Business

Using insurance to protect assets

Effective use of insurance to protect assets could be termed as a basic requirement of life. JOSEPH INOKOTONG in this write-up delves into it, in addition to excerpts on understanding risk-based supervision (RBS) in insurance.

Insurance has taken firm root in many parts of the world, and it plays a fundamental role in economic development as it enables and drives economic activity by protecting lives and property against insurable risks. Insurance companies act as a buffer against adverse events and as the invisible glue of society.

Risks such as COVID-19 or climate change may arise again on the horizon of economic and social progress, causing increased vulnerability throughout the world, but with a greater impact on countries whose economies are still emerging. Given the current environment, where it appears that insurance penetration remains very low in many markets that could benefit the most from the peace of mind it brings, requires urgent attention.

Importance of having insurance

In everyday life, people experience an infinite number of situations that they cannot foresee and that can affect their well-being and that of their families. Here is where insurance begins to play an important role since it allows people to eliminate the effect of these unforeseen events or reduce their impact.

That is why it is important to take out insurance to protect one’s property, health, and life: to take care of what matters in life and to be sure that they will not be affected no matter what happens. Even so, as pointed out earlier, insurance penetration is not the same in all countries. For example, in Latin America, the culture of living insured is less common. The same can be said of Nigeria.

How insurance can help

Insurance provides protection and support in any unexpected circumstance. It is better to have it and not need it than to need it and not have it.

It reduces your losses and risks: Both on a personal and business level, having insurance makes it more likely that one will overcome unforeseen events such as natural disasters that are beyond your control.

It gives you peace of mind: Insurance also helps reduce fear and frustration in the face of future uncertainty. Not having financial stability affects one’s health, as it causes stress and anxiety. This is why financial literacy is also very important.

Insurance and development

A quote attributed to Henry Ford says “the whole world relies on insurance. Without it, every person would keep their money without investing it anywhere for fear of losing it, and civiliation would have ground to a halt a little past the Stone Age.”

As people have seen, there are a number of essential steps for gradually closing the protection gaps that exist in emerging markets, where the consequences of uninsured risks can be even more severe and long-lasting than in other economies. Insurance allows for assuming risks that support development with the peace of mind of having protection.

According to MAPFRE, they boast of leading actions that help to close these gaps, either by promoting financial culture for all or by establishing clear commitments in our good governance policy. These commitments, which are rooted in responsibility, integrity, and transparency, are focused on permanently innovating products and services that facilitate and promote accessibility to insurance for an increasing number of groups, including those in emerging countries, while also ensuring complete advisory and information prior to taking out a policy as a basis for transparency and the creation of a relationship of trust.

There are basic elements for effective insurance development in emerging markets. The Geneva Association and the Insurance Development Forum (IDF) recently released a report exploring how regulation, as well as government policies, can either facilitate or limit the development of robust and responsive insurance markets that help close gaps in emerging markets. Among other conclusions, the following points stand out as key factors.

The first priority revolves around decision-makers who must make regulation of the insurance market a political priority and create a legal and fiscal framework that allows for its expansion. Emerging markets require a different approach to insurance regulation and supervision.

This regulation should take into account the maturity of each particular market, and as widely known, “regulatory techniques and practices should not go beyond what is necessary in order to achieve their purpose and opt to balance prudential and market development objectives.” That is, they should opt for simplicity.

Financial education and risk awareness

The lack of understanding of finance, which is the elements and tools to manage a personal and family economy or to understand risk and vulnerability in an environment such as the current one faced by many, by a large percentage of the population, is one of the main barriers to the expansion of insurance, beyond policies at the state level.

Financial education programmes will be necessary as early as primary school to build this useful foundation of basic financial knowledge for day-to-day life. In addition, closer collaboration should be pursued between governments, regulators, and the insurance industry so as to improve public understanding of the role of insurance for societies and the importance of good insurance regulation.

More financial education and better understanding of exposure to loss and its consequences would help in understanding insurance, an intangible product, not as an expense but as an investment.

