Posted on Sep 21, 2012 by Sergio Ulloa
The insurance industry seems to be going through a lull. Things are quiet, with few major news events, no major catastrophes rocking the industry and a general sense of calm. How much of this is merely the swimming duck effect, with the appearance of calm on the surface, but energetic kicking happening under the water remains to be seen - but there is certainly a lot going on behind closed doors.
In Europe, the insurance industry is still working hard to effect amendments to Solvency II. As far as it is concerned, the proposed legislation is still far from the final draft, even after almost 10 years of planning and negotiating. Solvency II is going to force the industry to implement measures that will simply become an extra burden, with proposed capital requirements completely out of proportion to actual risks. One example often cited by opponents of the current version of the legislation, is that of Hurricane Katrina in 2005, which caused widespread damage resulting in US$40 billion of claims. While this was the most expensive mega-catastrophe in recent years, the insurance industry was able to absorb this hit and recover rather quickly.
Indeed, according to a recent report published by the Universities of Leeds and Edinburgh, the expected financial losses linked to natural catastrophes such as hurricanes and earthquakes are not of the magnitude to "justify substantially high capital holdings against catastrophe underwriting risk." The report focused on U.S. insurers, but the findings apply to all those potentially affected by the regulations.
While negotiators and lobbyists in Europe and North America are working feverishly to keep the insurance industry as legally unfettered as possible, the sales and marketing departments also have their work cut out for them.
The current economic climate is putting a lot of pressure on insurance premiums, with many Europeans currently underinsured when it comes to life cover. One of the main reasons for underinsurance is that the products are seen to be expensive, and customers are looking much more closely at what they are spending their hard earned pennies on. This trend can safely be extrapolated to other types of insurance, as the economy is affecting individuals as well as businesses and organisations of all types and sizes. In the life cover market alone, Swiss Re calculated that the protection gap amounts to EUR10,000 billion across the 14 EU countries. This gap is basically the difference between projected amounts of money needed by dependents in the event of a person's untimely death, and the financial provisions put in place to cover such an event.
In light of this, there is much work to be done to develop innovative products that offer clients an attractive deal. With such a stagnant economy, sales teams are going to have to work not only harder, but much more intelligently to improve their figures. There is certainly untapped potential in the European market, but without new products and bold strategies, only a small percentage of this potential will be realized. Insurers in the USA and EU are facing a lot of legislative uncertainty, especially so in America, as the government rolls out a raft of healthcare and health insurance changes, along with new taxes and regulation for insurers and re-insurers on the horizon. There is certainly a long uphill struggle ahead, but opportunity is often found in the midst of adversity. Although the demand for insurance will not be going away anytime soon, the nature of the business is changing somewhat, and insurers will need to adapt to stay in the game.
Emerging markets offer a whole lot of new opportunity, albeit with some risk and a lot of uncertainty. As the global shift eastward continues, money is flooding into Eastern Europe and Asia, which means access to a whole new set of customers, along with new cultures and completely different environments. Traditional insurance is doing very well in the developing world, and insurers are using strategies such as bancassurance very successfully to help them penetrate these new markets. However, because of the flexible and entrepreneurial nature of emerging markets, where many things are still in flux, traditional insurance companies are also having to face new challenges on a regular basis. Developing countries are not afraid to try something new, and have the luxury of being able to draw on the experience of more developed countries and businesses. For instance, there is a lot of interest being shown into using captive insurance as a solution to risk management and financing, especially based on the experience of large companies like BP in dealing with large scale disasters like the Deepwater Horizon spill in 2010.
Another area where there is a lot of upheaval and change in developing countries is in the area of healthcare. In 2011, the WHO's 193 Member States committed themselves to reforming their health financing systems to move towards universal health coverage. The goal of universal health coverage is that all people can use the health services they need without being exposed to the financial hardship often associated with paying for them.
In the developing world, where a large majority of people live on a subsistence basis, very few can ever afford any kind of healthcare, yet these are precisely the people who need assistance and public provision of healthcare services.
Developing nations face this problem almost universally, and much work is being done to study possible ways to finance universal healthcare and to develop models that provide a better bang for their buck.
Currently, public healthcare is provided based on variations of two basic strategies.
In the first type, a country provides universal healthcare based on a single risk pool, of which all eligible people are members, and funds its system through general taxes. Usually, in this kind of system, healthcare is provided by publicly owned facilities. The NHS in the UK is a good example of this strategy.
In the second type of system, a government provides healthcare to its nationals via mostly private providers, and funds the system through payroll taxes. The government essentially pays for private healthcare on behalf of its citizens. There are usually a few different risk pools, which means that different classes of citizens pay differently and possibly also receive different treatment. The German system works according to these principles.
At the moment, a majority of developing countries have public health systems that use multiple risk pools, but the current trend is definitely towards broader and larger risk pools. Many feel that consolidating pools mean lower administrative costs and less fragmented and possibly unequal treatment. The general consensus is that bringing everyone into one pool can make healthcare more equitable because everyone is entitled to the same set of benefits.
The role of the private healthcare industry varies, but in a majority of developing nations, private services are incorporated into their systems, with the state buying private care for their citizens when the public services cannot provide the necessary treatment.
This would be the best system from the perspective of the patient, as excluding the private sector from a universal healthcare system generally produces double standards, where the poor go to publicly funded facilities and receive basic care, while the rich can afford the very best treatment in private hospitals and clinics.
Developing nations have a their work cut out for them, but at the same time they have a huge advantage with "greenfield" development opportunities - unhindered by archaic and inefficient systems, and generally, a public healthcare system which can only really improve.
Of course, the biggest concern when talking about health services anywhere in the world revolves around finances. Many countries remain uncertain as to how to finance universal health coverage. Medical services have an amazing capacity to consume budgets, and universal coverage seems to be simply unaffordable to many.
Pre-paid schemes such as health insurance, provide one solution to this problem. The WHO hold the view that health insurance and other prepaid health financing mechanisms, are a key route to universal coverage. Every year, out-of-pocket payments force millions of people into poverty. Larger risk pools, combined with a larger percentage of the population contributing to a healthcare fund, would make it affordable for most developing countries to extend a basic standard of care to all their citizens, and even provide subsidies for more advanced services at private facilities on a more limited basis. Increasing taxes or funneling revenue from national resources like oil or minerals for the specific purpose of providing improved healthcare is not a hard sell, as long as citizens eventually feel they get what they pay for. Not all countries will be able to start with a full range of medical services, but getting the ball rolling through pilot programs and incremental extension of public healthcare will mean that they can grow their systems in a controlled fashion, experimenting with new solutions and strategies as they go. Assuming that health ministers can keep their departments on course and free from the ubiquitous bureaucracy, the goals of universal health coverage might just be within their reach.