The insurance expert from the ADB speaks about the role of government, tech and COVID-19 in the context of the changing insurance landscape
In the first part of this interview, Arup Chatterjee, Principal Financial Sector Specialist, Sustainable Development and Climate Change Department at the Asian Development Bank, spoke to Unravel about the evolution of insurance in Asia, the reasons for low uptake of insurance in Asia and changing perceptions of insurance owing to COVID-19.
In this part of the conversation, Mr Chatterjee speaks to Shivaji Bagchi and Siddharth Poddar about the role of government in the insurance sector, differences in insurance between developed and emerging markets, the role of tech, the insurance landscape as a result of the pandemic and the workings of pandemic pools.
Unravel: Can you tell us about the role of government in the insurance industry?
Arup Chatterjee: When I started working in the insurance industry more than 30 years back, we were taught that the sovereign is not insured. You should not be insuring governments assets because governments can take care of themselves. However, now in many emerging markets and also larger markets, sovereign insurance is becoming increasingly popular for financing large scale catastrophes. Since sovereign insurance is usually more expensive than post-disaster financing which should be financed ex-post borrowing and tax increases, it should aim to finance the immediate short-term liquidity needs and not any long-term resource gap. That is where the government can create additional fiscal space by transferring some of its risks to the insurance sector and international capital markets. We are increasingly seeing a trend where the state is bearing the premium burden—to a significant extent—to insure its citizens for health-related emergencies, or farmers for crop and livestock losses, or small businesses and households against natural hazards.
Take India, for example. Initially, there was the Rashtriya Swasthya Bima Yojana and now the Ayushman Bharat Pradhan Mantri Jan Arogya Yojana health insurance scheme. Both have elements whereby the government paid the premium to insurance companies for managing the risk and to administer the scheme. Similar is the case with the government sponsored crop insurance scheme, Pradhan Mantri Fasal Bima Yojana – where the government shoulders more than 90% of the premium. Of course, the response on the success of the scheme has been mixed. There are criticisms that insurance companies are making an undue profit, which is not entirely correct. This erroneous perception can be removed through better insurance awareness among farmers and further streamlining the scheme. But India is not the only outlier. Government run schemes in Nepal, the Philippines, Pakistan and the Peoples Republic of China are all looking at further reforms.
Unravel: And how does the insurance industry compare between developed and emerging markets. How are they different?
Mr Chatterjee: First, there is more insurance awareness in developed markets, as compared to emerging markets. Second, they don’t have legacy issues in dealing with gradually eroding joint family systems, which means they depend on insurance institutions to take care of themselves, rather than family and friends. It is quite a different structure that way in terms of how risk is managed, particularly at the household and community levels.
And then, of course, the state does play a role, but there are arrangements where citizens have to contribute in the form of high taxes for the state to take care of their welfare. This contribution starts happening at a very early stage. Because of their income levels, citizens in developed nations can contribute to a high premium, which, unfortunately, in emerging markets, only a very small number can do.
There is more insurance awareness in developed markets, as compared to emerging markets. Also, they don’t have legacy issues in dealing with gradually eroding joint family systems, which means they depend on insurance institutions to take care of themselves, rather than family and friends.
If you look across much of Europe, the state still takes care of a lot of the social security aspects, and they can do this because of the higher tax rates. A significant burden of the entire health expenditure is taken care of by the state. And the same applies to pensions. So, the state provides the basic minimum support to its citizens for a healthy living. Just in terms of absolute numbers, wages in these countries are also far higher than what the average middle class earns in most Asian countries. Since insurance companies charge the same risk premium for similar risks, insurance is relatively more expensive in Asian countries when compared to the disposable income of the people.
Unravel: Earlier in our conversation, you spoke about reaching the last mile in insurance. Is technology playing a role in making insurance services reach the last mile?
Mr Chatterjee: Insurance will follow banking in this regard. If people start using mobile banking—or other fintech channels—insurtech will take off too. Mobile payments can catalyse the distribution of insurance by facilitating the payment gateway. I was talking about insurance being a high touch business. Of course, you can sell some insurance products using technology, but that would be more of the mass-based products such as accident insurance or health insurance. Additionally, you can use technology to pay for renewals automatically and making claims besides designing more customised products for a wide range of consumer segments.
But I would say that there continues to be a lot of advice-based selling for big ticket insurance. For instance, which is the best pension plan you should buy, or which are those buckets of investment you need to invest in? So, when you pay your first premium, I think you might still need a face-to-face interaction for certain products. Or say if I’m buying life insurance cover when I’m 40 years old, I still need a health check-up to be done. I don’t think those types of things can be eliminated when you buy an insurance today.
Another problem is multiple small ticket microinsurance policies being sold to middle-class populations. Data may show that millions have some form of coverage. However, there is an absence of accurate information on whether they are adequately covered or are still under-insured to a great extent. So, if my income is $10,000 and I buy two life insurance policies with a cumulative coverage of $1,000, I’m still underinsured. But this person has more than one insurance policy, so how do you measure the protection gap that way? We have to be careful about what types of protection products are being sold and how they are being accessed and used – to get a better idea about the protection gap. There has to be an enhanced awareness about the extent of reasonable financial protection that households and businesses might require under different life-cycle scenarios of households and small businesses.
Unravel: Do you think COVID-19 has adversely impacted the insurance industry?
Mr Chatterjee: The market valuations of insurers have suffered in line with broader markets as a result of COVID-19. It is my humble opinion that the direct impact will be limited due to low penetration of insurance. In my view, insurance companies have escaped this time. Even if they had sold health insurance, their balance sheets have really not been adversely impacted—especially in the developing world—because the numbers who have been affected and are also insured is quite low. Individual governments have allowed some pre-testing to be covered, which was initially not the case. The number of health and life insurance claims to be lodged is likely to increase. However, I think that is still not large enough to dent the balance sheets of insurance companies.
