Why the poor won't touch microinsurance

In a world where life’s uncertainties lurk at every corner, microinsurance sounds like the perfect safety net—affordable, accessible, and tailored for the underserved.

Despite its promise, its uptake in Uganda remains dismally low, barely scratching the surface at under one percent.

But why do people shy away from it? Part of the answer lies in its paradox: microinsurance is both important and complex.

While it aims to cushion low-income households from life’s curveballs—be it a health crisis, crop failure, or sudden bereavement—its very design and implementation often alienate the people it seeks to serve.

The problem is not just here. This insurance which is crafted for low-income earners is genuinely low even on the continent with only a 0.03 percent penetration compared to Uganda’s 0.0003 percent.

For general insurance comparatively, there is an average penetration of 2.8 percent on the continent compared to Uganda’s 0.8 percent which has been stagnant there since 2013.

The insurers do not like this because it is worrying. Even the regulators are worried about it, yet its ripple effects are considerably immense to the population.

In the six months to June, micro insurance has demonstrated exciting growth in premiums, expanding by 35.2 percent, but the premiums remain frustratingly low, confined to just under a billion shillings.

For a country where most people are low-income earners, micro-insurance is not just a financial product; it is a lifeline. In the half-year to June, premiums under micro-insurance rose to Shs613m from Shs463m.

But the pressing question is: How far can it grow, perhaps by 2025?

While the numbers indicate progress, they also highlight the stark reality of the slow growth in the insurance market, which has stagnated below 1 percent.

The micro-insurance sector, despite its promise, struggles to break free from being a peripheral player amid widespread vulnerabilities.

Low-income earners have irregular incomes and no money left over after meeting their basic needs, according to the results of the FSD Uganda Micro-Insurance Challenge Fund, which was established in 2018 to test the effectiveness of microinsurance and savings strategies in managing risks among marginalised market segments.

Other pressing priorities like food, healthcare, and education compete with the idea of paying insurance premiums and possibly losing that money if no claims are made.

But this is a vital tool for improving financial inclusion in Uganda, where many people live on the edge.

In the last two to three years, the number of micro-insurance providers has increased from one to five, thanks to the formation of the Micro Insurance Association of Uganda, which has mobilised a collective effort to revitalize an underused market.

However, the sector faces significant challenges, particularly in distribution.

Microinsurance products can’t rely on established distribution channels unlike conventional insurance.

Hamza Mutebi, the chairperson of the Micro Insurers Association of Uganda and the general manager of Turaco, says distribution and claim settlement are still critical problems.

Technology

According to Geoffrey Okidi, Agriculture and MSME finance lead at Financial Sector Deepening Uganda, the fundamental issue is the mismatch between existing products and the needs of potential consumers.

The current products on the market are designed for high to middle-income earners with regular disposable income seeking to protect themselves from risks

But innovative distribution methods whether through technology or partnerships with established service providers such as Airtel and banks – present an essential code that is the missing piece to financial inclusion.

Providers are investing in Artificial Intelligence (AI) platforms designed to expedite claims processing. These platforms allow payments within days—or hours—of a claim, making the process smoother.

Microinsurance provides both life and general insurance coverage in one go.

Nonetheless, a major obstacle is distributing these products; they cannot be marketed like conventional insurance.

As highlighted by the African Insurance Organization (AIO), utilizing technology and innovative distribution methods is essential for promoting growth in the micro insurance sector.

Mutebi says the cost of distribution can be managed through innovative partnerships with large service providers such as Airtel and Letshego, given that they have large networks and a wider reach. 

“With micro insurance, you’re distributing very affordable policies to the mass market. If you don’t figure out innovative ways to distribute them, soon or later you will burn yourself out of the market. For instance, a company like Turaco cannot afford to distribute a policy like any other conventional insurance of Shs5,000 per month the same way ICEA distributes [a product of] Shs100,000,” Mutebi notes.

However, technology alone won’t solve the puzzle. Jonan Kisakye, chief executive director of Uganda Insurers Association, says there is a need for a flexible regulatory environment that is not stringent in terms of regulatory compliance.

“These market women, wheelbarrow pushers, and all these people in the informal sector need to know that it is easy to access this insurance. Otherwise, they will not be interested,” he says. 

