Inclusive insurance is not a new concept but an evolving one. Its importance in meeting the sustainable development goals in emerging markets is undisputed. Inclusive insurance enables positive social outcomes by cushioning vulnerable populations from various risks and empowering them to become more entrepreneurial through risk-sharing. As a reinsurer focused on the protection needs of emerging Asia and the rising middle class, inclusion in insurance is a part of Peak Re’s business mission. Inclusive insurance is critical to development in emerging markets and is even more important today as the effects of the COVID-19 pandemic, social inequality and macro trends such as climate change threaten to leave vulnerable populations even further behind.
Inclusive insurance is evolving. The COVID-19 pandemic, for example, has increased the awareness of health and life protection in emerging markets in recent years, while the accelerating pace of digitalisation globally has improved financial access and inclusion. Moreover, financial innovations, such as social and impact bonds1, are bringing risk capital to promising social interventions that support vulnerable segments of the community.
Inclusive insurance is a broad term encompassing different approaches to bringing insurance protection to the unserved or under-served groups of people, that may have been left out of the traditional insurance business models.
Inclusive insurance’s lasting impact on economic development
Several studies have alluded to the lasting contribution of inclusive insurance in economic development and poverty reduction. Insurance can help break the cycle of poverty by helping individuals and families overcome significant financial shocks, thereby reducing the reliance on costly debt or unpredictable external aids in times of financial distress. The ability to recover quickly from financially impactful events, over the long term, can be a significant support for upward social mobility.
This is important, as 51% of the world’s population, living on low incomes (between USD2.01 - 10 per day), is vulnerable to falling back into poverty from external financial shocks. For almost 100 million people, out-of-pocket medical expenses can be high enough to push them into extreme poverty (defined as income of less than USD2 a day). For up to 130 million people, exposure to climate change and ‘natural disasters’ threatens to do the same.
Pathways between inclusive insurance and positive social outcomes
This article was written by Kritika Kashyap, Economist, with additional comment from Jasmine Miow, Director, Head of South and Southeast Asia at Peak Re. The article is reproduced with the kind permission of ICMIF Supporting Member Peak Re.
To access the full in-depth article, including more graphics, please visit this webpage. For more insights from Peak Re’s Knowledge Centre, please click here.
The original article is provided in English only. Any translation to other languages via the ICMIF website has not been done by Peak Re, and therefore Peak Re are not liable or accountable for those translated versions.
Published April 2024
Source: Peak Re, adapted from Access to Insurance Initiative (a2ii.org)
Inclusive insurance’s influence beyond financial risk protection
Beyond building resilience, insurance risk transfer is also known to promote risk-taking and entrepreneurship. Field studies have shown that insurance can empower farmers to shift towards higher-return but higher-risk cash crops (such as castor or groundnut) and increase their appetite for and access to more profitable activities such as livestock farming. Ultimately, insurance had a positive impact on improving farmers’ incomes. Other studies have shown that insurance can promote a productive shift in resource allocation for entrepreneurs, where they can allocate more resources to their core business, shifting from saving for unexpected risks.
Insurance is also shown to reduce reliance on harmful coping strategies among low-income households, such as the sale of productive assets, or taking children out of school for extra labour2. Several of these studies concluded that insurance could be more beneficial and cost-effective than cash transfers as a policy tool to alter poverty dynamics and meet countries’ long-term development goals3,4.
| Examples of Models of Inclusive Insurance | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Microinsurance | Affordable insurance products that are specifically designed for low-income populations. The sum assured is often small, with small and flexible premiums. These products often provide risk coverage for a group rather than individuals. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Public Private Partnerships (PPP) and/or government-sponsored insurance | Multistakeholder engagements where the public sector enables affordable insurance through subsidies or sponsoring insurance for specific segments or risks. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Mass-market insurance and digital insurance | Products designed for sale through far-reaching distribution channels to reach population segments regardless of socio-economic status. These products are often standardised and easily understood by target populations. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Products focused on a particular community/segment such as Takaful insurance, gender or age-specific insurance policies | Inclusive products for communities and segments that may be excluded from, or whose needs are not met by traditional insurance business models. For example, Peak Re supports a medical insurance scheme for autistic children. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Peer-to-peer (P2P) Insurance | P2P platforms collect known acquaintances with similar risk profiles towards a shared pool with transparency about members’ profiles, claims and the size of the pool. The social affinity disincentivises fraudulent claims, and unused amounts are returned to group members at the end of the coverage period. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Source: Peak Re Research. See more details on these models discussed in “Inclusive insurance to fuel an inclusive recovery”
In addition to these models, the private sector is exploring new technologies that can address the issues of affordability, availability and accessibility to tap into the opportunity in inclusive insurance.
Interview on Inclusive Insurance with Jasmine Miow, Director, Head of South and Southeast Asia at Peak Re
Jasmine, you’ve worked on a number of inclusive insurance businesses with our clients in South and Southeast Asia. Could you share how our role as a reinsurer in inclusive insurance differs from other traditional P&C businesses?
