When Cyclone Idai made landfall in the east African countries of Mozambique, Madagascar, Malawi, and Zimbabwe earlier this month, it claimed hundreds of lives, cut off electrical power to millions, damaged or destroyed schools, hospitals, and businesses, and drove innumerable families from their homes. Flooding nearly submerged Mozambique’s fourth-largest city, Beira, a port that serves as a gateway to inland areas of Mozambique, Zimbabwe, and Malawi. The damage is so severe and widespread that Idai ranks among the most devastating cyclones in history.
While the humanitarian crises surrounding Cyclone Idai got some attention, the underinsurance crisis, or “insurance gap,” that helps perpetuate them is routinely overlooked. In countries like those in the path of Cyclone Idai, insurance penetration rates are extremely low—meaning there is an enormous gap between the value of the property assets and the rate at which they are insured. Research by Lloyd’s and the Centre for Economics and Business Research indicates that Bangladesh, India, Vietnam, the Philippines, Indonesia, Egypt, and Nigeria all have an insurance penetration rate of less than one percent. Therefore, properties rebuilt with insurance proceeds in those countries are the exception to the rule, and other sources of financing are scarce or nonexistent.
10 years ago, the Microinsurance Centre and Lloyd’s published a report titled “Insurance in Developing Countries: Exploring Opportunities in Microinsurance,” which highlighted the growing need for insurance in developing countries. Microinsurance is designed to protect low income people against risk, such as accident, illness, and natural disasters. The report estimated that about 135 million people—just five percent of the total potential market—were insured by microinsurance at that time. Lloyd’s noted market growth of up to 10 percent per year and concluded that insurers expanding into developing economies could potentially place as many as three billion new microinsurance policies. Additionally, establishing a grassroots presence in an emerging economy can reap so-called “first mover” benefits by positioning an insurer to gain market intelligence for other business activities, and provide other types of insurance as the needs of the economy grow and diversify.
In a second report published in 2018, Lloyd’s expanded on the many ways that emerging insurance markets in developing economies yield humanitarian benefits by providing badly needed funds to support rebuilding. The report, titled “A World at Risk: Closing the Insurance Gap,” explains that in areas where most properties are uninsured, rebuilding is extremely difficult because limited financial resources must be prioritized to meet more basic needs. Meanwhile, the slow pace of rebuilding prevents participation in the economy, which deprives people of income that could be used to rebuild, leading to a vicious cycle. Indeed, “[c]atastrophes coupled with underinsurance can be seen as one of the significant factors that holds back economic development and perpetuates global inequality.”
Insurers keen to close the insurance gap serve both profit motives and humanitarian aims
As insurance markets in developing economies expand, more building owners can insure their properties, and more of the properties that suffer damage – whether from a catastrophe like Cyclone Idai, or from less dramatic weather events, fires, or other perils – are quickly rebuilt. Economies with better insurance markets recover more quickly, which encourages investment in real estate, which helps stabilize the economy, encouraging further investment and economic growth. Development of insurance markets can help create a positive cycle leading to stability, investment, growth, and opportunity. Meanwhile, insurers who participate in this positive cycle gain profits, access to large and diversified risk pools, benefits to reputation, and market intelligence.
As the communities devastated by Cyclone Idai regain their footing and immediate needs are met, they will eventually focus their energy on rebuilding. But for most building owners, the financial resources necessary for rebuilding will be very hard to come by, and insurance benefits will be non-existent. This insurance gap may be overlooked by insurers focused on familiar, established markets in developed countries. But insurers keen to close the insurance gap know that their efforts have the potential to drive long-term growth and profits, while also supporting humanitarian aims.
Posted by Rory Zamansky and Dennis Anderson
Posted by Rory Zamansky and Dennis Anderson
 The International Association of Insurance Supervisors defines microinsurance as “the protection of low-income people against specific perils in exchange for regular premium payments appropriate to the likelihood and cost of the risk involved.”