By Vaasav Gupta
Insurance markets are critical to any nation’s socioeconomic health. On an individual level, it provides benefits in many aspects: it ensures financial stability and protects from unexpected occurrences that may otherwise create financial difficulties by transferring risks from individuals to large insurance corporations. Because of this, insurance is a large industry. In 2020 alone, the gross insurance premiums written worldwide were over $5.2 trillion 1. Furthermore, the industry continues to grow: Insurance firm Swiss Re estimates 6.1% nominal growth in total premiums in 2022 2. Despite the necessity of insurance and its market growth, many impoverished people in developing nations lack insurance products. This paper will examine the three main insurance industries – health, life, and disaster – in developing nations, and how lacking insurance products in these countries hurt everyday people.
Globally, over 800 million people spend 10% or more of their budgets on healthcare expenditures, and of them, nearly 100 million are forced into poverty by these high expenses 3. Because of this, health insurance has become a necessity for medical care affordability. Low-income individuals are more likely to receive poor care due to budgetary constraints, which is troublesome because they often live in unsanitary, polluted areas 4, creating more health issues. Because of greater need but less access to healthcare, Nearly 6 million people die in low- and middle-income countries annually from poor healthcare quality and access. Fewer, but no less noteworthy, (2.9 million) die from not receiving healthcare entirely 5. And while per capita healthcare expenditures are much lower in low-income nations compared to high income OECD nations ($27 compared to $4618), in low-income nations the out-of-pocket share of these expenditures is 48% and in high income OECD nations it is only 14% 6. This may be because higher-paying jobs have better benefits, including health insurance, which may reduce out-of-pocket expenditures. This, however, means that hourly, low-wage employees who need health insurance the most may receive the worst products if any.
Nations have adopted different health insurance systems to increase access to quality healthcare for poor individuals. Universal health insurance is a popular option, but there are many different types of it that nations adopt. Thailand, for example, has a single-payer, completely tax-funded system with only small co-payments from the healthcare recipient. However, they face funding challenges as it relies heavily on taxation of a primarily low- and middle-income population 7. The contributory system is also a popular option, where the “poorest are subsidized by tax revenues, but everyone else is required to pay a premium, collected through a payroll tax for formal sector workers and collected directly from individuals for everyone else” 7. Regardless of the specific type of universal health insurance, though, publicly funded insurance systems are more affordable and improve health, welfare, and sustainability 8. However, some countries may be too poor and lack the tax base for universal healthcare. Furthermore, corruption and existing institutions can serve as roadblocks to its adoption 9.
Community-based health insurance is another option. Such providers are usually non-profits and typically operate in rural, poor areas. However, because they are non-profits, they typically lack adequate funding and are volunteer-run. This means that management lacks the time, skill, and funding needed to make it a viable option 22. Social health insurance, however, is more centralized as it has mandatory participation, and premiums are proportional to income. The aim of this is to create affordable care because it creates a large risk pool, enabling more stable (and ideally lower) premiums for individuals. Japan, Thailand, and the Philippines are a few countries where it is practiced 23. But because social health insurance mandates participation and premiums, it requires strong institutionalism for payment collection. This is difficult in developing countries, where authorities may be weak and underfunded. And in Africa, for example, nearly 86% of employment is in the informal sector 10. In areas like these where a significant portion is “informal,” tax bases are weak and authorities may struggle to collect payments, making social health insurance difficult to finance. While there are several options, health insurance options in poor nations are limited and difficult to optimize due to economic and development issues.
LIfe insurance products are widely sought out by household earners in developed countries as it provides the comfort of knowing that the insured loved ones are financially secure after the insured’s death. This can enable peace of mind, decreasing stress and allow better financial planning. Life insurance comes in primarily three forms. Term life insurance only covers family until the end of a predetermined period. This is mostly for those needing more immediate protection and may have an uncertain future. Whole life insurance, on the other hand, never expires. Universal life insurance policy holders pay based on their ability for each premium, while term and whole insurance lock in rates from the start. Universal insurance holders have greater flexibility as they can adjust their premiums and death benefit 24.
Aside from its benefits on a personal level, life insurance also holds various functions regarding economic development. Because they collect so many funds, life insurance firms amass large amounts of capital that they then invest back into the economy. These amounts are quite significant and therefore play a notable role in any economy. A University of Nebraska – Lincoln study found that life insurance growth explains roughly 14% or variation in economic growth 11. Hence, greater adoption of life insurance among citizens can help poor countries build infrastructure and develop economically. However, life insurance products typically are not promoted in low-income economies as corporations may be hesitant to expand operations there because of higher probability of loss and/or lower returns.