Simplicity and affordability

As can be seen by the discerning mind, on both the regulatory and financial education sides, an essential element is simplicity. For the consumer, they must be products that are simple to take out, with no exclusions and complex clauses. They must provide clarity about their benefits and satisfy concrete and tangible needs. It is important not to forget that the price must be right and in line with the economic reality of each market.

Basic financial education, a favourable regulatory framework for insurance and affordable products that are clear and simple to purchase will help create a context of trust in this fundamental element for economic development.

Insurance Risk Management

As a fully integrated risk practice, PWC said it has the size and capability to address all risk issues and deliver end-to-end solutions

Insurance Risk Management, it stated is the assessment and quantification of the likelihood and financial impact of events that may occur in the customer’s world that require settlement by the insurer; and the ability to spread the risk of these events occurring across other insurance underwriter’s in the market. Risk Management work typically involves the application of mathematical and statistical modeling to determine appropriate premium cover and the value of insurance risk to ‘hold’ vs ‘distribute’.

In its work, the company assists in the alignment of the pricing market strategy and reinsurance arrangements to the organisation’s risk appetite as well as optimising the goals of the organization Assists clients to recognise risk events and changes to claim rates earlier, so as to move towards a more market responsive, risk-based pricing approach which ensures the efficient deployment of capital and a reduction in extreme risk event losses.

Enhance the feedback mechanism from claims function to underwriting and product development processes to improve the performance and profitability of these processes.

Understanding risk-based supervision (RBS) in insurance

According to Access to Insurance Initiative (aii), the implementation arm of the International Association of Insurance Supervisors (IAIS), the 11th consultation call, held on July 23, 2015, was focused on risk-based supervision (RBS) in inclusive insurance. The calls were hosted by Hannah Grant (A2ii) in English, OnurAzcan (A2ii) in French, and Patricia Inga Falcon (A2ii) in Spanish and supported by George Brady and Jules Gribbles from the IAIS Secretariat.

Technical inputs were provided by Holly Bakke (Financial Systems Expert, Strategic Initiatives Management Group, LLC) on the English calls, Louise Adnot (Autorité de contrôleprudentiel et de resolution, ACPR, France) on the French call and Dr. Ian Web (Technical Specialist, Prudential Regulation Authority, Bank of England) on the Spanish call. Country experiences were presented by RinaldGuri, Ph.D. (Head of Research, IT & Statistics Department, Albanian Financial Supervisory Authority (AFSA)) and Jocelyne Kaneza (Agence de Régulation et de Contrôle des Assurances, ARCA, Burundi). On the call, an overview of the key considerations for implementing a risk-based supervision (RBS) framework was provided, and supervisors were given the opportunity to discuss the challenges in implementing RBS in their respective jurisdictions.

Considerations for prudential supervision in inclusive insurance markets

Prudential supervision should be both risk-based, and proportionate. These criteria are equally relevant when supervising insurers who are operating in conventional insurance markets, as well as in inclusive insurance markets. However, as there are differences in the nature, size, and risk profiles of the insurers involved, and the business lines written; prudential supervisory approaches applied to conventional markets may not be appropriate for inclusive insurance. Therefore, a risk-based supervisory framework should, if proportionately applied, take into account the following considerations: Nature of the insurer’s business; Risks arising from that business; Steps taken by the insurer to mitigate risks; Likelihood of risks being realised in spite of mitigation; and the potential impact if those risks are realised.

For instance, when assessing the risk of a large complex insurer, or an insurer with complex products, sophisticated risk management methodologies might be appropriate. Likewise, such an insurer should be expected to employ sophisticated risk management practices. Conversely, if there are many small insurers with simple risk profiles, or an insurer with a business line that has a lower risk, a proportionate risk-based approach to supervision might be best.

Whatever the approach, it is important for supervisors to remember not to assume that small insurers, small policies, and low risks, always go hand in hand. Whenever higher risks are identified, both the insurer and the supervisor should move towards more sophisticated risk assessment; but where low or lower risks are present, supervisors should allow for simpler risk assessment and risk management practices.

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