November 22, 2022
How inclusive is insurance? When the industry was first pioneered by mutual societies in 17th century England, it was with the principles of mutualization and inclusion at its heart. Today, that role is looking battered. In mature markets that have long valued insurance, successive crises, like the 2008 global financial crisis and the Covid-19 pandemic as well as changing work and career patterns have hit the middle class hard. Working people have become vulnerable, stuck between falling or uncertain incomes and growing expenses. Consequently, even in countries like France, more and more people are dropping insurance, with potentially serious consequences to their resilience.
Despite this, insurance companies have not evolved to a model to address the new reality. The bias towards linear lives, with social protection historically based on a career of fulltime work for one company, remains. Insurance models are only slowly taking into account the changing world of work, of flexible and contract work and the gig economy. This further widens inclusion gaps.
On the other hand, most emerging markets lack insurance inclusion in the first place. Unlike mature markets, the middle classes in emerging markets are growing, albeit defined by precarity of earnings and informal work structures. Yet insurers focus on the small number of high earners — a missed opportunity for the industry. Products are often cut and pasted from western models that do not meet local needs, and distribution networks are underdeveloped.
Together, these challenges suggest an industry far from first principles. Paradoxically, companies whose purpose is to protect against risks have not evolved to meet new ones. There are consequences for trust: in emerging markets from lack of familiarity with insurance models, and in mature markets through mutual suspicion between companies and potential customers.
Lack of inclusion has consequences for resilience, with widening protection gaps and higher exposure to risk. While emerging markets may have growing middle classes, many households remain one crisis away from falling back into poverty. In the absence of formal insurance, more expensive, uncertain, and informal risk management strategies are relied upon. The pandemic has also heightened risk, with approximately 100 to 120 million people per year falling back into poverty due to healthcare expenditures.1
The situation highlights the need for a new model of inclusive insurance that takes into account the points of rupture and transition and builds resilience by protecting from financial and social vulnerabilities, as well as fulfilling business goals. The industry is aware of the challenge. At AXA, we have been using Financial Diaries to investigate how to design adapted safety nets since 2016.
Inclusive insurance is vital to building societal resilience as well as the personal resilience gained by health coverage, for example. This is clear by looking at who it is intended to protect. At AXA, our expectation was that the reach of insurance in emerging markets would “stop” at the poverty line. Instead, we discovered a “missing middle”, a growing low- to middle-income population too rich to be poor, but too poor to be rich, with lives becoming better over time and generations, but still defined by financial vulnerability, volatile levels of income, and lack of access to credit.
These people often serve as the economic motor in their markets — retail merchants, smallholder farmers, and microenterprises. Lack of trust in or access to affordable insurance ties up potentially productive capital in costlier alternatives and reduces appetite for risk. Here, inclusive insurance builds resilience in two important ways: it covers the most relevant risks in an affordable and accessible manner, and it optimizes revenue. It allows businesses to grow and take risks. A smallholder farmer, for instance, rather than keeping back some crop as a buffer, could choose to sell and invest in expansion. Thus, inclusive insurance helps create upward mobility in emerging markets by formalizing risk management strategies or complementing informal ones.
In mature markets, the purpose of inclusive insurance is slightly different: rather than enabling upward trajectories, it stops people from falling as their lives become less linear. Rather than a “missing middle”, there is a “sinking middle” — in France, 25% of the population, after meeting every constrained expense, has between just 70 and 90 euros left per month. As the numbers of those in multiple employment, independent employment, and the gig economy grow and become a significant economic motor, well-adapted insurance products can preserve or increase societal resilience.
Inclusive insurance builds resilience in two important ways: it covers the most relevant risks in an affordable and accessible manner, and it optimizes revenue. It allows businesses to grow and take risks.
Key to making inclusive insurance happen in the emerging world is appropriate product design and distribution. There is a need to look at the entire value chain.
In emerging markets, we have found that while some countries, such as India and the Philippines, have strong insurance cultures, products are not designed for local needs and thus do not register. One meaningful example is an accident policy for India that specifically excludes ice skating, a sport with almost zero presence in that market — an indication of how policies are often simply replicated from mature markets. There is a need to create relevance, with simple policies that can be explained easily and with minimal complexity via SMS, WhatsApp, and other micro forms of delivery. This is not about making products smaller, but about building a relevant insurance culture.
Equally important is product distribution. In the absence of brokers and other traditional means of distribution, this comes via leveraging and partnering with telecoms companies, microfinance institutions, remittance companies, and e-wallet and e-commerce platforms, as well as direct and word-of-mouth means. Again, it is about creating relevance using trusted digital and physical networks.
In mature markets, the purpose of inclusive insurance is slightly different: rather than enabling upward trajectories, it stops people from falling as their lives become less linear. Rather than a “missing middle,” there is a “sinking middle”.
Lessons learned from Indonesia, one of AXA’s biggest emerging markets for inclusive insurance, underline the above. There, in partnership with a microfinance institution, we conducted market research with a view to extend life insurance coverage to other areas and to create a life insurance product designed specifically for women. But the research revealed that in the eyes of women, it was important to focus on coverage for their husbands, for that was where the financial risk lay. Likewise, we discovered the importance of distribution and marketing via digital payment and credit companies, getting messages out via SMS, and making use of digital wallets.
Ultimately, inclusive insurance is about making the industry itself resilient, by capturing the economic opportunity presented by markets either uninsured or disengaging from insurance, to serve the markets of the future.
Emerging markets are a work in progress. The next frontier for inclusive insurance, for AXA and other companies, is mature markets such as France, where tools like Financial Diaries will prove valuable in closing data gaps and learning how people manage their financial lives. The objective is to create relevant and affordable products that meet the needs of both the middle income population that already value insurance and those in the new world of work, such as the gig economy.
For the industry and for its customers, the move to inclusive protection is an essential one in a world defined by successive crises, from the climate crisis to the financial crisis to the pandemic. Customers are becoming aware of protection gaps, and insurers are realizing business and social impact cannot be siloed. If insurers do not adapt, they will cover an ever-diminishing share of the population. Ultimately, inclusive protection is about returning to first principles, and ensuring a responsibility to protect people at a time of change, when building resilience is crucial.