Hannah GRANT: The Access to Insurance Initiative (A2ii) is the implementation partner of the IAIS for financial inclusion: While the IAIS determines the necessary standards and structures for good supervision, it is our role to listen to and work closely with insurance supervisors and provide guidance on how to implement those standards. A2ii's close relationship with insurance supervisors and the IAIS enables us to better identify areas where support is needed and to feed what we learn on the ground back into the IAIS's standard setting process.
The A2ii was created in 2009, as a unique global partnership working with development agencies, insurance supervisors, international insurance bodies and local entities, with the mission to inspire and support insurance supervisors to promote inclusive and responsible insurance. We work closely with our partners, leveraging off their comparative strengths. For example, we have recently signed a partnership agreement with the IAIS and the International Actuarial Association, under which we will work on a joint actuarial capacity building programme for insurance supervisors. Partnering with the IAA will allow us to draw on the collective subject matter expertise from the global actuarial profession for this important initiative.
To provide you with an overview of what areas the A2ii works on: we generate and disseminate knowledge, build capacity, contribute to IAIS standard setting, promote learning & dialogues, support regional & country implementation and get involved in global advocacy processes. One key activity, for example, in terms of capacity building for insurance supervisors is the Inclusive Insurance Training Programme for Insurance Supervisors, that we organise together with the Toronto Center. One of these training events is planned to take place in CEE, at the end of 2018.
XPRIMM: The concepts of microinsurance and inclusive insurance are receiving more and more attention in the region. But there is a need of clarity in what these concepts are concerned. Could you, please, comment on that?
H.G.: Microinsurance, as defined in the 2007 IAIS Issues Paper on the Regulation and Supervision of Microinsurance, is insurance that is accessed by the low-income population, provided by a variety of different entities and run in accordance with generally accepted insurance practices. This means that the risk insured under a microinsurance policy is managed based on insurance principles and funded by premiums. Microinsurance covers a broad variety of products - for example, life insurance, funeral cover, health, invalidity, livestock, crop and asset insurance.
Inclusive insurance is a broader term denoting all insurance products aimed at the excluded or underserved market, rather than just those aimed at the poor or a narrow conception of the low-income market. This definition can be found in the IAIS Conduct of Business in Inclusive Insurance Issues Paper published in 2015.
XPRIMM: Why is it that regulators everywhere seem to need support in what capacity building for inclusive insurance is concerned?
H.G.: Inclusive insurance markets have grown tremendously over the last one or two decades. By definition, inclusive insurance is addressing people or risks that have been formerly excluded or insufficiently covered by traditional insurance markets. This means that all stakeholders in the inclusive insurance sphere are continuously confronted with new market participants, new products and new risks that require new or adapted supervisory solutions. Especially in the wake of InsurTech, inclusive insurance providers and supervisors alike find themselves in a rapidly changing environment, with a lot of innovation taking place. Supervisors need to carefully balance the promotion of market development by supporting innovation, while at the same time considering new consumer protection challenges and also systemic risks that are associated with these innovations, especially when they reach scale. But even before the rise of technological innovation in insurance, distribution in inclusive insurance markets was always characterized by innovative approaches and new stakeholders in the insurance value chain. Take for example the so-called mass insurance products in Latin America using supermarket chains as agents or self-help groups in India that started providing, e.g., health insurance cover to their members.
One of the key instruments that A2ii uses to tackle the challenge of this high pace of change is peer exchange: Supervisors are keen to learn how others have dealt with the challenges they are facing as well and what their experiences have been. This is at the heart of what A2ii is doing. For example, we organise bimonthly supervisor only WebEx calls ("Consultation Calls") to provide supervisors with an opportunity to learn about a specific topic from an expert, hear how other supervisors have dealt with the issue and discuss. In the last call on March 22, we had 82 supervisors from 30 countries exchanging experience on "Innovation hubs and accelerators".
XPRIMM: I had the honour of joining you as speakers at one of the first Inclusive Insurance-dedicated events in the CEE, taking place in Slovenia. One of the major discussion topics revolved around the regulatory challenges that building such schemes in the EU would face. How would such schemes survive Solvency II, the IDD, GDPR etc.?
H.G.: The key principle underlying the implementation of inclusion-friendly regulatory regimes is proportionality. The IAIS guidance is very clear in that the same rules apply to inclusive as to traditional insurance, but in a manner that is proportionate to the nature, scale and complexity of the risk involved. In that sense, there is no contradiction of implementing inclusive insurance schemes under Solvency II. On the contrary, a supervisory regime that focusses on risk actually provides a good basis for a supportive inclusive insurance environment.
That said, I think the real challenge presented by these schemes, to a more inclusive friendly approach, is the prioritisation of resources to ensure compliance with them. As a result, supervisors, as well as the industry, will likely have less resources available to dedicate to the development of a more inclusive regulatory and supervisory environment and serving the underserved.
Data protection is an equally important issue in inclusive insurance as it is for other insurances because of the rapid advances in InsurTech businesses. Therefore, improvements in data protection regimes across the CEE are also important for ensuring inclusive insurance consumers are protected against some of the new risks emerging because of these technologies.
XPRIMM: What types of micro or inclusive insurance products would most likely be suitable for developing economies of the CEE region, in your opinion? How do you see the future in this regard?
H.G.: Insurance penetration rates are very low across the CEE. According to SWISS Re, the total insurance penetration rate (life and non-life) stands at 1.9% in 2016 in CEE, in comparison to 7.5% across the rest of Europe. This is similar to the penetration rates seen in many countries in Africa - 2.8% in 2016 -, therefore the growth of all types of insurance products would be, I think, of huge benefit to the CEE region.
