Arup Chatterjee, the insurance expert at the ADB, speaks about the roots of insurance in Asia, the evolution of the industry and the changes COVID-19 will bring
In this first part of the interview, Arup Chatterjee, Principal Financial Sector Specialist, Sustainable Development and Climate Change Department at the Asian Development Bank speaks with Shivaji Bagchi and Siddharth Poddar of Unravel about the evolution of insurance in Asia over the years, the reason for its low uptake in Asia and the impact of COVID-19 on the insurance industry.
Unravel: Why is insurance not as popular in Asia as in other parts of the world?
Arup Chatterjee: Insurance in the commercial sense is not yet very popular in Asia, but I would say that everybody in Asia is insured but not completely protected. When we talk of insurance, we tend to focus on commercial insurance – but most people, to some extent, are self-insured. Even when a homemaker keeps a handful of rice stored away for a rainy day, that is insurance – but we don’t recognise it as such.
Then, of course, there are family networks and community networks – where many contribute for the welfare of a few. If there is a loss of income due to an accident or a catastrophic illness, or death, then the family or community steps in. So, in a sense, protection mechanisms already exist. These are known as informal insurance in the insurance lexicon. In terms of insurance evolution, these informal forms first evolved into what is known as mutual or cooperative forms of insurance. And then, over time, they further evolved into joint-stock companies. Some of the large multinational insurers that we see today, once started as mutuals. With the advent of fintech we are now seeing digital insurers. That is pretty much how insurance has evolved in the world.
In Asia, the trajectory is somewhat similar. We are at the stage where we are slowly moving into the commercial level of insurance from a community level. The reason for this is Asia by large has been poor. Of course, Asians have had the advantage of the joint family system, one of the key characteristics of the distinctive Asiatic mode of production conceptualised by Karl Marx. The joint family system served as the backstop for a family or an extended family. Since Asia was poor, both people and businesses generally did not have large assets or incomes. So, with the joint family system disintegrating and the middle class growing and becoming increasingly prosperous, it started looking for alternative avenues to save, invest, and protect assets and incomes. That is how we are seeing insurance evolving in Asia.
Unravel: You talk about the growing middle class in the region. What about other strata of society?
Mr Chatterjee: It is primarily the middle-class who are directly buying insurance in Asia. If you look at the lower middle class or low-income groups buying insurance – that is yet to take off. There are particular challenges there, and they are mainly economic.
Besides, people also don’t buy insurance because they are in denial of known risks – the “it won’t happen to me” self-insurance plan, although it may well happen to others! The risk is ignored. I see it all the time.
Many people buying insurance don’t have the experience or the understanding of the potential financial risks. This is true of the middle class too. Very often, even if they can afford health insurance, they choose not to buy it. They don’t realise that a major injury or illness can cost far more than they think. Their choice to not buy at least a health insurance plan speaks about the lack of understanding of potential risks. Similarly, many buy accident insurance but not life insurance, whereas there is four times more likelihood of dying due to illness than by accident.
When we talk about economics – of course, insurance is not cheap. For example, if your insurance premium is $1, and if you are regularly contributing for seven to ten years, you might get back about 20 to 70 cents in the long term. That return will depend on the nature of the contract and the statistical characteristics of the loss. But the remaining 30 cents to 80 cents would be covering distribution costs, administrative costs, capital costs, profits and things like that. So, as a result, people don’t see the value. Even with a back of the envelope calculation, they find out that they are sometimes paying 2x or 3x of the risk premium for insurance and don’t see the value. Moreover, there is a lack of usage with the real sector not growing in tandem; for example, you may have a health insurance policy but no good private hospital nearby for treatment.
Many people buying insurance don't have the experience or the understanding of the potential financial risks. This is true of the middle class too. Very often, even if they can afford health insurance, they choose not to buy it.
Insurance is a high-touch industry today and reaching the last mile in terms of distribution costs is very expensive. If an agent goes to sell insurance and a customer doesn’t buy it immediately, the process becomes very expensive, especially if it involves long travel for a small-ticket policy. This makes insurance costly.
Finally, there is a lack of trust. There are claims issues, mis-selling by agents, product terms not adequately explained, and so on.
In a nutshell, I would say people don’t buy insurance, one is for cultural reasons. Apart from being in denial, there’s also a religious angle – for instance, many Hindus and Buddhists believe that whatever has happened is predestined. It is their fate and lies etched in the lines of their palms, in the furrows of their brows. Any news of a terrible disaster rarely fails to espouse reference to ‘karma’. Similarly, Muslims consider risk transfer to be forbidden according to Sharia, and therefore buy Takaful or Islamic insurance based on risk-sharing. Second is the issue of cost, and third is the issue of trust.
Unravel: Arup, since you mention trust. Have we seen trust in insurance decrease?
Mr Chatterjee: Again, let me go back to the evolution of insurance. There are several issues. When I talked of community-based insurance schemes, they were suitable for taking care of what is known as idiosyncratic risks. That means if there are 100 people in the village and if 10 falls ill, then with the contribution of that 100 they can take care of the expenses of those 10. That worked. Maybe, if the fund had some reserves, they could manage or stretch it up to 15. If it went beyond 15 ill people, they would have to reduce the benefits each of these 15 would get. If the number were substantially more, these types of schemes or funds would go bust.
