Against the backdrop of a green and resilient recovery from the COVID-19 pandemic, the world’s attention is centered on closing the protection gap. Closing the protection gap will enable a swifter post-disaster recovery and ensure business continuity for the most vulnerable. The Global Index Insurance Facility (GIIF) team caught up with Pedro Pinheiro and Nick Moody of the Insurance Development Forum (IDF) for their reflections on closing the protection gap by insuring the missing middle.  Pedro Pinheiro is the coordinator of the Inclusive Insurance Working Group, while Nick Moody coordinates the Risk Modelling Steering Group.

GIIF: In your view, are there any early success stories in inclusive and micro insurance that are primed for scaling?

Pedro Pinheiro: When risks such as the pandemic or climate hazards materialize, the most vulnerable and unprotected people will cope by seeking assistance from their community, selling existing assets or working in lower paying jobs to make ends meet. With these informal coping mechanisms, the household barely has a chance to fully recover from one crisis before they are struck by another. Although this should not be a task of the private sector alone, many microinsurance products across the world are supporting the development of an ‘insurance culture’ as clearly there is a need to think about how these communities and households can be better protected.

AXA Emerging Customers is a good example of how traditional insurers can become more agile and leverage results by adopting a focused approach that caters to customers who are accessing formal insurance for the first time. In 2020, during the COVID-19 pandemic, the company swiftly responded to the crisis by bundling digital health services with 15 of their inclusive insurance schemes across nine countries, reaching 1.8 million people.

The example of Blue Marble, at its turn, shows how co-creating solutions with partners that understand the local context is proving to be very a successful strategy to extend microinsurance coverage against climate shocks to millions of smallholder farmers across the globe, starting with the Nespresso coffee value chain in Colombia  and potentially expanding to other crops in countries such as Guatemala, Honduras, El Salvador, Kenya, Zimbabwe, Mozambique, Zambia, Indonesia and Pakistan.

What makes these products successful is that they are contextually and culturally ‘fit-for-purpose’. Why do I say that? In terms of language, locality, distribution channels and context, these products meet these emerging consumers’ needs and expectations. For instance, distribution channels that consumers already trust include community agents, microfinance organizations, mobile network operators, or even retail magazines. These products are also designed to provide protection that is contextually relevant while staying affordable. Technology is also an important lever in helping to reduce the costs of delivery or access. Ultimately, the moment of truth comes when claims are paid to individuals or families: enabling communities and families to appreciate the value of insurance in managing the shocks they face.

These elements I have touched on – accessibility, affordability, relevance and cultivating trust – are all necessary for us to build viable inclusive insurance markets and for the Insurance Development Forum (IDF) to achieve its ambition of 150 million covered through inclusive insurance by 2025 and which feeds into the G7, G20 and V20 InsuResilience Global Partnership’s vision to cover 500 million people with insurance solutions by 2025.

GIIF: Based on your experience, where are the gaps in building a sustainable inclusive insurance ecosystem to support the “missing middle”? What will it take to close these gaps?

Pedro Pinheiro: We must constantly emphasize the insurance industry’s triple role of risk underwriting, risk management, and as institutional investors. While most policymakers already consider the first role, there are major untapped contributions that the industry can provide through its risk analysis to guide preventative action and promote more risk-resilient behavior on behalf of consumers. The risk management process in insurance mirrors the sequence of activities in disaster risk management—from understanding, assessing, and reducing, though to disaster response and relief, recovery, and risk financing. In relation to climate risk, for example, risk analysis undergone by insurers provides clear signals to ex-ante mitigation measures and avoid unproductive investments (e.g. building in landslide areas). This is even more relevant in poorer countries, where insurance covers less than 5% of disaster losses, when compared to about 50% of disaster losses in high-income countries being covered.

A good example of an insurer’s commitment to risk management comes from Indonesia, a country that ranked in the top third in terms of climate risk, with high exposure to all types of flooding, and extreme heat, according to the World Bank . In that context, Asia Affinity Solutions, a privately held “value operations” company based in Hong Kong, is seeking to leverage cooperative structures and decades of seaweed farming experience to supply much more than just life, personal accident and catastrophe insurance protection. The company provides support systems, advanced technology and quality seedlings to foster innovation and stabilise household earnings, as well as providing the technology which guarantees end-to-end supply chain transparency, with the added value of environmental and financial insights packaged into an accessible mobile app. The project has a strong ESG footprint and can generate positive externalities to the whole planet, as Seaweed aquaculture, when managed efficiently, could play a key role in climate mitigation by acting as a natural protection against wave impact, helping prevent coastal erosion and acting as a carbon sink. 

