THE world recently
completed the first of four meetings that could have profound
implications for the finance sector. Last month’s Financing for
Development Conference in Addis Ababa considered the future of
development finance. Next month in New York, the United Nations will
unveil the new Sustainable Development Goals that will replace the
Millennium Development Goals. Then, in October, the Group of 20 will
meet in Istanbul, where designing a finance framework for
infrastructural development will top the agenda.
Lastly, in Paris in December, the annual climate change talks must ensure that enough climate finance is in place to fund the urgent action that is needed if the world is to avoid run-away global warming while supporting adaptation efforts in countries most vulnerable to climate change.
Smart, forward-thinking corporate leaders will be keeping a close eye on these meetings. And every part of the finance sector will have to consider the implications for their business models and their markets.
Take the insurance industry, a strong suit in SA’s finance sector. Launched in Addis, a University of Cambridge Institute for Sustainability Leadership (CISL) report on insurance, by CISL fellow Ana Gonzalez, echoes recent calls by the Group of Seven for 400-million of the world’s most vulnerable to be provided with access to insurance.
There is good reason for insurers to be alert to the opportunity. First, the low density of premiums in these emerging markets — at $136 a person versus $3,666 in more industrialised nations — means the future growth of insurance lies in these markets.
The interconnected nature of risk means that large uninsured populations could potentially destabilise insurers’ more traditional, developed markets. Yet the main barrier to entry lies in the fact that the traditional insurance model is broadly unsuitable for a burgeoning market that requires high-volume, low-premium policies. This means administrative costs are often higher than in industrialised markets, leading to lower profit margins that make traditional commission-driven broker distribution ineffective. And a lack of historical actuarial data means insurers are often forced to price any uncertainty associated with entering such markets into their underwriting, further undermining the ability to offer affordable premiums.
So how can insurers overcome these challenges? First, there is a need to innovate more cost-effective insurance products suitable for emerging markets. Gonzalez cites the example of the CARD Mutual Benefit Association in the Philippines, which has designed a life insurance product now used by more than 11-million people. Another example, the African Risk Capacity is a $200m capitalised catastrophe fund designed to build African countries’ resilience to natural disasters.
Developing partnerships will be crucial for achieving these successes, particularly with policy makers who may have to subsidise some of the high costs associated with entering these markets, at least at the start. Insurers will have to start leveraging other parts of their business activities more strategically, helping to lessen risk exposure by becoming more proactive in managing societal risk.
ClimateWise, a CISL-facilitated leadership platform of more than 30 leading global insurance companies, is working with policy makers to identify viable solutions to extend insurance cover into emerging markets. The group is exploring a range of adaptation options, promoting resilient urban centres and understanding how insurers’ investment flows can be used to help manage climate vulnerabilities.
With political will and insurer motivation the challenges of insuring emerging economies are far from insurmountable.
Yet it will require innovation and compromise by insurers and policy makers if insurance is to play its part in sustainable development.
• Herbstein is programme manager of ClimateWise. Calland leads CISL’s new Africa Initiative
Lastly, in Paris in December, the annual climate change talks must ensure that enough climate finance is in place to fund the urgent action that is needed if the world is to avoid run-away global warming while supporting adaptation efforts in countries most vulnerable to climate change.
Smart, forward-thinking corporate leaders will be keeping a close eye on these meetings. And every part of the finance sector will have to consider the implications for their business models and their markets.
Take the insurance industry, a strong suit in SA’s finance sector. Launched in Addis, a University of Cambridge Institute for Sustainability Leadership (CISL) report on insurance, by CISL fellow Ana Gonzalez, echoes recent calls by the Group of Seven for 400-million of the world’s most vulnerable to be provided with access to insurance.
There is good reason for insurers to be alert to the opportunity. First, the low density of premiums in these emerging markets — at $136 a person versus $3,666 in more industrialised nations — means the future growth of insurance lies in these markets.
The interconnected nature of risk means that large uninsured populations could potentially destabilise insurers’ more traditional, developed markets. Yet the main barrier to entry lies in the fact that the traditional insurance model is broadly unsuitable for a burgeoning market that requires high-volume, low-premium policies. This means administrative costs are often higher than in industrialised markets, leading to lower profit margins that make traditional commission-driven broker distribution ineffective. And a lack of historical actuarial data means insurers are often forced to price any uncertainty associated with entering such markets into their underwriting, further undermining the ability to offer affordable premiums.
So how can insurers overcome these challenges? First, there is a need to innovate more cost-effective insurance products suitable for emerging markets. Gonzalez cites the example of the CARD Mutual Benefit Association in the Philippines, which has designed a life insurance product now used by more than 11-million people. Another example, the African Risk Capacity is a $200m capitalised catastrophe fund designed to build African countries’ resilience to natural disasters.
Developing partnerships will be crucial for achieving these successes, particularly with policy makers who may have to subsidise some of the high costs associated with entering these markets, at least at the start. Insurers will have to start leveraging other parts of their business activities more strategically, helping to lessen risk exposure by becoming more proactive in managing societal risk.
ClimateWise, a CISL-facilitated leadership platform of more than 30 leading global insurance companies, is working with policy makers to identify viable solutions to extend insurance cover into emerging markets. The group is exploring a range of adaptation options, promoting resilient urban centres and understanding how insurers’ investment flows can be used to help manage climate vulnerabilities.
With political will and insurer motivation the challenges of insuring emerging economies are far from insurmountable.
Yet it will require innovation and compromise by insurers and policy makers if insurance is to play its part in sustainable development.
• Herbstein is programme manager of ClimateWise. Calland leads CISL’s new Africa Initiative
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