The seeds of a regulated insurance industry germinated with the need to instil trust by putting safeguards in place for proper management of insurance funds to protect the policyholders. The industry, meanwhile, evolved in terms of introducing covers for protecting against covariate or catastrophic shocks and liabilities. However, insurance company failures continued to happen due to lack of corporate governance and overall control, failure of asset-liability management, lack of professional staff and systems to evaluate risks, miss-selling and fraud. With every failure, the government intervened and devised a law or regulation. Over a period of time, in this tryst with trust, there were layers of regulation and laws that got built-in and smaller schemes and insurance companies got left-out as they were seen as contributors to the problem due to their lack of access to capital and absence of professional management.
Essentially, insurance was developed by the poor to manage risk among themselves. However, the insurance industry forgot the very people who built that system or contributed to developing it. In fact, insurance evolved such that it excluded the poor.
Essentially, insurance was developed by the poor to manage risk among themselves. It was not designed by the rich—whether you take examples of community schemes or the Great London Fire—it was the community that developed these schemes with the policyholder owning a share of the risk. However, with multiple failures and losses, regulations sided with the large insurance players with deep pockets who had neither social purpose nor responsibility. The insurance industry forgot the very people who built that system or contributed to developing it. In fact, insurance evolved such that it excluded the poor.
And the irony is that despite all of this, insurance failures continue to happen. With the increasing sophistication of the industry and the growing prominence of insurance companies – even today, you still find insurance companies failing because of their inability to value risk, estimate liabilities, do proper accounting and manage operations professionally. Many Asian countries lack professionals who can estimate and evaluate risks and losses. These problems continue to persist and are impediments to the development of sound insurance markets and building public trust.
Unravel: How do you see the insurance market evolving in Asia, especially in light of COVID-19?
Mr Chatterjee: I’m taking a very contrarian view. Of course, many Asian countries have a legacy of belonging to socialist economic systems. They are now transforming into market economies – so sometimes they take two steps forward and one step back, as it happens with any economic and social experiment.
In the socialist-oriented systems, governments initially took the responsibility of managing risk – whether by paying retirement pensions to their old employees who were usually employed by them or the state or state-owned enterprises, taking care of health expenditure, or providing some degree of subsidies for education and housing. Separately, they also offered schemes for death while in service, loss of employment, workmen compensation and the like.
There were also social assistance plans and schemes for the poor and vulnerable sections of society and small businesses. They were funded mostly through the budget, with minimal contribution from citizens. If you were a government employee, there would be a direct nominal deduction from your salary for pensions, for health and other such benefits.
Over time, with an increasing population and other economic factors, governments have realised that they don’t have enough revenue to support such schemes. And therefore, they are slowly shifting this responsibility of managing life-cycle risks from the state to the individual or businesses. This is fine, because there has to be some risk-sharing, but in most cases many benefits have been drastically reduced or discontinued.
Unfortunately, while this change is happening, we have not seen this very rationale of citizens being made more responsible for their financial future by being appropriately communicated to and explained. Nowhere has any government said the extent to which it will take care of its citizens and beyond what point they need to take care of themselves. And the problem is more pronounced in informal societal systems. The Asia-Pacific region comprises 65% of the worlds informally employed, and most of them lack social protection and insurance. These people are not saving for their retirement or insuring for taking care of life’s exigencies – many are living hand-to-mouth. The joint-family system has broken down, and governments do not promise them any income assistance to take care of them when they are old. And there is a queuing problem in public hospitals too. So, you will have social problems of destitution among the old, particularly the women, and other economic problems such as exorbitant healthcare costs with limited means to meet them.
After COVID-19, there is going to be higher demand for health insurance in our region. I also see that post-COVID there will be an increase in the demand for loss-of-income type of insurance from both small and large businesses, due to business interruption.
The younger generation, particularly in the urban areas, are more aware of these risks. Just 20 years back, health insurance was only a part of an employment package offered. But today, youngsters negotiate how much health insurance coverage they will get, who in the family will be included and what kinds of illnesses will be covered, as a part of their pay package. However, there is lack of seriousness.
After COVID-19, there is going to be higher demand for health insurance in our region. Given the increasing longevity, there will also be a greater demand for retirement products and pension types of products. These types of products will slowly take over. Natural hazards like cyclones and floods and man-made disasters such as industrial accidents have also accompanied the pandemic. So, it is expected that there will be an increased uptake of disaster and liability insurance products over time.
I also see that post-COVID there will be an increase in the demand for loss-of-income type of insurance from both small and large businesses, due to business interruption. Earlier, businesses bought insurance for damage to physical assets, where the physical damage to an income-earning asset was linked to the loss of income. With this pandemic, we have seen no damage to any assets, but still a loss of income because of the great lockdown, supply chain disruption and labour migration.
The views expressed in the interview are personal and not those of the Asian Development Bank.
The second 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.