The direct impact of COVID-19 on insurance companies will be limited due to low penetration of insurance. In my view, insurance companies have escaped this time because the numbers who have been affected and are also insured is quite low. Where insurance companies might have problems is in terms of supply chain disruptions, because there will be some claims that will get triggered due to the pandemic.
Where insurance companies might have problems is in terms of supply chain disruptions – for example, those who sold trade credit insurance type products, because there will be some claims that will get triggered due to the pandemic. Also, individuals and businesses hit by financial difficulties will lose personal and business income. This is likely to translate into policy cancellations and lower renewals.
Unravel: Do you foresee an uptake of insurance because of the pandemic?
Mr Chatterjee: One would expect the uptake of insurance to rise as it happens after any major disaster and is likely to remain statistically significant for about a decade, at least, before public memory fades. Insurance companies have already started devising new products for pandemics, which were earlier not covered. They are also now creating special COVID-19 products. Special COVID-19 health insurance products have been launched in many countries recently. Additionally, we are seeing interest in developing business interruption insurance where the physical hazard is excluded.
Basically, there is a push to either reconfigure existing products or tailor-make new products that are more customer-friendly, technology enabled and light touch. Some other types of products will also have to be imagined. For instance, say you have taken an education loan, and suddenly you are unable to attend college – there has to be some compensation.
I don’t see this pandemic as a one-off thing; there will be more frequent catastrophes like this in the future. Insurance companies are in the business of managing risks, so they need to be agile and ready with risk models that will help them design products that offer solutions in keeping with the times and cover emerging risks. And that’s not sufficient; timely compensation is also important and will be a key differentiator.
Unravel: There’s also much discussion now about pandemic risk pools across the world. Can you throw some light around this?
Mr Chatterjee: Risk pooling is a risk-sharing arrangement between insurance companies that are not prepared to underwrite high-risk exposure or liability. A pool can help in creating underwriting capacity and enable retention of a portion of the risk in a diversified portfolio through joint reserves and capital, before transferring the excess risk to the reinsurance and capital markets. The pool also ensures that there is no adverse selection; otherwise, only people and businesses at risk will buy insurance. The benefit of risk diversification is difficult to achieve in a pandemic. You cannot spread your risk across geographies to reduce your portfolio risk as everybody is affected at the same time.
In the case of a pandemic pool, we have to look at three elements. One is the health element. Are you looking at the pool to cover healthcare or health insurance? For healthcare, it has to be structured in such a manner that it can take care of the additional burden of healthcare costs that may arise for the government by providing immediate liquidity. It’s akin to sovereign disaster insurance, where governments create a pool – if it’s a big country, the provinces or states in that country can also contribute. There is a co-sharing of risk. When a pandemic is declared, there is an immediate transmission of liquidity to buy personal protection equipment, ventilators, medicines, or for meeting any other urgent expenditure. On the other hand, access to a pandemic insurance pool by major health insurance schemes and insurers can limit their tail risk, thereby enabling them to continue to offer affordable health coverage for pandemic risks.
The second element relates to business interruption losses. When you look at Europe or North America, the pandemic pools that are currently under discussion in these countries are meant to cover business interruption losses, which have been huge. Typically, most business interruption insurance excludes losses due to pandemics and pays only when there is physical damage. The economic shutdown has hit businesses hard, and many are reeling under huge losses, underscoring the importance of coverage for business interruption to cover against loss of income when there is no physical damage. For example, we’ve recently learned that the Wimbledon championship was covered for business interruption – possibly one of the very few sports events covered.
The third element is what we call ‘post-pandemic’. In many countries in South Asia and Southeast Asia, there will be several banks, non-bank financial institutions, and microfinance institutions whose balance sheets will be strained further. So the government has to pump in money to prop them up. Theoretically, if we think that the balance sheet is clean and has been affected only by a pandemic, these financial institutions could also purchase insurance to protect their portfolio risk.
I don't see this pandemic as a one-off thing; there will be more frequent catastrophes like this in the future. Insurance companies are in the business of managing risks, so they need to be agile and ready with risk models that will help them design products that offer solutions in keeping with the times and cover emerging risks. And that’s not sufficient; timely compensation is also important and will be a key differentiator.
All these types of elements can be discussed and suitable insurance solutions can be introduced. I believe business interruption insurance should not be only for manufacturing businesses but also cover services. Many countries are pondering how this type of mechanism can be put in place by looking beyond physical hazards. At this moment, reinsurers are reluctant to underwrite the risk because they don’t understand the risk properly yet.
Moreover, before taking a hard look, if a risk pool is feasible, we need very robust pandemic and epidemiological modelling in place. This will enable better measurement, mitigation, and management of epidemic risks and optimise preparedness and response strategies – including via insurance. We also need to understand the state of healthcare infrastructure including veterinary public health, as they are not uniform across any country. This can enable risk-based premium pricing and provide comfort to sub-sovereign governments, businesses and households that they are not cross subsidising the losses of some other region that do not have good systems in place. For insurance to be efficient and effective, it is very important to reduce the inherent risk through risk reduction measures; otherwise, the cost of insurance can increase due to higher levels of residual risk.
The views expressed in the interview are personal and not those of the Asian Development Bank.
The first part of this interview can be read here.
Arup Chatterjee is Principal Financial Sector Specialist, Sustainable Development and Climate Change Department, Asian Development Bank. His current work involves financial, governance, risk management, and regulatory reforms across different industries. He has held stints with the Bank for International Settlements in Switzerland, and Insurance Regulatory and Development Authority of India.