during the 90’s…

which company would

give the greatest

returns?

© 2015 Deloitte Touche Tohmatsu Limited

Ye

ars

Company

25

0

20

15

10

5

Typical

Fortune 500

20

8

5

4

2 2

1 1

If you had $1 to invest

in 2015… which

company would give

the greatest returns in

2030? Would it still be

the airline?

Companies are reaching $1 billion in value at an exponential rate

© 2015 Deloitte Touche Tohmatsu Limited

1996

Market Cap: $28B

Employees: 140 000

2012

Bankrupt

Employees: 17 000

April 2012

Market Cap: $1.3B

Employees: 13

“Uber yourself, before you get Kodaked”

Linear Exponential

© 2015 Deloitte Touche Tohmatsu Limited

It is difficult to predict the future, but it is possible to understand fundamental trends that are shaping it

““Integrated circuits will lead to such wonders as

home computers—or at least terminals

connected to a central computer—automatic

controls for automobiles, and personal portable

communications equipment”Gordon Moore 1965

© 2015 Deloitte Touche Tohmatsu Limited

What does LINEAR growth feel like?

Take 30 LINEAR paces…

1

3029

28

23

45

67

89

27

And you are thirty

paces away

Source: Singularity University

© 2015 Deloitte Touche Tohmatsu Limited

What does LINEAR growth feel like?

Source: Singularity University

Take 30 EXPONENTIAL paces…

1

1.07x109

2 4 8 16 32 64

6.71x107

1.34x108

2.68x108

5.37x108

And you are 26 X

round the world

© 2015 Deloitte Touche Tohmatsu Limited

Stop looking for direct or linear solutions in exponential markets

0 1 2 3 4 5 6 7 8 9 10

130

110

90

30

10

50

150

70

2004

2002

2008

2006

Linear Trend

Exponential Trend

Te

ch

nolo

gy C

ap

abili

ty

Time

16%

14%

12%

10%

© 2015 Deloitte Touche Tohmatsu Limited

Attaining exponential growth requires investment through the zone of disappointment

Disappointment

Chaos /

Amazement

Disruptive

Deceptive

15% of baby

boomers wish

to use mobile

devices for

insurance

41% of genX 60% of genY

…The mobile phone is the greediest driver of dematerialisation

© 2015 Deloitte Touche Tohmatsu Limited

Telecoms or Banking? Healthcare or

Technology?

Agriculture or

Biotechnology? Services?

…And convergence begins to blur the lines between industries

© 2015 Deloitte Touche Tohmatsu Limited

Industry skills are

most valuable now,

but…

Will today’s

knowledge help you

be successful in the

Future

Are you limiting your

growth to your

industry paradigm?

Which industry are

you in? Is it time to

leapfrog the rest?

Telecommunications

or banking?

Data or insurance?

Telecoms or Banking? Telemetry or insurance?

Technology or

insurance?

Meteorology or

insurance ?Healthcare or

insurance?

© 2015 Deloitte Touche Tohmatsu Limited

Leading South African

CEO’s top priorities for his

last 3 years:

1. Boost African expansion

2. Ward off Google and

Apple

3. Start a whole new

financial services business

Sizwe Nxasana, Recently FirstRand CEO

Get practical, this is not about crazy trends this is about value creation

© 2015 Deloitte Touche Tohmatsu LimitedSource: Amended from thedigitalinsurer

Certain & Imminent disruption Emerging disruption potential Current mechanisms likely to persistVery likely to be disrupted

Key take away’s

• All individual customer channels will be disrupted in the short to medium term

• Small business channels are likely to favor digital scoring and real time pricing but relationships are still important

• Large corporates will still be dominated by strong trusted broker relationships in the medium term

Channel / Customer segment Life and health insurance Non-life insurance

Agency Banca Broker Direct Agency Banca Broker Direct

Individual Customers

Modern digital and mobile enabled advisory channels will win in this segment

Affinity and aggregator models will win in this segment

Niche - but could gain mass appeal with the right products and marketing

Likely to be extinct as a stand alone channel

Migratign toward digital cross-sell platfroms

Aggregator models will win

Competition with aggregators but winnign models will succeed

Small BusinessesDigital employee benefit & worksite models will emerge - models will likely vary based on channel

White space up for grabs wit innovative digital platforms

Large CorporatesEstablished brokers dominate as the segment is highly relationship driven

Established brokers dominate as the segment is highly relationship driven

Deloitte – A partner in execution

We don’t talk and present… we build

© 2015 Deloitte Touche Tohmatsu Limited

To stand still, organisations need to innovate… and to really grow you need a second A team

© 2015 Deloitte Touche Tohmatsu Limited

Ma

rke

t Fo

rce

sWithout innovation organisations will ultimately decline

“Nearly 40% of the companies listed on the Fortune 500 in 1999 were no longer there 10 years later”

Re

ve

nu

e

Today Time

Decline without innovation

(Due to industry and competitor pressure)

