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Insurance Has Grown Rapidly In Emerging Markets But There Are Still Significant Protection Gaps

Studies show insurance mitigates risk of poverty and contributes to overall development in emerging markets, latest sigma says.

  • Insurance has grown rapidly in emerging markets but there are still significant protection gaps
  • Evidence-based research shows that insurance facilitates higher income-generating activity by households and small business, and can improve quality of life
  • Understanding the heterogeneity and barriers to insurance in emerging markets supports establishment of effective risk transfer systems
  • Innovation, technology and public-private partnerships can extend the reach and of insurance in emerging markets

A growing body of empirical research on economic development in the emerging markets shows insurance facilitates higher income generating opportunities and contributes to improved quality of life, the latest sigma "Insurance: adding value to development in emerging markets" says. Every year, 100 million people around the world fall into poverty because of out-of-pocket spending on medical treatment.1 Case studies indicate that insurance can help mitigate this, by providing both reduced out-of-pocket spending on and improved utilisation of healthcare services among insureds.2 Different approaches such as microinsurance and public-private partnerships, alongside innovation and the use of technology can better align risk transfer solutions with the needs of consumers and businesses, and help overcome location specific barriers to the development of the insurance sector in emerging markets.

The standard measure to gauge the development of a country's insurance market is the insurance penetration rate.3 "However, this sheds no light on how many people have insurance. Nor does it say anything about how insurance makes peoples' lives better," Kurt Karl, Chief Economist at Swiss Re says. "The evidence-based research being done today offers more granular insights about the contribution of insurance across a broader range of development metrics, findings which can inform policy decisions."

Demand- and supply-side barriers 

Emerging markets are heterogeneous and present different demand and supply barriers for insurance solutions. For instance, affordability is a major demand-side barrier, but even when heavily subsidised, as studies from Nicaragua4 and India show, demand for insurance can remain low. The implication is that trust could be an equally or more important consideration than price. Other key barriers include lack of awareness, behavioural biases and institutional/regulatory constraints.

A better understanding of the barriers can shape new approaches to expand insurance coverage and technology has proven to be a key enabler in many countries. The growing proliferation of new data about insureds collected via sensors and smart devices, combined with smart analytics and predictive modelling permits more granular underwriting. This allows insurers to create products and set premiums based on insureds actual behaviour - rather than based on parametres such as age, marital status and gender. In China and India, the numbers of mobile subscribers are forecast to increase to around 1.2 billion and close to 1 billion by 2020, respectively. In both countries, digitally-enabled insurers already offer a variety of simple (eg, pay-per-use sharing economy insurance) and sophisticated new products (eg, liability for new technology).

Likewise in Sub-Saharan Africa (SSA), mobile technology has been a main driver of insurance growth. For example, with low incomes, small sums insured and very small premiums, mobile technology has been employed to distribute cost-efficient microinsurance. The rapid expansion of mobile money platforms has been the key facilitator. Parametric insurance products for example rely on weather stations for their data and can pay claims in an automated manner using mobile money methods. By 2016, such systems had helped, for example, more than 1 million farmers in Kenya, Tanzania and Rwanda buy risk protection via the crop, livestock and index insurance offerings.

Innovation can help extend the reach of insurance in emerging markets. A key challenge for insurers, particularly in reaching consumers for whom insurance is inaccessible or unaffordable, is that the low premium sums involved do not cover the costs of providing insurance. In these situations, insurers are finding different ways to reduce costs. One example is community-based cost sharing, where insurers partner with community organisations such as mutuals and cooperatives to share the expense of providing policies.

A community-based health insurance programme has been particularly successful in Rwanda, where 84% of the defined population had enrolled by April 2017.5

Another approach is client segmentation. In 2010 Aseguradora Rural, S.A. (Rural Insurance) in Guatemala designed a suite of micro health products to meet the needs of the different client segments of the partner Banrural bank. Focus groups, interviews, medical care statistics and analysis of clients’ socio-economic and epidemiological profile were used to identify potential market segments and product coverage. The scheme was a success: by the end of January 2013, the number of policies issued was 12 453 (or 22% of the bank's clients), and there were only 735 cancelations.6

Public and private sector collaboration supports insurance growth

Governments play an important role in further expanding the availability of risk transfer solutions in emerging markets. This can be done via the introduction of mandatory insurance, but also by providing a supportive policy environment. In 2007 for example, the Chinese government implemented an agricultural insurance subsidy policy. The agriculture insurance market in China has grown by a CAGR of 43% over the last 10 years. By 2016, premiums were CNY 41.8 billion (USD 6.6 billion), making China the second largest agriculture insurance market in the world.

Public- and private-sector stakeholders must work together to build effective insurance systems. Requirements include increased awareness of risk issues and financial literacy, and promoting inclusive finance programmes.

As the case studies in this sigma report show, insurers and policy makers can use evidence-based decision-making for better cost-benefit analysis of different risk management strategies. Insurers need to understand the drivers behind consumer choices. Simplified policy wording is also critical in reaching consumers and small businesses. Ultimately, insurance development should be needs-based. The ability to improvise and innovate will help overcome existing market barriers and better align product solutions with consumer needs.

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1 Universal health coverage fact sheet, World Health Organization, 2016.
2 R. Thornton, L. Hatt, E. Field et. al., "Social security health insurance for the informal sector in Nicaragua: a randomized evaluation." Health Economics, vol 19, 2010, pp 181-206, and A. Fitzpatrick and R. Thornton, The Effects of Health Insurance within Families: Experimental Evidence from Nicaragua, Policy Research Working Paper 8115, World Bank, 2017.
3 Insurance penetration is defined as insurance premiums as a percent of gross domestic product.
4 For example, Thornton et. al. (2010) find that take-up rates were about 20% for subsidized insurance premiums in Nicaragua, but in the second year fewer than 10% continued to purchase the subsidized policies.
5 "Health care in Rwanda, An African trailblazer", economist.com, 15 September 2016, http://www.economist.com/news/middle-east-and-africa/21707226-how-poor-country-brought-health-insurance-91-population-african
6 Health and life micro insurance products to Banrural clients in Guatemala, Micro Insurance Innovation Facility, 2013.

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