A key difference when it comes to an inclusive insurance business is that there are no standard solutions and structures that you can work with. For example, when we’re working on health solutions for women in the Philippines, the conditions and the variables involved, the information available and the value sought by our clients would be completely different from when working on a similar project with women in rural India.
Working on inclusion requires customisation and an agile temperament, which we at Peak Re are proud to provide for our clients. We encourage co-creation and provide creative inputs to our partners through end-to-end product development.
The other difference is the need to develop partnerships with government bodies, development agencies and NGOs, which are often key stakeholders for these solutions. For example, in Malaysia, there is significant government support for insurance policies for the B40 segment (i.e the bottom 40% income households). This support is not only in the form of sponsorship for insurance initiatives but also in providing expertise, data and distribution channels. This type of support makes a material difference in rendering inclusive businesses viable.
Which of these aspects would you say is the most crucial in developing viable inclusive insurance solutions?
I would say it is finding the right long-term partner to develop these solutions. Many traditional insurers may question the viability and commercial profitability of inclusive solutions such as microinsurance. However, we believe that if the product design, distribution and claims handling are properly structured and explicitly tailored to the needs of the target group, inclusive solutions can well be commercially viable and sustainable. The key is finding partners who share the same long-term mindset and the right approach in terms of being agile and creative when it comes to developing these solutions.
As a reinsurer, we believe that all risk should be assumed at a commercially viable rate. But one has to be able to find the right stakeholders. For example, community-based organisations such as cooperatives or NGOs can be excellent distribution channels that can help make a model viable and one that the poorest in society can afford and embrace. To achieve this, the end-consumer must be at the centre of the initiative, and we need to understand the behaviour of each segment on how it reaches out for financial support when in need.
Insurers also need to be able to simplify and adapt products, delivery and compensation systems according to the members that they serve.
Role of reinsurers in the inclusive insurance process
Let’s also talk about some of the challenges you face when it comes to inclusive insurance business.
You know, the challenges are not new. I think the industry is well aware of some of these issues - the expense ratio is high if using conventional distribution mechanisms, there are difficulties in distribution and claims, and products need to be made simple and effective to meet the needs of the target segment (for example, have flexible premium payment options for daily or irregular wage earners.)
A key one is addressing the gaps in understanding coverage. For example, exclusions can sometimes be very difficult to explain – why one person is being covered for their illness, while the other is not. Simple products are important to achieve the larger goal of building trust and education in parts of society where insurance is still a nascent concept. Insurance awareness and education are other massive challenges when it comes to inclusion. We have a role to play in educating the end user on the importance of insurance.
But the biggest challenge of all is building reliable ecosystems. Insurance penetration, by itself, is ineffective if the right infrastructure is not in place. Health insurance cannot provide its full value in areas where medical facilities are not accessible. Infrastructure, housing, medical facilities and financial inclusion all need to develop together in order to be truly inclusive.
Inclusive insurance has been discussed for a few decades now. I think microinsurance as a breakthrough concept came about in the 1990s. Are you seeing new innovations or changes in inclusive insurance models?
Yes, indeed. Our society has undergone two major shifts in the last few years.
First, the COVID-19 pandemic has ushered in major changes. Health awareness has increased acutely since the pandemic. During the pandemic, many insurance and reinsurance companies worked alongside governments to provide timely solutions such as COVID coverage and vaccine insurance. I think this has improved the trust placed in insurance. We’re seeing more demand for health coverage, especially for the unorganised workforce and bottom-of-the-pyramid segments. Many governments in emerging markets are exploring affordable health/medical schemes in addition to the cash-assistance based insurance products that have existed in many markets.
The role of technology and digitisation has also gained more prominence. Technology has opened doors to reaching distant populations. We’re already seeing the use of mobile network operators for easier distribution and payment channels for inclusive insurance. Technology is also enabling the collection of risk data from unconventional sources. For example, machine learning platforms can generate credit scores for those without access to formal financial systems based on their mobile phone usage data. Use of remote sensing and satellite data for parametric solutions is another example where technology is integrating with insurance. I believe there is a lot of scope for technology to modernise inclusive insurance in terms of improving insurance access, data collection, payments facilitation or claims assessment.
And what about climate change? Are you seeing more inclusive products that are providing protection against this rising risk?
We are, to some extent. In Emerging Asia, many people’s livelihoods are vulnerable to climate change, particularly given the dependence on agriculture. In this area, public-private partnerships are playing a key role in providing insurance-based risk solutions to farmers for crop failures from natural catastrophes.