Grow your traditional business

(Innovating around the core)

Super growth outside traditional business

(Adjacent or Transformational, Corporate Venturing)‘Quantum’

Growth Track

‘On target’

‘Do nothing’

The going rate

We helped a short term insurance group generate an additional $40m in annual profits by year 5

© 2015 Deloitte Touche Tohmatsu Limited

Phase I

Innovation Mandate

Month 9Month 3

Roll out

commences

Phase II

Maximising Value

Month 10

5 projects in

maturation

1 business

launched

($10m profit year 3)

3 projects worth

$40m p.a. profit

approved

& implemented

Life

Insurance

BUSINESS INSURANCE

Learning from the Futureuture orldWF

How a mining client created its future

© 2015 Deloitte Touche Tohmatsu Limited

Phase I

Innovation Mandate

Month 1 Month 4

R14m saving

implemented

Month 6

R470m cost

savings identified

Property Co

Osmiridium

Water Co Uranium Co

Month 14

Phase II

Improvement Platform

Phase III

Maximising Value

4 New businesses

incorporated

Month 18

2 Business

Launched

valued at

R3.1billion

Learning from the Futureuture orldWF

How a mining client created its future

© 2015 Deloitte Touche Tohmatsu Limited

Phase I

Innovation Mandate

Month 1 Month 4

R14m saving

implemented

Month 6

R470m cost

savings identified

Property Co

Osmiridium

Water Co Uranium Co

Month 14

Phase II

Improvement Platform

Phase III

Maximising Value

4 New businesses

incorporated

Month 18

2 Business

Launched

valued at

R3.1billion

Learning from the Futureuture orldWF

Assisting a technology company to develop and commercialise a world-first converged services platform solution

© 2015 Deloitte Touche Tohmatsu Limited

Developed world first converged services platform solution for

emerging markets.

15 patents registered, 24 pending

Developed new innovation capability within the client,

leveraging 7 subsidies that have never worked together before

Deloitte completely reconfigured the proposition and technology towards a market feasible,

disruptive solution

Deloitte managed and coordinated a multi-disciplinary team of 220 specialists across 11 companies and five countries to innovate, develop

and commercialise the proposition.

The project involved seeing the initiative through from redevelopment of initial concept to product

research and development, manufacture, company formation and final platform launch

“Our‏offering‏is‏disrupting‏local‏industry‏and‏

has‏broken‏new‏ground‏globally.”

Client Sponsor

New technology and

working prototype

developed in half

benchmark time

Platform

leveraged to

major B2B

Partner

Market launch

21 months

“We‏now‏have‏capabilities‏we‏would‏never‏have‏had‏without‏the‏process”

Chief Technology Officer

“The‏most‏advanced‏application‏in‏

a‏…xxx...‏we‏have‏seen”

Google

“We‏could‏not‏have‏done‏this‏

without‏Deloitte”

GM – Growth Unit

Month 4 Month 14 Month 21 Month 27

Reconfigured

and innovated

proposition

Client approached Deloitte to

commercialise a media opportunity

The Challenge

The Solution

The Result

Assisting a large pan African financial services company drive growth and fundamentally change their cost base

© 2015 Deloitte Touche Tohmatsu Limited

Acquire a niche

financial services

company for $ Bn

market expansion

Develop a first in

world digital

platform reducing

cost base by

80%

Commercialise a

new industrial

customer service

line with $800m

NPV

Month 3 Month 12 Month 19 Month 27

Evaluated 180

ideas confirmed

10 real growth

opportunities

Drive new growth into Africa and

fundamentally change the cost base of the

group

The Challenge The Solution

The Result

180 Ideas

1 Acquisition

2 Greenfield start up’s

1 Going concern 85% CAGR

$4 bn projected NPV at 20% hurdle

9 opportunities

The secret sauce is governance not creativity

The ‘Innovation and Growth’ unit will establish a structured basis to develop next horizon growth initiatives

© 2015 Deloitte Touche Tohmatsu Limited

Develop

Innovation &

Growth Mandate

1

Market scan, characterising and

identifying key mega-trend growth

themes that will influence sector

Determination of growth targets,

considerations and metrics aligned to

organisational strategic goals

Setup Growth Office

– Establishment of a process to

structure ideation and opportunity

development process

– Structuring and resourcing of the

opportunity development team

– Establishment of opportunity

development governance process

– Selection and setup of opportunity

prioritisation and development

tools

Ideation &

Concept

Development

2

Collaborative idea generation and

capturing program

Trend analysis, market sizing and growth

potential

Disruptive competitor identification and

review

Opportunity mapping and prioritisation

Feasibility assessments of opportunities

through stage gated process

Evaluation against key feasibility factors

including financial, strategic, market

capabilities etc.

