Rethinking insurance for sustainable development
Tom Herbstein, Programme Manager, ClimateWise
20 July 2015
In a recent Cambridge Institute for Sustainability Leadership (CISL) report on insurance, Fellow Dr Ana Gonzalez Pelaez called for access to insurance within emerging markets to be accounted for by regulatory environments in order to aid sustainable development.
The report, launched at the Financing for Development Conference in Addis Ababa on 13 July, echoes recent calls by the G7 for 400 million of the world's most vulnerable to be provided with access to insurance. However, from an insurance perspective, operating in emerging economies presents many challenges – requiring insurers to have to rethink insurance for these markets.
There is good reason for insurers to be interested in these markets. Firstly, the current low density of premiums in emerging markets – at just $136 per person versus $3,666 in more industrialised nations – means that the future growth of insurance lies in these markets. Over the past decade, emerging insurance markets have seen average growth rates exceeding 11 per cent per annum, compared with just 1.3 in industrialised nations.
The interconnected nature of risk means that large uninsured populations could potentially destabilise insurers' more traditional, developed markets, as outlined in recent reports by both Lloyd's of London and the Foreign & Commonwealth Office. Insurance has historically played a crucial role in helping to stabilise economies, with a proven link between the size of a domestic insurance industry and the strength of that country's GDP.
Yet the main barrier to entry lies in the fact that the traditional insurance model is broadly unsuitable for a burgeoning market that necessitates high-volume, low-premium policies. This means that the proportion of administrative costs is often far higher than in industrialised markets, leading to lower profit margins that make traditional commission-driven, broker distribution ineffective. Furthermore, a general lack of historical actuarial data means insurers are often forced to price any uncertainty associated with entering such markets into their underwriting and further undermines the ability to offer affordable premiums.
Insurers also face challenges associated with uninsured communities who may not have been exposed to insurance before, who then see it as a form of tax or struggle to comprehend a financial product they may have to pay over a lifetime yet potentially never draw upon. Finally, all this is against a backdrop of challenging regulatory and operating environments, which further increase the risk and costs associated with insuring emerging markets.
So how can insurers overcome these challenges? First there is a need to innovate more cost-effective insurance products suitable for emerging markets. Our report provides the example of the CARD Mutual Benefit Association in the Philippines, that has successfully designed a life insurance product now used by over 11 million people, 80 per cent of whom are below the poverty line. The African Risk Capacity is a $200 million capitalised catastrophe fund designed specifically to build African country resilience to natural disasters.
Developing partnerships will be crucial for achieving these successes, particularly with policymakers who may have to subsidise some of the high costs associated with entering these markets, at least at the start. Insurers, for their part, will have to start leveraging other parts of their business activities more strategically, helping to lessen risk exposure by becoming more proactive in managing societal risk. ClimateWise, a collaboration of over 30 leading global insurance companies, is currently working with policymakers to identify viable solutions to extend insurance cover into emerging markets. The group are exploring a range of adaptation options, promoting resilient urban centres and understanding how insurers' investment flows can be used to help manage climate vulnerabilities, such as through investing in resilient infrastructure.
Given the clear political will and insurer motivation, the challenges of insuring emerging economies are far from insurmountable. Yet it will require innovation and compromise, by both insurers and policymakers, if insurance is to play its part in sustainable development.
First published in Insurance Day (subscription required).