The challenge lies in educating the masses about the benefits of microinsurance and ensuring it is accessible to those who need it most.

Real stories, real impact

Proscovia Wanyana, a teacher from Iganga District, in her experience with LetsGo Insure - a partnership between Turaco and Letshego - showcases the benefits of micro insurance.

Wanyana received a payout of Shs500,000 for her hospital expenses within three days after an emergency, which was crucial since her entire bill amounted close to Shs600,000. She noted that the monthly deduction of Shs50,000 from her Letshego loan repayments made all the difference.

 While such stories highlight the potential of micro-insurance, they also underscore inherent challenges, particularly low claims, which typically range from Shs200,000 to Shs300,000 and can sometimes be slow to process.

Establishing a robust claim management system is, therefore, critical to attracting more low-income earners into the fold.

Regulatory support and prospects

The Insurance Regulatory Authority, (IRA) says is still intentional about nurturing micro insurance by providing the sector with enough support to reach the underserved Ugandans.

“We are not yet happy with the percentages, and we are still trying to do many things which will be rolled out soon. We are concluding the micro-insurance regulations which are going to guide the sector,” Wanyana notes.

However, “We have guidelines that are helping the existing players. We are engaging other development partners to see how we can help the micro insurance providers to give more service,” Ibrahim Kaddunabbi, the IRA chief executive officer, said while releasing the insurance sector half year results for the period ended June.

IRA has also in the past shared plans to lower the minimum capital requirements for investments in the sector to free up capital for existing players and allow more to come in.

Experts weigh in

Fred Muhumuza, a senior economist, explains whether this segment can grow. He emphasizes the importance of understanding the insurance market before setting growth expectations. He points out that while the potential exists for significant growth, it is crucial to determine whether the market is saturated or if there is room for expansion.

As he notes, “You don’t set a growth figure before you understand the market… is it already saturated? Because if it is at Shs600 million, then there is no way it reaches a billion." He underscores that thorough market research is key to develop an accurate growth strategy.

A major challenge the insurance industry faces is a lack of education about what insurance is. The economist observes that many people, even those in higher income brackets, may have the means to insure themselves but simply don’t, because they rely on alternative forms of support.

“Most people trust social insurance. If I get sick, I’ll go to hospital. I’ll talk to my relatives, they will help me out.” This reliance on informal networks prevents many from seeing the value in formal insurance products, which they might perceive as unnecessary.

This relates to the findings from the Insurance Regulatory Authority's (2022) study on the uninsured market. The existence of other pressing needs ranked highest among the reasons for being uninsured, followed by a negative perception of insurance and then limited knowledge about insurance.

The negative perception could be attributable to ignorance about how insurance works, failure by some insurance companies to pay claims as they are presented, and misinformation about insurance. The uninsured also indicated that informal insurance was more attractive to them because it is easy to join and does not require one to have huge savings but rather small and consistent

Furthermore, Dr Muhumuza highlights how the geographical limitations of insurance services can be a deterrent.

“I fall sick in Bundibugyo, and then you say your insurance service providers are in Kampala, they are in Fort Portal, they are in Mbarara. Now I’m in Bundibugyo, who covers me there?”

For many people, especially those living in remote areas, the lack of accessible services can make insurance irrelevant, forcing them to rely on their resources instead.

He concludes that to grow the insurance market, understanding consumer behaviour is crucial. While people may have the financial capability to insure themselves, they are not yet ready.

“They may not reach a billion, they might reach it and surpass it. But we need to understand more of that market segment,” Dr Muhumuza says.

This highlights the industry's need to educate the public on the benefits and availability of insurance, particularly in underserved areas, and address logistical challenges in service delivery.

A path forward

As micro insurance evolves, the prospects for growth are promising.

If the sector can tackle its distribution challenges and leverage technology, the ambitious goal of reaching a billion shillings in 2025 could be a small target. 

It will also be a promising initiative that could help Uganda break free from the stunted insurance penetration rate of less than one percent.

The prospects look promising as the government pushes for full implementation of the national health insurance scheme, which may pave the way for broader financial inclusion and security for its citizens.