In his famous book titled ‘Competitive Strategy’ Michael Porter developed the five forces widely used in the analysis of a market.
The five forces are threat of new entrants, buyer power, supplier power, threat of substitute products and competitive rivalry.
In analysing our Zambian market within the insurance context I find the five forces very useful and relevant.
I bet both academicians and practitioners can benefit from this topic.
The threat of new entrants refers to new insurance players setting up in Zambia. Currently the minimum capital requirements in Zambia is about K1 million or about US$150,000.
There is currently no distinction whether it is a local, foreign or Reinsurance Company.
This poses a huge opportunity to those who wish to set up while those already operating must be wary of new entrants.
They must analyse the threat of new entrants at strategic level. For example with new entrants comes in throat cutting practices so as to penetrate the market.
Despite overall industry growth such practices shrink premiums as existing insurers will also try to hold onto their loyal customers, be it at reduced premiums.
Those customers who are price sensitive may move to new entrants until such as time when they taste their services especially the claims paying ability.
If they are satisfied then chances are that customers will stick to the new entrants while on the other side if they (new entrants) do not meet the expectations of customers is settling claims they move back to the ‘veterans’ at the speed of lightening.
To make the market more competitive to enter and also increase capacity the government through the Pensions and Insurance Authority (PIA) should revise the minimum capital requirements upwards.
In other countries like Kenya the minimum capital requirement is US$450, 000 while in South Africa it is US$560,000 for general insurance companies respectively.
The second force according to Porter’s five forces is the buyer power.
In general terms the Zambian insurance market is soft and the power buyer is high.
Buyers can easily bargain for higher limits at lower premiums. It is largely hard for insurers to insist on higher premiums if competitors are willing to offer lower ones otherwise buyers may switch.
The market is also heavily brokered such that brokers are able to negotiate better or lower terms for their clients from the many insurance companies available.
In markets like Tanzania broker power is enhanced by compulsorily making commercial lines brokered.
We now turn to supplier power where switching providers tends to be very expensive.
Where a client has premium outstanding for example the supplier or insurer has more power because if the client decides to change insurers they can be reported to PIA and risk heavy penalties from the regulator.
Before the liberalisation of the economy in 1991 Zambia only had the mighty Zambia State Insurance Company (ZSIC) as a sole supplier of insurance.
At that time ZSIC had high supplier power arising from the monopolistic market.
They could get business at the speed of lightning and pay claims at the speed of a chameleon and would still survive because there was no competition.
Presently, any insurer who takes this route would find themselves losing customers faster than they get new ones.
The supplier power is generally very low.
Substitute product is the next force according to Porter’s five force model. In insurance the fact that death is guaranteed means the industry has not entered decline in the product life cycle although a few specific products have come and gone.
In this context it is difficult or almost impossible to replace conventional insurance products with unconventional ones such as creating reserves or captives.
Substitute innovation occurs where old products replace new ones; this is currently difficult to find in our market.
Product enhancements such as Personal Accident benefit on a motor policy or those additional extra benefits such as loss of use, increased towing, emergency repairs etc cannot qualify to be direct substitute of primary products.
However market players should be alive to such innovations as customers will definitely be attracted to such innovations than the old standard policies.
Finally we look at the extent of competitive rivalry in the industry.
There are currently over twenty five insurance companies in Zambia competing for about K1.6 billion gross premiums which is less than two percent of Gross Domestic Product (GDP).
This fierce rivalry should be viewed as good for the customer.
Among players rivalry should not be taken personal where people even fail to greet each other or collaborate as an industry but rather it should be taken as a healthy situation which widens the customer’s choice and stands to benefit them through improved service delivery.
Comments: webster@picz.co.zm or webster_tj@hotmail.com or on face book search for Insurance Talk-Zambia page or call/text 0977 857 055
[The Author is a Chartered Insurer with more than 10 years industry experience]