Bridging the protection gap in Eastern Europe

For some families living in the former industrial regions of Eastern European countries, the social welfare payments offered by the Government are the most expected moment, each and every month. They are most helpful as a survival tool but, at the same time, combined with insufficient or even sometimes inexistent state-driven programs for tackling these issues, are considered by experts as a factor against actual change in both mentalities and lives.

Beside the subsistence funds coming from welfare, the same people theoretically benefit from public health insurance schemes and, at least in one country - even from a mandatory household insurance. In practice however, things are not always what they seem to be. There is however, in most Eastern European countries, an enormous protection gap, experts tend to agree, between the bottom layer of Government assistance and the upper one consisting of traditional insurance - unaffordable in these cases.

So we need to embark on a journey of discovery before even pronouncing the term "inclusive insurance" - as only by understanding the state of the regional insurance markets and the societal specificities one can find the right approach for bridging the protection gap. And inclusive insurance can be a real solution in this regard, as it was revealed during the Micro insurance & Inclusive Insurance: Opportunities and Challenges for Central and Eastern Europe and the Transcaucasian Region Conference (Ljubljana, Slovenia; 17 May 2017;

Looking at the larger CEE region: to put it mildly, there is plenty of room for development. The average insurance penetration in the entire region is about 2.50%, according to the latest data presented in the XPRIMM Insurance Report (, quite low in comparison with the EU average of 7,4% (Insurance Europe, 2015). Not to mention that we witness a constant downward trend in the last 5 years, meaning that insurance growth rate is lower, in average, than the economic growth in the region.

The relevant markets in the region are the usual suspects: Poland, with something like 40% of the entire premium production, the Czech Rep, Hungary, Romania and Slovenia. Slovenia also has the best performance in penetration terms (5.11%)

At the same time, the average insurance density in the CEE is 258 EUR/capita which is concerning if one look at the EU average, currently above 2.000 EUR (IE, 2015). But Slovenia stands out once more, with an insurance density closer to the European average (985 EUR/capita) - yet, lower than 5 years ago.

Why is the region different?

It is already common knowledge that purchasing power is still low, not allowing for increased spending on insurance products. In example, the average annual wage in the EU is around 18.200 EUR while in 7 of the CEE countries, according to the same XPRIMM Insurance Report, it is below 5.200 EUR/year. Nevertheless, CEE markets produce premiums of 31.3 billion EUR (2016) out of which 37% life, 33% motor, almost 10% property. Another regional specificity is that life insurance has a lower penetration than in more developed economies, not to mention property insurance, especially for NatCat risks. And it is when tragedy strikes, that those in low- and middle-income groups often lose their earning power and face immediate hardship.

Crop insurance has a very low penetration in most markets although is state subsidized - inefficient subsidizing system, high fragmentation of the agricultural land properties, rudimentary exploited for household consumption etc. while health insurance is underdeveloped in most countries as it is perceived as or really unaffordable for large masses of clients and dependent of the public health system reform.

Going back to the region, another factor that makes the region different: financial education is still "work-in-progress" (historical reasons, lack of political reforms etc.) not to mention that trust in the financial services industry is not always where it should be. Many countries have to fill in the gaps of 50 years of not properly accessing the more developed financial markets.

The potential is huge, but...

But local specificities need to be taken into account when building micro insurance or inclusive insurance operations. Most expertise comes from non-European countries from Africa, Asia of South America. Political, Economic, Social and Technological factors are games-changers. So the questions are: How to design inclusive insurance products?, How to engage with communities at grassroots and distribute? and How to ensure efficiency and good governance in the EU regulatory landscape?

Some major topics for discussion refer to the fact that mutuality and risk awareness are not embedded in the Central and Eastern European culture and that, as opposed to other regions of the world, there is a segment of the population that could potentially afford traditional insurance but, for various reasons, decides not to do so. This means that target markets for inclusive insurance need to be clearly defined, whether we are speaking about people on social welfare which need extra protection but can not afford it (or simply do not want it), disadvantaged communities without IDs and documents thus lacking access to any kind of financial services, young unemployed people that are looking for social guidance or about remote communities living in isolated places or nomadic/excluded minorities. All of these social categories require different approaches. For some of the communities briefly described above, Churches, City halls and Schools are often the gathering place therefore providing contact with the outside world besides mobile networks and television.

Bottom line: the region's target market for inclusive insurance needs to be segmented, most likely with the help of anthropologists and sociology experts, as part of a joint regional effort.

Regulation is key. or the regulators?

As it clearly emerged following the conference which triggered all these important discussions, the Solvency II Directive - which is at the center of Europe's regulatory landscape, is only part of the equation.

The Directive is said to be "agnostic" in relation to micro or inclusive insurance, according to Lieve LOWET, one of Bruxelles' most experienced lobbyists and Solvency II experts. "If micro-insurance is defined as specific insurance offered by an insurer to low-income people, it is covered by Solvency II". However, this Directive does not apply to (re)insurance undertakings excluded due to size (under 5 mil. EUR), nor to fully reinsured mutual nonlife. And it has to follow the proportionality principle both to the requirements for undertakings and to the exercise of supervisory powers. This means, and Lieve LOWET would agree, that it should not be too burdensome for insurers that specialize in providing specific types of insurance or services to specific customer segments, and it should recognize that specializing in this way can be a valuable tool for efficiently and effectively managing risk.

However, there is more to come from the regulatory side of things: the Insurance Distribution Directive, with the subsequent POG-Product Oversight and Governance Guidelines, Conflict of Interest, Suitability and Reporting to Customers provisions - are also elements that need to be considered. In example, POG will regulate in detail the design of insurance products and their distribution - and this is based on Solvency II as well as on the IDD. They have a close link to the system of governance under the Solvency II framework, requiring firms to introduce very explicit processes and measures with regard to the design, development and monitoring of new insurance products. How can all of these fit into the inclusive insurance ecosystem?

And of course, there is the IPID-Insurance Product Information Document that is mandatory to be presented before the conclusion of any for non-life insurance (as it is trying to fix consumer's level of engagement with disclosures, to help compare between products and to make customers focus less on the price and more the coverage). But can an inclusive insurance scheme comply and afford all of this while still offering the same level of consumer protection as classical insurance? This is also paramount!

One solution

One solution comes to mind: Regulatory Sandboxes developed by regulators and supervisors as a complement to the support offered by Governments to such initiatives.

As countries such as Spain or the UK, but not only, are already developing for InsurTech and digitalization. Why not national competent authorities from the region and beyond develop Inclusive Insurance Regulatory Sandboxes?

Because, although there is no definitive answer, something needs to be done: poverty reduction, resilience building and financial inclusion should be our top priorities . Bridging the protection gap is a necessary step for our future development. But are we doing enough for the future?

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