During the infamous cash crunch of 2023, my unlettered mother, who lives in a village in Ota, Ogun State, was stranded. Before the crisis, we sent money to her through my sister, who lived in her neighbourhood.
But when the cash scarcity hit my sister, my mother too couldn’t get cash, even from her petty trade.
A few weeks into the crisis, she called to say that she had opened an Opay account and could now receive funds from us and her customers via transfer to her new account, and she could pay her suppliers via the same app.
I have used this story to illustrate various aspects of customer-market fitness, the distinction between financial literacy and education, and the role of tech as an accelerator rather than a business model.
But after reading Harvard Professor Clayton Christensen’s management classic, “The Innovator’s Dilemma”, late last year, Opay and my mother’s encounter became more than a story; it became another framework in my toolkit of appraising changes in the market.
Through this lens, I intend to use Christensen’s disruptive principles to interrogate why and how incumbent insurance companies might be disrupted by new technologies from startups, existing insurers, or from adjacent sectors like telecos, banking, fintech, etc.
Of NIIRA and an industry ripe for disruption
The Nigerian Insurance Industry Reform Act (NIIRA) has been hailed by industry stakeholders and watchers. The National Insurance Commission (NAICOM) describes it as a catalyst for growth, while the Nigeria Insurers Association (NIA) welcomed it as a bold step in modernising the industry’s operations. But behind these accolades is a revving disruptive engine – the Official Guidelines for Insurtech Operators in Nigeria.
It is no news that Nigeria’s insurance penetration lags South Africa’s 11.54%, Namibia’s 7.41%, Morocco’s 4.10%, Kenya’s 2.25%, and the global average of 6.8%.
For me, this abysmal penetration rate is partly a product of Nigeria’s economic structure, where 90% of the workforce is employed in the informal sector.
Yet, insurance products remain complex, expensive, and exclude more than 100 million adults, according to EFInA report. The report also furthered that an estimated 96.4% of surveyed Nigerian businesses have no insurance, yet micro-enterprises make up more than 70% of Nigeria’s GDP.
Put simply, millions of Nigerians and businesses are just one accident or disaster away from financial ruin, and have no hope of a comeback except for families, friends, faith, and vibes. This probably explains why the InsureTech guidelines lean strongly towards retail and personal lines insurance.
Learning from the banking sector, blind spots incumbent Insurers must watch
Christensen’s theory of disruptive innovation explains that industry leaders are most vulnerable when disruptors target non-consumers (people who are not using existing products because they are too expensive, inconvenient, or complicated).
He explains that the disruptors enter with a simple, low-margin product that meets the basic needs of these overlooked customers. Over time, the product improves, and the disruptor moves upmarket.
Before and during the cash crisis, many Nigerians, like my mother, were ignored by the traditional banks because they chose to focus on mainstream customers.
So rather than competing head-to-head with legacy banks, Opay went after the Nigerians like my mother, whom incumbent banks aren’t serving effectively. Opay built a “good enough” digital infrastructure and agent network to enter from the bottom.
As with Nigeria’s banking sector, incumbent companies do not miss disruptive waves because they are badly managed businesses; they miss them because of several factors that are beyond their control. Drawing from Christensen’s research, here are reasons legacy insurers will be disrupted:
1. Companies depend on customers and investors for resources: While many have praised the new industry’s capital requirements, pressure to meet up is likely to tilt legacy insurers towards impressing investors with large policies, not the black box of micro covers.
On the other hand, disruptors don’t have existing customers; they are farming for them so they can attract investors.
2. So, all markets don’t solve the growth needs of large companies: The size of the untapped informal sector and micro businesses, is seductively tempting but for growth targets to maintain share price and create opportunities for their employees, insurers need policies with high sums assured, which are largely domiciled with corporates and high-net-worth individuals. Incumbent insurers are therefore likely to innovate around compulsory policies rather than micro insurance.
3. Markets that don’t exist can’t be analysed: Current insurers’ RPVs (Resource Processes and Values) are designed to be based on sound market research because the size and growth rate are generally known.
In contrast, there is a lack of known data to forecast on in Nigeria’s non-consumption insurance market. On the other hand, because disruptors don’t carry the pressures industry leaders carry, they can define and structure the market as they move on.
4. An organisation’s capabilities define its disabilities: While there have been some interactions with digital distribution, Nigeria’s legacy insurers are primarily dependent on traditional distribution channels (brokers, agents, and corporate clients) and complex underwriting processes.
These structures make serving low-margin customers costly and unattractive. Disruptors have the advantage of designing new value networks for this market without upsetting the economics of brokers and agents.
Like Opay, Insurance disruptors will also move upmarket
With over 50 million users, 1 million merchants, and transaction volumes surpassing $12 billion, Opay (like other prominent disruptor-fintechs) is now challenging traditional banks in the mainstream segment. They are now providing conventional banking services.
This is classic disruptive innovation: start with a “good enough” product for people ignored by incumbents, then improve and expand to compete with incumbents. Whether these disruptors will displace incumbent banks will be the ultimate test of the disruptive theory in Nigeria.
Faced with this type of reality, it may be tempting for legacy insurers to pander to Jim Collins’ “Genius of the ‘And’” philosophy, that is, growing their mainstream markets and exploring new ones at the same time. Only that research didn’t back up that approach.
According to Christensen, while it is easier for incumbents to acquire resources to explore new markets, it is more challenging to align established processes and values of large organisations to explore unknown, small markets.
He therefore suggested matching the size of the organisations to the size of the markets – an approach that most traditional Nigerian banks had to learn the hard way, but consequently midwifed spin-off fintech arms, Payment Service Banks (PSBs) and Agency Banking.
We can’t stop the disruption, but we can ensure it impacts real people in the real economy.
Because of Opay, millions of people like my mother are financially included today. Insurance disruption can also have the same effect.
The NIA has demonstrated readiness to welcome the possibilities with the recent launch of the Innovation Lab. So, the article is not about stopping disruption from happening.
It is about situating NIIRA, identifying potential pitfalls for incumbents and disruptors, and ensuring that, through their works, insurance contribution to Nigeria’s GDP grows and their effects are evident in the lives of every Nigerian.
