NASCAR, Talking Animals, and Closing the Protection Gap
By admin February 22, 2018

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Many Americans will recognize brand jingles, talking geese and gecko mascots, red umbrellas, and NASCAR race-car drivers endorsing insurance brands. These insurance companies provide help to individuals and businesses to manage and mitigate risks. The traditional insurance market operates as a pooling of resources (through premiums) from its policyholders and pays affected policyholders who experience losses during a year. In terms of development, insurance can be a critically important tool for not only reducing poverty, but also for helping those who have emerged from poverty to manage their risk and avoid falling back into poverty. The challenges facing formal insurance markets, governments, and private sector partners are significant. However, the current opportunities to partner and develop new, inclusive, products for customers can address the perennial development protection gap.

Globally, poor households face a larger amount of risks as well as a more diverse variety of risks. Living in poverty typically means not only living with a low income, but also an irregular one, and having often ill-adapted tools to deal with these challenges. This gap in protection, can become imbedded in each generation and create a cycle of poverty within a family.  According to the Inclusive Insurance Report from the Institute of International Finance (IIF) and Accion’s Center for Financial Inclusion, traditional insurance products designed for poor households could theoretically provide critical protection against high-impact events that can push a household deeper into poverty or send it back into poverty after it manages to escape. Therefore, inclusive insurance products can protect and lift up impoverish households that would normally be devastated by drought or the death of a main income earner in the household.

Despite what is perceived as a large need, “take-up rates” (i.e. buyers of insurance policies) of formal insurance products remain low overall, and what drives insurance demand in emerging markets is not well known, according to the Consultative Group to Assist the Poor (CGAP). For example, in Africa, only 2.6 percent of the population living on less than $2 per day uses insurance.

In addition to the low percentage of penetration by the traditional insurance industry, the targeted audience has traditionally been the top of the economic pyramid. The IIF and Accion report noted that the unserved populations (i.e. “new segments”) have a very real demand for services and that in the absence of formal safety nets, these more vulnerable populations have informal risk management strategies, based on the multiplication of revenue sources, and precautionary savings or loans from their families and communities. These strategies have limitations, according to IIF, stating that informal risk management is ten times less efficient than formal protection mechanisms, and one single emergency can force families to sell productive assets, move back to their village, remove children from school to help the household earn extra income or go back into poverty.

Furthermore, the traditional insurance market is experiencing stunted growth based on the adaptation of traditional insurance business models to new markets. The mindset surrounding product development needs to evolve from downsizing traditional insurance products to understanding customer realities and building appropriate, inclusive, products. Insurance companies need to transition from being a payer of claims to a customer-empowering partner. For example, instead of paying for health insurance that pays for doctor’s visits, when the nearest doctor is 120 km away, an insurance company can provide a call-a-doctor health network so that a simple phone call can provide me with insight into whether or not making the 120 km journey is necessary.

Additionally, as noted by CGAP, “regulation and supervision of insurance markets are key tools to improve access to finance for poor people.” Government regulators need to understand how these insurance tools can create and overcome barriers to access for market development and close the protection gap between its citizens. Multiple players, from government, academia, insurance providers, non-governmental organizations, among others., have been working collectively to broaden access to formal insurance products while at the same time ensuring an appropriate level of policyholder protection.

Compared to five or ten years ago, insurance has made incredible strides in emerging markets. To elevate the success of the insurance business, according to IIF and Accion, the outcome of insurance products in emerging markets must serve two purposes: financial profitability and social impact. The insurance industry needs to build public-private partnerships to educate unserved customer segments about the benefits and risks of insurance products, and to kick-start the market.

Additionally, governments are well-positioned to support the introduction of new inclusive insurance products to unserved, specifically rural areas who are vulnerable to climate change. The Alliance for Financial Inclusion has identified that diversification of crops and insuring their risk of success is an opportunity for governments and insurance providers to encourage risk amongst its policyholders to buffer against the effects of natural disasters.

It is a common saying amongst insurance providers that insurance is not bought, it’s sold. It is evident in the U.S. that traditional insurance providers are able to sell their products through creative endorsements by talking animal mascots or NASCAR drivers. However, this global dynamic is detrimental to the way providers and customers view insurance as a benefit and has substantially limited its reach to vulnerable populations. To sell insurance, companies label their product or service as a commodity that can be exchanged for a good at a later date, instead of viewing it as an investment or buy-in to a sustainable network that assists to mitigate their risks.

In order to build a new, more inclusive insurance market that works for the vulnerable populations in emerging markets, the traditional insurance mindset needs to change and evolve to develop more inclusive products. There are many players that need to come together to realize the promise that inclusive insurance can provide in closing the protection gap in developing countries. We cannot insure our way out of all the risks associated with intergenerational poverty, yet governments and insurers are recognizing the risks and working creatively with a range of partners to mitigate them. Highlighting both the commercial opportunity presented by inclusive insurance as well as the positive social impact it brings.

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