A new report by The Geneva Association and Insurance Development Forum (IDF) explores how regulation as well as broader government policies can facilitate or curtail the development of robust, responsive insurance markets that help close critical protection gaps. It also provides recommendations on what steps governments can take to provide a legal, regulatory and policy environment that will attract insurance resources and capabilities to emerging insurance markets. The Geneva Association’s Messrs Dennis Noordhoek and Kai-Uwe Schanz and IDF’s Mr Bill Marcoux provide some insights.
Over the past few decades, the economies of many emerging markets have grown rapidly, lifting millions out of poverty and creating a growing middle class. Insurance is critical to economic development as it enables economic activity by protecting lives, livelihoods and assets against insurable risks.
Insurance also acts as a shock absorber of adverse events, provides critical risk mitigation services and helps attract private capital to economies. With climate-change-related events, COVID-19 and other catastrophes increasing societal vulnerability, it is of great concern that insurance penetration in emerging markets remains low.
Core elements of effective regulation and supervision in emerging markets
There is a general consensus that the primary duty of insurance regulators is to protect the interests of policyholders. The execution of this role has two different dimensions: First, the prudential aspects where regulators focus on the risk carrier’s ability to pay individual claims, even very large losses, as they come due. The second is the conduct dimension, which addresses the performance of (re)insurers in carrying out their duties to customers and other stakeholders. A third possibility, revolves around promote the role of insurance in enhancing financial inclusion, whether through public, private or hybrid mechanisms.
Against this backdrop and based on an analysis of the legal, regulatory and broader government policy environments in 14 markets, the report finds that a set of common main factors influence the development of insurance market development across these markets. They include whether there is sufficient political prioritisation of insurance, the level of financial (including insurance) literacy, the effectiveness and efficiency of insurance regulation and supervision, risk awareness and a lack of trust among customers. A ‘hexagon’ of legal, regulatory and supervisory elements in emerging insurance markets (see Figure 2) provides a generic taxonomy of regulatory and supervisory practices and a framework for analysing insurance market development in emerging countries.
Financial literacy and risk awareness
As shown in numerous studies, a barrier to insurance demand in most emerging markets is the low level of financial literacy. This translates into a lack of understanding and formal tools to manage risk and vulnerability. Experience from several countries show that successful financial literacy programmes focus on getting people to understand their exposure to loss and its implications as well as their ability to take steps to avoid or mitigate the impact of loss. For a lasting effect, such programmes need to be part of the core curriculum in childhood education.
Solvency regulation
Regulators, particularly those in emerging markets, have the difficult task of balancing policyholder protection and financial stability mandates with market development. Contrary to what research suggests, some regulators perceive the market development mandate to come at the expense of solvency and market conduct goals. Often regulators have the added challenges of insufficient financial and human resources and support at the political (e.g., ministerial) level, mainly due to a lack of prioritisation of insurance by policymakers and their limited appreciation of insurers’ contribution to resilient societies.
Interviews with experts and executives conducted for the report suggest that in nearly all markets, the regulatory authorities are working on modernising regulatory regimes, for example by implementing risk-based capital (RBC) regimes and liberalising rate and form control regulations. However, mainly due to political headwinds, many of these core market development initiatives have been delayed.
Considering these factors and a study of development initiatives in a few countries, the report identifies concrete steps policymakers, insurance regulators and insurers could take to narrow protection gaps:
- Developing closer collaboration between governments, regulators, and the insurance industry to enhance the understanding of the role of insurance to societies and the importance of good insurance regulation
- Removing overly restrictive market access barriers to insurers and reinsurers to derive the benefits of competition, innovation and global risk diversification
- Making financial literacy a policy priority
- Including and supporting insurance market development as part of the mandate for insurance regulators, in addition to the policyholder protection and financial stability mandates
- Calibrating product regulation and other regulatory rules to foster innovation
Furthermore, for insurance markets to thrive, several conditions need to be met, including:
Supply side:
- Access to markets
- Availability of capital and risk appetite
- Underwriting expertise
- Efficient and market-appropriate distribution channels
Demand side:
- Affordability
- Products that meet consumer needs
- Clarity regarding product benefits
- Financial (including insurance) literacy of stakeholders
- Establishing trust
Policy and regulatory environment:
- Conducive insurance regulatory frameworks and public policies
- Rule of law
- An appreciation and understanding of the contribution of insurance to society, at a political level
These factors not only enhance economic stability and financial soundness, but also promote competition, innovation and responsiveness in the insurance sector, to ultimately make societies more resilient.
An important step in building political support is to ensure policymakers appreciate the essential role of insurance in promoting economic and societal prosperity and devote sufficient attention and resources to insurance regulation and supervision as well as financial education. In addition, in many developing countries the public-finance system does not consider insurance issues and dynamics. This is often true regarding the efforts of the development finance community, which can have a significant impact on government priorities and investments. Both the insurance industry and regulatory community must work together to bring insurance to the top of the policy agenda. Quantifying the contributions of insurance to prosperity and resilience will be vital to the dialogue with policymakers and can lead to the creation of public-private partnerships, which are critical to addressing protection gaps. A
Mr Dennis Noordhoek is director public policy and regulation with The Geneva Association, Mr Bill Marcoux is a member of the operating committee and chair of law, regulation and resilience policies working group with the Insurance Development Forum and Mr Kai-Uwe Schanz is deputy managing director and head of research and foresight with The Geneva Association.