How to Close Asia’s Insurance Protection Gap
Asia will drive the growth of the global insurance market in the years to come. Technological innovation along with solid financing and the right policies will be needed to make sure as many people as possible in the region get the insurance protection they need.
The demand for insurance in Asia in the coming decade will be shaped by rising household income levels of a rapidly expanding middle-class, policy measures to accelerate financial inclusion, and strengthening social protection and government insurance programs.
Governments are also increasingly making businesses, households, and individuals responsible for managing the adverse financial consequences of risks to assets, lives, incomes, and livelihoods. One can, therefore, expect increased spending on buying protection and an expanding role for the insurance and capital markets to manage contingent liabilities better. The same holds for access to medical care, which will be spurring demand for health insurance.
Also, with people living longer and aging, the need for life insurance and pension-related products is expected to increase. Therefore, it is not surprising to see projections that in 2030, out of the top five countries in terms of percentage of the world insurance market share (in purchasing power parity terms), four will be from Asia (the People’s Republic of China, India, Indonesia, and Japan) with a combined share of 46%. This share is twice that of 23% in 2015, contributed by only 3 Asian countries.
While these socio-demographic shifts drive up insurance needs, the coverage remains low with around 3% of GDP in developing countries in Asia, excluding the People’s Republic of China, compared to 9% in wealthier more developed OECD countries. Millions are either uninsured or underinsured, thereby pointing towards a significant protection gap -- the difference between insured losses and economic losses.
When the former Governor of the Bank of England, Mark Carney, referred to the 'tragedy on the horizon,' he had the 'property protection gap' or the impact of risks from natural hazards and climate change in mind, which is $134 billion for Asia alone today.
And this is just the tip of the iceberg. We need to deal with many other protection gaps, resulting from extraordinary causes and requiring unique remedies. Asia's mortality protection gap stood at $83 trillion in 2019, with three in four households in financial danger if a breadwinner dies. The health protection gap is $1.8 trillion in 2019 or 10% of the average annual household income. The pensions protection gap stood at $70 trillion in 2015 and is forecast to grow by 5% each year. With the increased use of digital technology, Asia's cyber-risk protection gap is at $27 billion in indirect economic losses.
The protection gaps are, therefore, manifestations of unresolved development problems. The ability to respond and mitigate shocks effectively using countercyclical policy measures is severely undermined as public insurance schemes do not exist or are underdeveloped.
Another related gap is the infrastructure financing gap, which is $26 trillion for hard infrastructure alone. Add in the expected need for social infrastructure funding, such as health and education, the gap almost doubles. Strategies need to be put in place to build resilience in developing countries and address the underlying factors to manage residual risk better and reduce the impact of potential shocks.
Where standard risk mitigation practices cannot quantify financial stresses, such as those posed by environmental and social factors, they may introduce significant residual risk potential. Investing with a strong focus on environmental, social, and governance principles will endure – and will likely be a vital aspect of the rebuilding that lies ahead.
Asia will drive the growth of the global insurance market.
Closing these gaps is vital for socio-economic prosperity, as it is linked implicitly to many of the UN's Sustainable Development Goals. The insurance industry can contribute by offering affordable fit-for-purpose risk-sharing and transfer solutions to the last mile. These initiatives should be considered:
- Governments can reduce the volatility of financial losses following a shock and manage their economic consequences in a non-inflationary manner by transferring some of their contingent liabilities to the private sector through an annual payment of insurance premium.
- By linking public insurance schemes based on premium subsidies with private insurance solutions, insurance can foster economic and financial inclusion of vulnerable and needy populations and transform livelihoods. It can also help in preserving the governments' balance sheets and respond flexibly in an emergency by providing rapid liquidity in the form of cash transfers.
- Governments can set up insurance pools which aggregates the insured risks in a diversified portfolio. By retaining some of the risks through reserves and capital, it can cover the high frequency and low severity losses; and transfer the less frequent and more severe losses to the insurance, re-insurance and capital markets.
For reducing the impact of the shocks, there is a need to step up investment in sustainable infrastructure, more particularly soft infrastructure, where there has been chronic underinvestment. Social infrastructure would be potentially attractive to long-term institutional investors like life insurance companies and pension funds due to their small exposures. The insurance industry can also play a key role in de-risking investments and mobilizing long-term private capital by wrapping the investment with insurance, technology guarantees, warranties, commercial and political risk insurance.
High transaction costs and lack of risk data have prevented them from fulfilling their expected role. By deploying sophisticated climate, geological, and pandemic models, they can determine vulnerabilities to catastrophes depending on location and underlying exposures. In this way, risk pricing carries crucial market signals; it informs policy-makers of their overall preparedness and supports targeted investment in risk mitigation and reduction measures.
Leveraging technological advances such as the internet of things, big data, artificial intelligence, machine learning, and blockchain, “insurtech” can also cut operational costs by enabling speedier claims reporting and assessment and ensuring better customer engagement. Experts estimate insurtech can cut up to 10% of premium costs and 8% in claims expenses while ensuring stable margins.
The fulcrum of insurance is gradually shifting to Asia. It is this region that will drive the growth of the global insurance market. And it is also here where risks are and where innovation is happening.
Insurtech will be a crucial driver for change as the insurance industry leverages technology for coming up with innovative risk financing solutions for reducing the protection gap and building a sustainable future.