Green insurance – Bridging the gap between rich and poor

South Africa’s insured population recovers faster and more completely from a loss event. They have access to the best available replacements and repairs. In stark contrast the uninsured have little or no access to basic quality workmanship. The poor are responsible for their own replacements and recovery costs, often turning to government to assist after catastrophe events such as fires or floods.

For this reason Centriq welcomes the UNEP F1 Principles for Sustainable Insurance initiative that will be launched at next year’s UN Conference on Sustainable Development. The initiative will address the ‘green economy’ in the context of poverty eradication and sustainable development and is an important first step in bridging the insurance gap between rich and poor.

A solid starting point to poverty eradication will be to narrow the gap that currently exists across socio-economic classes. The insurance industry, in conjunction with government and the financial services industry as a whole, has to consider the following points to stand any chance of remedying the situation over the next couple of years:

• The expansion of insurance provision for the poor as an important instrument with substantial long-term welfare benefits, especially since households in developing countries are usually exposed to high individual-specific (illness, theft or unemployment) and economy-wide (drought, recession, etc) risks.

• The need for subsidisation to enable insurance provision to the poor.

• The level of insurance contract exposure to adverse selection (hidden information) and moral hazard (hidden action).

• The limits which inadequate infrastructure place on social inclusion and faster economic growth and how we are going to overcome it.

• How we are going to take insurance beyond the traditional revenue streams (given the point mentioned above).

• How to achieve balance between underwriting risk and gaining market share.

• How we are going to increase our risk capital pool.

• The most relevant and promising products, institutional setup and the required regulatory framework to successfully expand insurance for the poor.

A careful understanding of the risks the poor face, the consequences thereof, and how they usually address it is required to develop and design the right insurance product and service offerings, including distribution models and outlets.

With that said, we can learn from the research conducted by the Economic and Social Research Council’s (ESRC) Global Poverty Research Group, which found that:

• Expanding insurance products to the poor should only be viewed as one part of a comprehensive expansion of protection of the poor. This is not "a panacea for all risk problems faced by the poor” due to the severe implications of particular catastrophic economic and social shocks.

• Many of the risks the poor face are covariate: floods, forest fires and economic recession typically affect large sections of a given community at the same time!

• Aside from shaping the risk they face by changing their activity and asset portfolios so there is less risk involved, some of the poor try to actively cope and manage the consequences of risk by entering into reciprocal gift-giving, contingent credit arrangements, ‘self-insurance’ where assets are accumulated in good years to be depleted in the bad years, or entering into informal mutual assistance arrangements with families or neighbourhood. These are rather imperfect ways to cope with ‘catastrophic’ events or shocks, as they usually result in substantial fluctuation in welfare outcomes, undermining also the asset base of a number of households for future wealth creation, not just in terms of physical and financial assets, but also in nutrition and human capital (e.g. where children drop out of school to start working).

• The above-mentioned coping strategies also cause the poor to use their assets less efficiently than the rich, which may result in poverty traps – a situation in which those who cannot escape poverty by their own means end up living in permanent poverty. An individual or community that continuously provides for other or sells productive assets to survive remains poor, even if other sectors of the economy are growing

• As expected, life insurance risks such as disability, illness, health care costs, loss of income-earning capacity and death of the breadwinner have long-lasting crippling effects

• The involvement of local and grass-root organisations with established links with the poor have proven to be successful in reaching the poor.

• A partner-agent model is most likely the most effective institutional arrangement to reach the poor. An example would be where a local finance institution with close links to relatively poor communities teams up with an established insurer to deliver low-cost, tailored products.

• Government needs to promote insurance provision to the poor by providing overall credibility to the set-up through legislation and regulatory framework support, among other initiatives.

Overall, when analysing the risks faced by the poor, those risks with the highest incidence and most serious consequences should take centre stage during the decision-making process. Social ills such as high unemployment and low income, lack of legal ownership, inadequate education, poor policing, crime and corruption will have to be addressed as a matter of urgency.