Another good example of climate change protection are disaster-relief pools, such as the Southeast Asia Disaster Risk Insurance Facility (SEADRIF). The ASEAN+3 initiative builds social resilience by providing rapid and predictable relief and reconstruction funding through parametric triggers in case of disasters. The regional risk pool has good access to international reinsurance markets. Such initiatives are much needed as climate change is increasing the frequency and intensity of extreme weather events, threatening the development and economic gains that emerging markets have achieved.
Inclusive Insurance and the contribution to UN Sustainable Development Goals (UN SDGs)
Insurers and reinsurers are working together to support and co-develop non-life focused inclusive insurance programs in Emerging Asia. There is a significant opportunity to recognise and cater to the needs of the rising middle-class to help close the protection gap in emerging markets. Importantly, insurance risk transfer mechanisms can contribute towards multiple UN SDG goals (see table).
| Features/outcomes of Inclusive Insurance | Role of Inclusive insurance in progressing towards UN SDGs | |
|---|---|---|
| Poverty alleviation | Inclusive insurance supports upward social mobility by building household resilience to external shocks, reducing reliance on costly debt and negative externalities, as well as creating a mindset shift towards savings and risk. |
SDG 1 (NO POVERTY) |
| Food security | Inclusive insurance supports risk management in the food production value chain, particularly in response to natural hazards and climate change, thus allowing smallholder farmers to gain access to crop protection and options for increasing productivity. |
SDG 2 (ZERO HUNGER) |
| Health and medical protection | Health is fundamental to societal and economic development, and insurance supports these goals. Approximately 800 million people globally are vulnerable to financial catastrophe from out-of-pocket health expenses5. Inclusive insurance can target this segment more efficiently than traditional insurance. |
SDG 3 (GOOD HEATH AND WELL-BEING) |
| Financial inclusion | By definition, inclusive insurance involves bringing insurance to groups that may be excluded by traditional insurance. This involves accommodating the specific needs of the market segments to help close the protection gap and reduce inequalities. Examples of this include microinsurance and female-oriented health insurance products. |
SDG 5 (GENDER EQUALITY) SDG 10 (REDUCED INEQUALITIES) |
| Promoting entrepreneurial behaviour | SMEs play a key role in growth in emerging markets. Insurance risk transfer is important for building business resilience and allowing for a more efficient allocation of resources towards core business. |
SDG 8 (DECENT WORK AND ECONOMIC GROWTH) |
| Build resilience to climate impacts | The underprivileged, particularly in less developed economies, are disproportionally affected by climate change. Inclusive insurance mitigates the impacts of extreme weather events on their livelihoods, especially where there is a high dependency on agriculture. |
SDG 13 (CLIMATE ACTION) |
| Partnerships with governments, NGOs, cooperatives, insurtech | Inclusive insurance often requires multi-stakeholder engagement between re/insurance companies, governments, international development agencies, NGOs, cooperatives, the community, and even technology to deliver insurance solutions. |
SDG 17 (PARTNERSHIPS FOR THE GOALS) |
Summary: Inclusive insurance in practice
Inclusive insurance is inextricably tied to growth and development of emerging markets. While the concept is gaining traction worldwide, major challenges remain on both the demand and supply side. On the demand side, more awareness of the benefits of insurance as a policy tool and the promotion of deeper public-private collaborations are needed to overcome some of the structural challenges in insuring vulnerable population segments.
On the supply side, the insurance industry must collectively endeavour to be more innovative and agile in designing suitable products, adapting to the needs of the different consumer segments (in terms of different risk exposures, consumption and income patterns), exploring new and efficient distribution channels and promoting insurance and financial education.
Reinsurance is part of the puzzle to solve the problem of insufficient financial inclusiveness. A long-term stakeholder approach, where partners share the same long-term vision and are strongly committed to inclusion, is the key to success. Anecdotal evidence also points to the need for supportive regulation and policies that enable different business models and incentivise innovation.
There have been significant developments in technology and digitisation that could overhaul the current market dynamic through advances in accessibility and awareness of inclusive insurance solutions. Technology can also support affordability of products by fast-tracking the product design process – such as by facilitating market research, reducing distribution costs and enabling easy servicing of products. For the re/insurance industry, collaboration with technology promises to be a significant opportunity towards its ultimate mission of closing protection gaps.
[1] Social impact bonds or ‘pay-for-success’ financing is a contract where investors finance effective social services through a performance-based contract with the public sector. This transfers financial risk from the social sector to the private sector.
[2] Can health-insurance help prevent child labour? An impact evaluation from Pakistan, Andreas Landmann, Markus Frolich, Journal of Health Economics, Volume 39, January 2015, Pages 51-59
[3] N. Jensen, C. Barrett, A. Mude, “Cash Transfers and Index Insurance: A Comparative Impact Analysis from Northern Kenya”, Journal of Development Economics, online, 2017
[4] S. Janzen, M. Carter, M. Ikegami, Valuing Asset Insurance in the Presence of Poverty Trap, Working Paper, University of California, 2012.
[5] World Bank and WHO 2019
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