Accident and (credit) life remain the most common microinsurance products available globally and I believe greater availability and uptake of these products would also benefit the CEE region. Credit life, whereby the life insurance product, is required as a form of guarantee for someone to get access to a loan, if well designed can provide valuable protection to low income individuals, whilst at the same time enables greater access to credit essential for entrepreneurial activity.
Of a particular interest for the CEE region are index based insurance products. There are products designed to trigger once a pre-determined threshold is hit, such as a certain rainfall level. The agricultural dependency of the CEE region, together with its catastrophe exposure, mean that these types of products could potentially provide small holder farmers with much needed protection against extreme weather-related events, enabling them to quickly pick themselves up without needing to sell productive assets. Although index based insurance products have been available on the market for a while now, technological innovations are helping to improve the accuracy of the indexes reducing basis risk (risk of someone suffering a loss, but index not been triggered or index being triggered although loss has not been experienced), as well as substantially reduce the distribution and servicing costs of getting the products to the consumers. This is helping to bring down the cost and improve the quality of the products and, thus, increase their attractiveness and appropriateness for low income consumers. That said, more time is still required before it is really known whether basis rate related concerns can really be adequately addressed to make index based products an appropriate solution for low income individuals.
XPRIMM: Why is it so important to promote the concept of "bridging the protection gap" from a societal point of view?
H.G.: There are different aspects to this question: first of all, insurance is an important building block of inclusive financial services that aim at contributing to poverty reduction. When loss strikes, it does not discriminate between the rich and the poor. Past development efforts might be reversed in the event of a shock and the near-poor may fall (back) into poverty.
On a macroeconomic level, a robust and developing insurance industry is widely understood to be an essential ingredient for economic growth and stability in developing economies. By mitigating the adverse effects of potential losses for individuals and businesses, insurance promotes trade, commerce, access to finance, effective risk management and entrepreneurial activities that might otherwise be perceived as too risky. Effective insurance regulation and supervisory systems with policyholder protection mechanisms in place and appropriate incentives for industry involvement are fundamental to the establishment, growth and maintenance of a robust insurance industry.
XPRIMM: A2ii has been doing work in the area of InsurTech and its connection to inclusive insurance. What is the role that technology plays and how do you see the future from this point of view?
H.G.: InsurTech heralds the advent of the Fourth Industrial Revolution. The speed of change has no historical precedent. When compared to previous industrial revolutions, change is occurring at an exponential, rather than linear pace. When it comes to greater access to insurance, these are exciting and unprecedented times. Market dynamics are shifting, but most importantly, new customer behaviour and expectations are emerging. InsurTech holds a vast potential for improvements in insurance product design, the development of better-tailored products and reducing administrative costs. These efficiency gains can lead to lower premiums, better client servicing and faster payouts.
However, with change comes the challenge of leveraging technology to serve the customer and create new customer engagement models. The potential value of meeting the customers' needs also brings new risks. One such risk comes with the issue of data protection and the questions of data and public intelligence ownership. Another one comes with the usage of big data and subsequently pricing out low-income consumers due to segmentation. To mitigate them, supervisors must monitor and understand the market, and, above all, be open to innovation. More clarity in this regard is paramount.
The A2ii is working hard to support supervisors in responding to these challenges they face. A series of three events in 2018 in Africa, Asia and Latin America, for example, focuses on questions around InsurTech and inclusive insurance. These "Consultative Forums", organized by the A2ii, together with the IAIS and the Microinsurance Network, provide a platform for promoting dialogue between supervisors and the insurance industry on a specific question. Also, our last WebEx Consultation Call on Innovation hubs and accelerators took a closer look at inter-institutional cooperation as a tool for responding to new market trends and for creating a safe space for the launch of new initiatives.
XPRIMM: Inclusive insurance products are often seen as useful tools in economic development. Can you, please, offer us some successful examples in this respect?
H.G.: In OECD countries, it is estimated that a 1% increase in life insurance premiums raises real GDP by 0.06% per year (as, for example, referenced by the ILO's impact insurance facility). Other studies, such as by the MicroInsurance Centre's Microinsurance Learning and Knowledge (MILK), reveal the critical importance of insurance for low-income people as a tool for regenerating income in the face of calamity. For instance, in Colombia, 66% of claim payouts were used to repay debt, hence preserving access to credit for future business development. In Indonesia, a credit life insurance product - Payung Keluarga -, is greatly benefiting vulnerable communities by easing the economic burden caused by death, by reducing household debt through loan forgiveness and cash-payouts. Access to innovative insurance products is also opening up loaning opportunities and encouraging investment. In particular, credit-linked insurance is gaining traction among farmers in developing economies. In Kenya, for instance, a crop insurance product - Kilimo Salama -, is sold directly to farmers on credit basis to insure their crops against extreme weather events. Academic research has shown that farmers who purchased weather index-insurance increased their expenditure and invested more in agricultural inputs.
XPRIMM: What future lies ahead for classical insurance when the basic model is being challenged by both inclusive insurance, peer2peer schemes and technolgical disruptors?
H.G.: We would not describe inclusive insurance as a challenge to classical insurance per se. The ambition to include new people in the market or to cover new risks is often a driver for innovation, especially in terms of distribution and the use of new technologies. We see insurance markets are becoming more responsive and innovative. However, it should always be guaranteed that innovation and change is to the benefit of the policyholders. It is, therefore, important that supervisors are able to understand the fast developments that are taking place and make them work for (inclusive) insurance. A2ii contributes to that by supporting supervisory capacity building and serves as a knowledge hub in key areas of inclusive insurance regulation.