In 2015, there was a record of close to 200 natural catastrophes. Asia was hardest hit, with the earthquake in Nepal causing the greatest loss of life. Yet uninsured losses continue to run high, especially among the rural and agrarian community in Asia. In a roundtable hosted by Asia Insurance Review with the CEO of Allianz Re as the keynote speaker, a group of 12 insurers, academics and modelling experts looked at how the insurance industry can go beyond the limit to better serve the needs of the economy, society and the poor in providing cover for the masses, given the higher frequency and severity of losses. The basic message is that the industry still needs to better communicate its value proposition to the still “unpersuaded unprotected”.
Drawing lessons from Allianz Re’s losses in the 2011 disasters, including the Thai floods and the Tohoku earthquake and tsunami, Mr Amer Ahmed, its CEO, was concerned with the lack of progress in filling Asia’s Nat CAT protection gap. He said the industry needs to examine its role in society as an industry and whether it understands its risks well enough to face the future with confidence. “What do we need to do to fulfill our role in society well and what do we see as the opportunities and obstacles?” he asked.
Changing consumer mindset
Sharing his experiences, Professor Pan Tso-Chien, Executive Director of the Institute of Catastrophe Risk Management at Nanyang Technological University, Singapore, noted that although the engineering community and authorities could be encouraged to strengthen buildings and infrastructure and the policies which govern them, the deeper issue is that many governments still pick up the tab when losses occur. “This does not help insurance take-up rates, and eventually goes back to taxpayers,” he said, adding that there is a disjoint among the three key elements – of engineering (which is a design process for building and infrastructure protection); social and government policy (which is for the good of society), and the financial community (represented by insurance which has the notion of profit making in picking up the losses and providing monetary protection to the affected). The crux lies in persuading consumers that all the three elements are necessary for protection, including realising that insurers need to find sustainability in the business.
Agreeing, Mr Ahmed noted insurers are just not explaining the value of the product well enough to their clients and seem almost embarrassed about the profit motive compared to banks, which even in a zero-interest environment are able to make money from clients. Mr Christopher Coe, Head of Agriculture, Aon Benfield Asia Pacific, said it is difficult to convince the public of the benefits of insurance, even though the governments can see the benefits and encourage them by providing premium subsidies.
Referring to the agricultural sector in particular, he noted that the motives of the government were sometimes questionable. “It’s got to a point where insurance has almost lost relevance in certain countries, where the deductible is so low it’s more a case of governments subsidising premium to get money back into the farming community in the form of insurance payouts – it’s become another way of distributing money to the public, rather than encouraging disaster and risk management practices.”
Improving communication with the public
They all agreed that insurers are poorly communicating their value to the public, who even today have a limited understanding of general insurance.
Mr Derek Teo, currently Chief Executive of the General Insurance Association of Singapore and a 40-year insurance veteran, said this state of affairs was sad, when general insurance is a critical and “recession proof” industry that is the “oxygen” for business. The issue is that insurance benefits are only visible when there are claims, and people do not understand they are paying for risk transfer. “When we talk about Nat CATs, it’s a major loss if anything happens and it is with insurance that we are able to rebuild societies. We need to communicate this message strongly and publicly. Only then will buyers become committed and know they get value for money,” he said.
Revising the claims process –Make it easy
However, one of the key hurdles is that often the claims settlement process is fraught with bureaucracy and can be cumbersome, leading public and press to misunderstand and misrepresent the sincerity of the insurers and their role in the rebuilding process. The roundtable felt that hence, consumers do not see that it is insurance which eventually reinstates their lives. Mr James Beedle, Senior Managing Director of Willis Re Asia, pointed out the example of Christchurch which was rebuilt practically from money from the reinsurance industry, where a protracted claims process due to complexities and loss adjustment issues resulted in a negative experience for many consumers in New Zealand.
With the fundamental principle that there is a “promise to pay”, Mr Peter Book, Head of Agriculture at Allianz Re Asia Pacific, said that there is a need to test that and find ways to make it work. However, Nat CAT is unlike transactional insurance with motor vehicles or households where frequency compels an efficient process for claims. “With Nat CATs you just don’t have the frequency of events to design that process, so if as an industry you can’t deliver on that promise to pay, then you whole raison d’être is lost. And people will get disenfranchised,” he stressed.
Mr Ahmed said that the use of parametric triggers for Nat CAT would be useful in principle to simplify the claims process, as it will lead to an immediate payout once a disaster of a certain magnitude hits.
The real role of insurance
Claims aside, Mr Ahmed asked if the insurer’s role is merely to “cut the check” or to actually help to support and mitigate pain and suffering. There was extensive discussion on this poser among the participants with some very fundamental issues emerging on what is the real role of insurance in the short term and the long term. They all agreed on the need for care and concern from insurers.
Mr Shitalkumar R Khandar, Regional Catastrophe Management Leader (Asia Pacific) from AIG APAC Holdings Pte Ltd, said that insurers should not confine themselves to the contractual obligations but do whatever else they can to help their clients in Nat CAT situations. They need to be able to respond to the needs of the clients and set up the right channels to reach out to these clients.
With Zurich Insurance doing work on flood resilience, working with academia and NGO partners, Mr Jonathan Rake, its Singapore CEO said insurers’ role in society should not merely be covering economic losses, but also bridging the gap between post-event rehabilitation and mitigation. While cyber is one front where industry partnerships in mitigation is a good example, insurers are not doing a very good job where Nat CATs are concerned. “The power of our insights as an industry, combined with the education community and mitigation, is endless opportunity. You’ve got to invest and see a benefit for your organisation. Our industry can bring things like agricultural techniques, flood prevention techniques, and data to society for greater good,” he said. This is the way to stay relevant too, the roundtable agreed.
