2022 Outlook: Asia’s insurance landscape

We continue our short conversations with some of our regular contributors about their outlook for 2022.

Here, we speak with Arup Chatterjee, Principal Financial Sector Specialist, Sustainable Development and Climate Change Department at Asian Development Bank, about key insurance-related themes he expects to play out in 2022, some changes he hopes to see in the industry, and the impact of COVID-19 on the insurance industry and social security systems in the region.

Unravel: What are key insurance-related themes you expect to see play out in developing Asia in 2022?

Arup Chatterjee: Three key insurance sector themes are particularly relevant and will influence developing Asia’s future – protection gaps, climate change and sustainability, and digitalisation. 

The pandemic has brought the protection gaps to the fore – such as gaps in property, mortality, health, pensions, and cyber risk insurance coverage. It has highlighted the importance of insurance and forced governments and the public to rethink their protection needs. Closing these gaps is vital for socio-economic prosperity and reducing inequality. 

Climate change remains at the heart of the insurance sector as it impacts both the liability and the asset side of insurers’ balance sheets. As a result, insurers will have a greater need to study and calibrate climate risks to understand them better and protect their balance sheets. It will also enable them to provide customers with bespoke insurance solutions targeted at climate change adaptation, for example providing a discount on motor insurance of electric vehicles or incentivising adoption of renewable energy, such as solar and wind power.

The insurance industry will also gradually play a leading role in supporting a green, inclusive and resilient recovery by absorbing disaster losses and promoting sustainable infrastructure investments by aligning their asset portfolios with environmental, social and governance (ESG) goals. 

The COVID-19 pandemic has increased customers’ receptiveness to interact with financial services providers digitally. The adoption of digital technologies will continue to accelerate and play an essential role in reaching the last mile. The rise of insurtech—particularly healthcare and agriculture risk management—will usher in new opportunities to design tailor-made products by transforming the quality of marketing, customer service and risk control.

Unravel: What are some changes you hope to see?

Mr Chatterjee: Regulatory changes will likely focus on climate-related stress tests to feed into prudential capital requirements. Besides testing capital adequacy, they will take a closer look at whether there is a requirement to hold more capital for covering potential losses from climate-change risks. Moreover, with climate considerations gradually becoming a high priority, another long-lasting regulatory shift will pivot towards sustainability themes. By integrating ESG factors throughout a portfolio, insurers will seek to achieve their risk-adjusted return and income objectives sustainably.

One can expect strong demand for protection-type products, driven by higher risk awareness, a recovery in group business and increased digital interaction. Additionally, the development of hybrid products combining parametric and indemnity insurance in the same policy will protect farmers against weather risk and see wider adoption.

However, new technologies are prone to data breaches, data leaks and cyber security issues. Roadblocks can include:

• Regulatory constraints
• Lack of top management buy-in
• Lack of well-thought-out strategy and road maps
• Lack of implementation plans

Unravel: Do you think there is a better appreciation of the need for strong social security systems in developing Asia in the wake of the impacts of the pandemic?

Mr Chatterjee: Social insurance schemes such as unemployment and health insurance or sovereign insurance schemes for natural catastrophes are absent or underdeveloped. In the absence of these automatic stabilisers to offset fluctuations in economic activity after an economic shock, many developing countries cannot borrow or can do so only at very high-interest rates. Moreover, since they cannot run deficits, they resort to procyclical fiscal policy by imposing cuts in public spending, potentially damaging economic welfare.

The widespread impacts of the COVID-19 crisis demonstrates the need to reform current social security systems. Asian countries need to consider innovative approaches to social protection to protect the most vulnerable effectively. They can look at alternative forms of support to formal economy workers in developed countries and adapt them. Some examples are setting up simple, temporary universal lifecycle social security schemes, and offering a universal basic income, at least temporarily. Other options that one can consider are identifying workers who lose their jobs using existing social insurance or income tax systems and provide them with a proportion of their salary, as long as their employer retains them on the payroll.

The pandemic presents an opportunity to build more effective social security schemes. It can be scaled back once the crisis finishes. If another crisis hits, they can expand them once again. Contrary to the common belief that social security for all members of society is a cost to governments, it must be seen as an essential component of a long-term, sustainable development strategy.

Unravel: Do you think there is a greater understanding of risk in society as we enter 2022? Why or why not?

Mr Chatterjee: The understanding of risk by Asian society is influenced by the social processes that come into play associated with the loss of stable income and high unemployment. These take the form of family structures capable of caring for family members in need as well as the governments’ economic competence.

Post-pandemic job uncertainty and income and labour market polarisation have become critical societal issues. Family structures have been weakened, with a corresponding rise in divorce and domestic violence. Moreover, trust in government to come up with long term support measures is waning due to the prevailing uncertainty about the quantum of assistance and timely response. Against this backdrop, one needs to re-examine the policies addressing work-related risks and socio-economic security, changes related to the structure and stability of families, and issues concerning governance in times of weakened institutional capacity and declining trust.