For centuries, the insurance industry has operated under a relatively straightforward business model; data is used to determine risks and underwrite policies, and premiums are then priced on the severity and likelihood of those risks. However, in a world where climate change is impacting our lives on a daily basis, this approach is no longer enough.
The fact is that the physical impacts of climate change are inextricably linked with the financial aspects of society. Swiss Re, for example, has estimated that global warming could reduce the value of the global economy by 10% in the next 30 years. What’s more, the reinsurer has also predicted that as natural disasters become more extreme and frequent, global property premiums could be pushed up 22%. Combine this with inflation and stagnant salaries, and people simply won’t be able to afford insurance.
Unfortunately, this scenario is already being played out across the globe, and as Laura Rosado of AXA Emerging Customers, highlighted during the Midi de la microfinance et de l’inclusion financière “Sustainable insurance: a meeting of two worlds”, it is also happening in developed countries.
In France, for example, research carried out by AXA has revealed that some 18 million people are being priced out of affordable insurance policies. As Rosado explained, every month, these households have less than EUR 100 to cover unexpected events. For them, insurance is paramount, and yet it is unaffordable.
To help combat such social inequalities, AXA Emerging Customersis helping make insurance affordable, relevant and valuable; providing products specifically tailored to vulnerable segments and their associated risks.
Breaking the cycle
The reason for this approach is clear; with too many people being priced out of policies, communities are being left vulnerable and unprotected when a disaster strikes. For the global economy, this is simply not financially sustainable.
In a bid to reverse these outcomes, insurers are adopting several different approaches, many with an end goal that sees the world become a more sustainable place. Covering various environmental, social, and governance (ESG) criteria – such as moving away from greenhouse gas-emitting industries and investing in green technologies – it is, in the grand scheme of things, all about taking the “prevention is better than cure” approach.
But it isn’t just about the focus on the insurer; as coined in a recent Financial Times article, it is also about “active insurance”, whereby insurers educate policyholders on the risks they face and supply them with the right tools to help them mitigate these risks.
Health insurers have been quick to the mark in adopting this new approach, teaming up with tech providers through apps, smart watches and even gym memberships to help encourage and enable customers to live healthier lifestyles in return for lower premiums. For the insurer, such interventions improve the health of the policyholder, which – as the article pointed out – helps reduce the probability and even the severity of a claim.
Global inequalities
Taking an “active insurance” approach isn’t just for life cover though; when it comes to climate-related risks, adopting a “prevention is better than a claim” approach can directly help secure the future of the planet, and therefore the future of the insurance industry as well.
However, many of those most vulnerable to climate-related events live in developing countries, where access to finance for investment in low-carbon technologies and insurance to protect themselves for risks, is often limited.
From a business point of view, the underinsured represents a USD 252 billion opportunity, but to tap into this market, insurers need to ensure their products are affordable. Yet this isn’t simply about altering claim sizes to lower premiums; if a policy is riddled with exclusions that prevent policyholders from recovering after an event, then the target market simply won’t buy into it.
For insurers to increase insurance uptake, they need to understand and then meet the needs of their customers. In short, policies need to be relevant. Data is crucial to delivering this; from knowing where the uninsured are living, to learning what risks they face, how best to help them, and importantly, how best to reach them.
It is all about understanding these vulnerable markets, knowing where the restrictions lie, and finding ways to overcome them, such as delivering financial education and even access to technology.
At the MiN, knowledge sharing is at the heart of what we do, and it is through this sharing of experiences and insightful innovations that our vast network of members from across the entire inclusive insurance value chain are helping increase access to insurance for low-income households and businesses across the globe.
The scenario is certainly a challenging one, but if insurers don’t embrace inclusion in insurance, they will miss out on a crucial market opportunity – one that not only supports the sustainability of the sector, but also the sustainability and resilience of people and entire national economies.
It might not be a walk in the park, but the MiN is here to help. Learn more about joining our tight-knit community of global experts and practitioners today.