Possible proof of concept development

Planning and design of opportunity

commercialisation roadmap

Secure finances, approvals and required

resources for each opportunity

Detail opportunity design and

specifications

Vendor procurement where required

Development and build of required,

processes, IP and technology

components

Setup required organisational and legal

structures

Commercial contracts associated with

opportunity

Incubate opportunities from through to

launch

Commercialise

3

Developing a growth blueprint is critical to directing and managing effort of the growth office

© 2015 Deloitte Touche Tohmatsu Limited

Develop

Growth

Blueprint

1The Growth MandateDetermination of growth

mandate targets,

considerations and metrics

aligned to organisational

strategic goals

Market scanCharacterising and identifying key mega-trend growth themes

that will influence sector

Setup the Growth

Office• Establishment of a process

to structure ideation and

opportunity development

process

• Establishment of opportunity

development governance

process

• Selection and setup of

opportunity prioritisation and

development tools

• Structuring and resourcing of

the opportunity development

team

Explicit ambitions with upfront targets and

metrics

Agreed process and governance upfront

Focused growth themes

Source ‘A’ team

Opportunity, ideation and concept development

© 2015 Deloitte Touche Tohmatsu Limited

Ideation and

Concept

Development

2

VALUE

PROPOSITION

Ideation FeasibilityInvestment

Case

EXTENDED

PANEL

MARKET

INSIGHT

INVESTMENT

CASE

INITIAL FEASIBILITY

STUDY

INVESTMENT

COMMITTEE

PRIORITISE

PORTFOLIO

VALUE

PROPOSITION

DELEGATE

APPROPRIATELY

IDEATION –

PRIORITISED

THEMES

BIG

DATA

NEW BUSINESS / M&A

CAPTURE

SYNERGIES

BUSINESS OF TODAY

PANEL REVIEW

Ideation in

multiple forms

Phased development of

business cases

OPEN

INNOVATION

Ideation Concept Development

Source ideas from multiple sources, look

within and outside the organisation

Separate opportunities between ‘Business of

Today’ and ‘Business of Tomorrow’

Assess opportunities in a governed, stage

gated process

Board approval for funding for bankable

business cases would be the final step in this

process

EXECUTIVE

APPROVAL

PRODUCT

DEVELOPMENTVALUE

PROPOSITION

NEW PRODUCT

Ideation FeasibilityInvestment

Case

Prototype

/PilotCommercialise

EXTENDED

PANEL

MARKET

INSIGHT

INVESTMENT

CASE BUILD COMMERCIAL

RELATIONSHIPS

INITIAL FEASIBILITY

STUDY

INVESTMENT

COMMITTEE

PRIORITISE

PORTFOLIO EXECUTE

VALUE

PROPOSITION

DELEGATE

APPROPRIATELY

DELIVER

RESULTS

IDEATION –

PRIORITISED

THEMES

BIG

DATA

NEW BUSINESS / M&A

CAPTURE

SYNERGIES

BUSINESS OF TODAY

PANEL REVIEW

SECURE

FUNDING

FUNDING & IMPLEMENTATION/

ACQUISITION

PARTNER WITH

INTERESTED PARTIES

PILOT AND

PROTOTYPE

Ideation in

multiple formsPhased development of

business casesProve technical

and commercial

validity of

various

propositions

Take from proof of

concept to full

operational entity

OPEN

INNOVATION

Ideation Concept Development

Commercialise viable opportunities with the greatest chance of success

© 2015 Deloitte Touche Tohmatsu Limited

Commercialise

3

Bring business cases to life with same

discipline, pace and focus

Structures allowed to flex

Business leadership identified during

commercialisation phase

Continuous innovation to solve

commercialisation challenges

Deloitte have an end to end capability to deliver across all phases of innovation and commercialisation projects

© 2015 Deloitte Touche Tohmatsu Limited

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30

Se

rvic

e L

ine

sT

oo

lsE

ffo

rt w

eig

hti

ng

Monitor Deloitte Innovation team 100% dedicated from start to commercialisation and hand over

Technical and Industry specific; Customer segmentation, product assessment, etc.

Legal, Tax, Risk Advisory and Data Analytics

Technology, Manufacturing

Corporate Finance

Managing the journey (Innovation

Team)

Defining the mandate

Ideation

Market analysis

Client / partner capability

assessment

Feasibility study / assessment

Commercialisation

Strategic Pricing Systems DynamicsCascading Choices Competitor Profile

Action Segments Opportunity filter

Tornado diagram

5 Forces CVP & System Alignment

Value Chain

Post merger integration Channel PathwaysBreak through projects

Economic Value Added

Prototyping

GUI Design Process design

The buying processRequired pipelineGrowth objective

Governance process

Mandate IdeationValue

PropositionInvestment

case

Prototype/ Pilot

Commercialise

Keys to successful innovation

© 2015 Deloitte Touche Tohmatsu Limited

Set compelling Innovation and Growth Targets 1

Innovation and Growth is not a part-time job -Secure the 2nd A-team

3

Build Innovation as a discipline embedded within the organisation

4

Create a burning platform within your organisation – Think with the Future in mind

2

Governance, governance governance 5

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