Insurers are also large institutional investors, and their assets can support resilient and sustainable projects across the globe. There are several actions that could be taken by Governments and regulators to support this triple role of the insurance industry in order to strengthen the network of protection of the “missing middle” and supplement the existing social protection floors that ensure essential health care and basic income security amongst other benefits.

GIIF: Looking into the progress so far and the potential in this area, how can technology be leveraged to offer protection to the underserved in insurance?

Pedro Pinheiro: Technology is undoubtedly key for microinsurance products to reach scale. While the pandemic boosted the insurance industry’s evolution towards more digitized processes, promoting access to inclusive insurance requires not only adjusting the infrastructure that is already in place in the industry, such as what is offered by the insurtechs, but also leveraging technology used in other value chains that are closer to the end-customer.

With the right partnerships, we might be able to unlock an extensive network of entry points for customers to whom insurance was never offered, but who could benefit from it immensely. Successful projects are already being rolled out in areas traditionally associated with the insurance industry, such as the extensive credit-life programmes covering individuals and SMEs in partnership with banks and fintechs all over the world, as well as in new frontiers moving beyond mobile network operators towards ecosystem partnerships such as digital platforms to reach the last-mile customer in the most remote areas.

Apart from enabling more access, technologies such as Artificial Intelligence, Machine Learning, the Internet of Things, and Blockchain are being leveraged to increase the user experience and offer better cover. They also allow insurers to access personalized data that, together with the automatization of processes, will help overcome the crucial challenge of inclusive insurance to offer better-quality products at a lower cost.

GIIF: What would be key product development considerations for the bottom of the pyramid in the insurance industry? 

Pedro Pinheiro: If the challenge on the demand side is to build the basis for an insurance culture, on the supply side we need to increasingly improve our understanding of the needs and expectations of emerging customers in order to offer coverage that is affordable and relevant to the risks they face. We already know that microinsurance cannot be offered as a small-sized traditional product, so we need to innovate to create – for example - unemployment insurance that is fit for casual day workers, or a homeowners’ policy that will also cover a small shop that is run in the street-facing window of a low-income house. Of course, this requires a shift in the old product development processes, and the thinking behind traditional insurance concepts related to pricing and risk pooling mechanisms. It also requires attracting more diverse talents to the insurance industry in terms of, not only of careers, such as behavioral psychology, design, programming, etc., but of the social and economic backgrounds of the professionals responsible for developing the products.

We also need to consider the provision of some level of financial support for premium payments/subsidies from the public sector, the broader development finance ecosystem, and donor governments if we want to achieve a certain level of scale in the short run, especially in countries that combine very small populations with high level of vulnerability to climate change, such as Small Island Developing States (SIDS). This could involve putting in place smart subsidies with the specific objectives of expanding access to insurance while at the same time stimulating the creation of markets and fostering the development of sustainable businesses. This is where public-private partnerships become essential and are central to the mandate and work of the Insurance Development Forum. In this context, I must applaud our partners, the InsuResilience Global Partnership and the Government of Germany for tabling the issue of premium financing as an important topic for the G7 and how the broader development community should seek to address this issue.

GIIF: What do you see as the role of the Global Risk Modelling Alliance (GRMA) in supporting coordination of various actors, especially with regards to accessing country granular data? 

Nick Moody: I like the phrasing of this question. The temptation is to think that new research and data is always the answer, when in fact so much already exists, has been used for a single purpose and has then been forgotten. It is so inefficient. One of the principles of the GRMA is the use of open platforms and data standards – the key point is that if there is no overhead to translating and sharing data and models, sectors can more freely exchange existing knowledge and integrate new research.

This isn’t just wishful thinking. For example, in practical projects in Bangladesh and the Philippines, the insurance industry’s Oasis LMF open risk modelling platform was recently used to develop very high quality, climate-conditioned flood and cyclone models for local authority use. This approach enabled a wide range of organizations to share a very granular view, including high quality terrain and exposure data from local universities, climate projections from global sources and high-resolution hazard models from the private sector.

All of this was done for public good. The GRMA intends to replicate this approach for multiple hazards in 20-25 countries, with the primary aim of putting the local risk owner firmly in control of the analysis that underpins the hard decisions they have to make.

I should also underscore the unique nature of the GRMA as it represents collaboration between the private sector (through the IDF), the V20 Group of Ministers of Finance and the German Government to focus on improving the availability of quality risk information. This is unprecedented in many ways, and I hope serves to demonstrate the kinds of innovative and meaningful partnerships that are so necessary to tackle the global challenges we face.

With a big thank you to Pedro Pinheiro (Insurance Development Forum Inclusive Insurance Working Group), Nick Moody (Insurance Development Forum Risk Modelling Steering Group), and Helen Wright (Lysander PR Limited) who made this interview possible.