Partnerships and government intervention
In most Nat CAT discussions, it is always very clear that the industry needs to work with the public sector and the NGOs to help the masses. Mr Khandar stressed the need for Private-Public-People partnerships as a fundamental need in managing Nat CAT risks.
Making a review of the current status quo, Mr Kenrick Law, Regional CEO of Allianz Re Asia Pacific stressed the need for more to be done in the partnership. For example, Professor Pan’s team had done great research on earthquakes and the academia should find a way to commercialise such work. Integrating the Nat CAT models which brokers and others are coming up with on their own, he said everyone should come together for a cohesive effort to go beyond the limit of the industry.
Mr Beedle noted that the insurance sector is good at understanding the science of risk and how to underwrite these exposures via an established insurance mechanism. However in the area of persuading people to buy protection, which is the most important part of closing the protection gap, the industry needs help. It often is a case of affordability and the willingness to buy, especially where those in developing nations have to choose between the primary needs of families and investing in the cultivation of crops versus spending on insurance. It is in this third pillar of affordability that the reliance on PPP becomes acute. Governments and NGOs have a definite role to play, he added.
Mr Teo warned that in working with other bodies, general insurers must be prepared to stand tall as often insurance gets marginalised by other professional bodies as is the case with the International Accounting Standards Board (IASB).
Mr Richard Jones, CEO of Guy Carpenter Singapore, said one of the ways could be for Nat CAT insurance to be made compulsory, ideally with government backing. Of course with compulsory insurance, more will be covered and the product will become that much more affordable. He cited various examples of the government partnership in successful compulsory schemes including Taiwan’s TREIP, which will remain sustainable.
Noting that plugging the protection gap by selling individual policies to individual villages is not going to happen in the short term, with the lack of affordability and trust, he suggested an early “micro solution” of enlisting governments or quasi-government bodies to help the affected more effectively with insurers in the background. He said this could happen if insurers could bring them round to the view that insurance would create more resilience at a national or supranational level.
Mr Perfecto Domingo, Senior Vice President, Risk Management & Technical Services at MSIG Holdings (Asia) Pte Ltd cited his country, the Philippines, as a prime global example where an active government had pushed out microinsurance successfully to 28% of the population. The value of microinsurance was experienced in the rapid payouts post Typhoon Haiyan in 2013. This success could also be attributed to insurers which were keen to fulfil the role of rebuilding society. He noted that the microinsurance model is being emulated in Thailand and India.
Mr Rake said the costs of reaching people could be challenging. Thus, the game changer would be to partner with non-insurer local entities who have distribution channels across the country. This has already been done in banking and other sectors.
Improving value proposition through innovation
The power of innovation was one of the key issues discussed at the roundtable as a factor to bridge the insurance gap. The participants even explored the relevance of an innovative solution by agribusiness Syngenta in Kenya where insurance was offered as part of the purchase of crop seeds which could be replaced if they failed to bloom. Mr Ahmed said that to rely on an external or governmental distribution model, insurers must first have a strong value proposition.
Mr Rake expressed optimism that branding aside, insurers must do more to change the world’s perception of insurance built over 300 years of insurance history. The key is to make insurance be seen as “relevant” to their business or life. There is no “quick fix”. The big questions need to be answered: “Can the industry deal with strategic risks that are uninsurable today?” “Can the industry get sufficient capacity to those struggling to get it?”
He said: “Innovation will be a major challenge for big globals sitting on archaic platforms. That is going to be a big game changer. But we are going to adapt and change products and services to stay more relevant over time.”
And looking at disruption, Mr Rake said that new technology, though it brings both pros and cons on the liability for corporates, would “absolutely improve” the way consumers buy insurance.
Changing government mindsets
The roundtable discussed the challenges faced in the juggling act of taking on more risks in a riskier world and yet getting investors to put more money into the business. “In terms of investment, can we steer some of it to hopefully bring a better risk landscape in future and mitigate these risks?” asked Mr Law. Some of the suggestions included getting traction at international platforms like the UN, World Bank and IMF especially in the area of climate change. The other is through using annual reports to raise investment consciousness.
The politics of compulsory insurance and incentivising the right behaviour, the impact of earthquakes on sovereign ratings and taxing premiums to fund Nat CAT relief activities were some of the issues discussed. The participants expressed concerns in the fundamental flaw in the system which does not reward the right behaviour
(example: a corporation does not get charged if it retains a risk; but if it insures that risk, it’s insurers who get a capital charge for it). There were also concerns with the notion that S&P was planning to include risk management elements like climate change into its rating analysis.
The Roundtable did stretch the limits to look at getting CFOs of corporates to understand the value that insurance brings to a company. Insurance is obviously making inroads as can be seen in the case of alternative power generation plants, where wind farms with insurance are able to get better loans than those without cover. There were also worries that some academic research is not being accepted by governments, who deem it impolitic at the moment unless a solution was at hand.
There was a general feeling that the insurance industry could play a real role in bringing insurance to the masses in the Nat CAT domain, but it really has to communicate its benefits better to the market, to sell itself well and to drive home the simple benefits of insurance for Nat CATs. Getting people to understand the risks they face and getting them to see that insurance is there to help along the way as a relevant partner is another challenge. But pricing and affordability are yet greater obstacles to be overcome despite the need.
In summing up, Mr Ahmed, who felt that the industry is doing a good job though others do not understand the business fully, said there are two issues to act on: (i) “First, there is a collective industry responsibility to raise awareness of risk and insurance at various levels with governments and individuals. We need to highlight our value proposition to the world. (ii) The second aspect is individual, in terms of competing on our risk appetite and pricing.”
So watch this space where insurers will go beyond the limit for the greater good to stay relevant.