In addition to corporate hesitance, life insurance adoption faces many other challenges in poor communities. In many of these communities and developing countries, life insurance is considered unimportant and has ideological and cultural oppositions. Furthermore, many individuals hold the belief that economic security is “provided through families” 12. The poor infrastructure and human capital in these nations also makes life insurance difficult to establish because thorough technical analysis and data science is required for insurers to create plans and assess risk. Still, life insurance is a growing industry in developing economies. According to a McKinsey & Co. study, developing nations account for more than half (52%) of global life insurance premium growth 13.
Catastrophe and Climate
As the climate crisis continues to worsen, insurance coverage is important to protect against disasters. Developing economies and impoverished people are most vulnerable to natural disasters 25. Natural disasters cost the 77 poorest countries an average of $29 billion annually, and only 3% is covered by insurance 14. This can cause many to fall into or remain in poverty due to heavy expenses. The potential for loss is large: According to British insurance company Lloyd’s, total assets uninsured against disasters are worth $163 billion 16. For uninsured damages on these assets, governments may need to bear expenses, as oftentimes citizens may lack the financial means to make repairs themselves. In poor countries, however, this is difficult due to low government funding and poor infrastructure.
While these catastrophe risks for uninsured populations have always existed, they are only recently growing more severe as climate change becomes more serious. In the last 50 years alone, the number of natural disasters has “increased by a factor of five” 17. When these disasters hit, damage may be caused and livelihoods may be ruined. However, they have uneven impacts. According to a UN study, in rich countries roughly 30% of losses from natural disasters were covered from 1980 – 2004, compared to less than 1% for low-income countries 18.
There are many reasons why people avoid disaster insurance. Often, individuals dismiss risks until a catastrophe actually occurs. They underestimate the likelihood they will experience a natural disaster. This “out of sight, out of mind” 19 mentality leads to greater losses for disaster-stricken populations when catastrophes do occur. People may also avoid insurance because they lack information on how likely their property is to sustain damage. This makes it difficult to estimate the actual amount of damage should a disaster occur 20. For these reasons, property owners are left unable to repair assets when disasters strike. Due to the lack of funds for disaster recovery in low-income nations, foreign aid sometimes helps these uninsured populations. In 2017, for example, Germany pledged $23 million to “help vulnerable countries tailor disaster risk financing mechanisms to suit their needs” 21. These programs empower developing countries to tailor financial assistance in the case of disaster.
As global inflation increases, individuals from low-income backgrounds need to be insured to stay financially stable in the wake of rising costs of necessities like healthcare and disaster repair. However, underdeveloped insurance industries make this difficult and contribute to the poverty cycle: poor individuals cannot afford repairs, further engulfing them in poverty. These conditions extend to their children, which makes it increasingly difficult to escape poverty over time.
Spes Nova works to combat this by giving low-income artisans the tools to survive and afford necessities like insurance. Spes Nova is also researching parametric insurance policies that would lower the cost for insurance to low-income people and businesses in emerging economies where there is currently a lack of insurance products. Parametric insurance policies guarantee a payout if a disaster occurs in an area and does not require an auditor to confirm the damage (reducing implementation costs making it a more financially viable model). For more information, visit https://spesnova.org/.
1 Rudden, Jennifer. “Global Insurance Industry: Gross Premiums.” Statista, 1 Apr. 2022, www.statista.com/statistics/273156/gross-premiums-generated-by-the-insurance-industry-worldwide-since-2006/#:~:text=Gross%20premiums%20of%20the%20insurance%20industry%20worldwide%202020&text=In%202020%2C%20this%20figure%20reached,dollars%20in%20the%20previous%20year.
2 Aizpun, Fernando Casanova, et al. “Sigma 4/2022 – World Insurance: Swiss Re.” Inflation Risks Front and Centre, Swiss Re Institute, 12 June 2022, www.swissre.com/institute/research/sigma-research/sigma-2022-04.html.
3 “World Bank and WHO: Half the World Lacks Access to Essential Health Services, 100 Million Still Pushed into Extreme Poverty Because of Health Expenses.” World Health Organization, World Health Organization, 13 Dec. 2017, www.who.int/news/item/13-12-2017-world-bank-and-who-half-the-world-lacks-access-to-essential-health-services-100-million-still-pushed-into-extreme-poverty-because-of-health-expenses.
4 Hood, Ernie. “Dwelling Disparities: How Poor Housing Leads to Poor Health.” National Library of Medicine, National Institue of Environmental Health Sciences, May 2005, www.ncbi.nlm.nih.gov/pmc/articles/PMC1257572/.
5 Kruk, Margaret E, et al. “Mortality Due to Low-Quality Health Systems in the Universal Health Coverage Era: a Systematic Analysis of Amenable Deaths in 137 Countries.” The Lancet, The Lancet, 5 Sept. 2018, www.thelancet.com/journals/lancet/article/PIIS0140-6736(18)31668-4/fulltext.
6 Escobar, Maria-Luis, et al. Why and How Are We Studying Health Insurance in the Developing World? Brookings Institution, www.brookings.edu/wp-content/uploads/2016/07/theimpactofhealthinsurance_fulltext.pdf.
