In November 2017, government agencies, regulatory bodies, financial institutions and technology companies around the world gathered in Manila for the 2nd Asia Finance Forum to discuss applications of financial technologies (FinTech for short) in achieving sustainable development goals.
Indeed, FinTech will fundamentally reshape the way we understand, plan and conduct financial activities. Due to its portable and scalable nature, technology can help propel emerging markets to the forefront of innovation and create “what has never been”. M-Pesa, a mobile-money digital platform which originated in Kenya, has enabled millions of people without bank accounts to have one via mobile phones. Elsewhere in India, the electronic payment company Paytm is now helping 250 million mobile users bypass the ‘plastic generation’ of credit cards into digital financial transactions.
With accelerating mobile penetration and digital inclusion across the globe, emerging markets are well positioned to leapfrog traditional models and materialize a ‘late-mover advantage’ in financial services. Less hindered by legacy systems, they are likely to be more adept at implementing new solutions and achieving higher proportional gains from the status quo.
Beyond the Proverbial Chicken and Egg Conundrum
The needs in emerging markets are diverse and many. As we speak, there are billions across the world without any form of risk protection for their assets and livelihoods. Insurance for the masses remains one of our world’s greatest unmet needs, and there is much more that FinTech can do to accelerate growth in this area.
Socio-economic conditions of emerging markets call for a fundamentally different approach to insurance. Oft-cited challenges for insurance in emerging markets today are demand-side factors such as low-income levels, poor financial literacy and cultural issues that stimulate risk-taking behaviour. Thankfully, just as with M-Pesa and Paytm, technologies can offer great gains in these areas via process automation, greater ease of use, and improved accessibility for all.
This begs the question: as demand grows, do we have the right products and processes in place to meet market needs? Here, I would like to describe three major supply-side factors that will be key to growing new insurance markets for the masses.
The Cultivation of New Insurance Markets
First and foremost, governments have a key role to play in providing incentive schemes and regulatory frameworks that help kick start new market developments. Take India for example. Through providing supportive market regulations, premium subsidies and historical records (useful in technical activities), the government takes an active role in piloting new insurance schemes and scaling up successful programs across the nation. Currently, there are a total of seven government-directed nationwide schemes in India geared at insuring the masses from life, health and agriculture risks.
Secondly, knowledge acquisition is important in equipping market players with key technical capabilities and operational know-how for the long-term operability of markets. This includes the methods, processes and standards in key value chain activities, as well as new technological innovations that may be integrated into products and processes. Here is where partnerships between insurance companies, government agencies and technology firms can jointly create new operational models for insurance and unlock new value for the society at large.
Lastly, insurance companies will require overseas risk capacity to underwrite new risks. This will increase risk diversification beyond the local market and help create more resilient portfolios for insurers. By working with the global reinsurance industry, local insurers can increase their risk capacity, meet solvency requirements and ensure sufficient funds to pay out claims. Reinsurers also stand to benefit with increased reinsurance premiums and greater diversification of overall portfolio risks. Therefore, ever-closer cooperation between insurers and reinsurers will be key to expanding the market for all.
Building insurance markets in emerging economies is a multifaceted challenge that requires the collective efforts of many. When starting from ground zero, much initial efforts have to be spent on establishing strong foundations for the long-term sustainability of markets. Fortunately for us, technology can unlock new methods and approaches that minimize initial barriers to demand and supply. With the right gears in the right places, it won’t be long before the wave of digital transformation brings inclusive insurance for all.