7 Banerjee, Abhijit, et al. “The Challenges of Universal Health Insurance in Developing Countries …” MIT Economics, Aug. 2019, economics.mit.edu/files/17644.
8 World Bank Group. “Universal Health Coverage for Inclusive and Sustainable Development.” World Bank, World Bank Group, www.worldbank.org/en/topic/health/publication/universal-health-coverage-for-inclusive-sustainable-development.
9 McKee, Martin, et al. “Universal Health Coverage: A Quest for All Countries but under Threat in Some.” ScienceDirect, Value in Health, 15 Nov. 2012, reader.elsevier.com/reader/sd/pii/S1098301512041526?token=5BB1F7FADFA46A93ECADAB44D02EEA8DB3EFDF3C9C3C8CAA2EE62C29C9FB1C8EAE39696F2FC1CBE1F3CAAE4367C9BC30&originRegion=us-east-1&originCreation=20220808023722.
10 “Nearly Two-Thirds of Global Workforce in the ‘Informal’ Economy – UN Study – United Nations Sustainable Development.” United Nations, United Nations, 30 Apr. 2018, www.un.org/sustainabledevelopment/blog/2018/04/nearly-two-thirds-of-global-workforce-in-the-informal-economy-un-study/.
11 Soo, Hak Hong. “Life Insurance and Economic Growth: Theoretical and Empirical Investigation.” DigitalCommons@University of Nebraska – Lincoln, University of Nebraska – Lincoln, 1996, digitalcommons.unl.edu/dissertations/AAI9712527/#:~:text=The%20conditional%20directional%20feedback%20from,run%20and%20the%20long%2Drun.
12 Outreville, J. Francois. “Life Insurance in Developing Countries: A Cross-Analysis.” United Nations Conference on Trade and Development, United Nations, Dec. 1994, unctad.org/system/files/official-document/wir2021_en.pdf.
13 Bernard, Pierre-Ignace, et al. “The Future of Life Insurance: Reimagining the Industry for the Decade Ahead.” McKinsey & Company, McKinsey & Company, 29 Sept. 2020, www.mckinsey.com/industries/financial-services/our-insights/the-future-of-life-insurance-reimagining-the-industry-for-the-decade-ahead.
14 “UNDP Launches New Insurance and Risk Finance Facility: United Nations Development Programme.” UNDP, United Nations, 27 Sept. 2021, www.undp.org/press-releases/undp-launches-new-insurance-and-risk-finance-facility.
16 “Emerging Economies Have $160BN Insurance Gap.” Lloyd’s, Lloyd’s, 18 Oct. 2018, www.lloyds.com/about-lloyds/media-centre/press-releases/emerging-economies-have-160bn-insurance-gap.
17 “Weather-Related Disasters Increase over Past 50 Years, Causing More Damage but Fewer Deaths.” World Meteorological Organization, 31 Aug. 2021, public.wmo.int/en/media/press-release/weather-related-disasters-increase-over-past-50-years-causing-more-damage-fewer.
18 Linnerooth-Bayer, Joanne, and Reinhard Mechler. “Insurance against Losses from Natural Disasters in Developing Countries.” United Nations Department of Economic and Social Affairs, United Nations, Oct. 2009, www.un.org/esa/desa/papers/2009/wp85_2009.pdf.
19 Bakkensen, Laura A., and Lint Barrage. “Flood Risk Belief Heterogeneity and Coastal Home Price Dynamics: Going under Water?” NBER, 25 Sept. 2017, www.nber.org/papers/w23854.
20 Kousky, Carolyn. “The Challenges of Disaster Insurance.” Risk Management and Decision Processes Center, Wharton School of the University of Pennsylvania, 6 Sept. 2017, riskcenter.wharton.upenn.edu/lab-notes/the-challenges-of-disaster-insurance/.
21 Whiting, Alex. “Insurance for Poor Could Protect the Most Disaster-Vulnerable – Governments.” Reuters, Thomson Reuters, 20 July 2017, www.reuters.com/article/instant-article/idUKL5N1KB4KS.
22 “Community Based Health Insurance.” World Health Organization, World Health Organization, 7 Mar. 2020, www.who.int/news-room/fact-sheets/detail/community-based-health-insurance-2020.
23 “Social Health Insurance.” World Health Organization, World Health Organization, Mar. 2003, apps.who.int/iris/.
24 “What Is Universal Life Insurance? | Allstate.” Allstate, Allstate Corporation, Dec. 2021, www.allstate.com/resources/life-insurance/universal-life-insurance.
25 “Who Are Most Vulnerable to Natural Hazards?” 21st Century Challenges, Royal Geographical Society (with IBG), 25 Aug. 2015, 21stcenturychallenges.org/who-are-most-vulnerable-to-natural-hazards/.