A hugely under-insured India gears up to capture more reinsurance biz

Asian countries, China and India remain under insured because of low per capita income

There is just no getting away from the harsh fact that insurance is an afterthought across the globe, especially assets. This is what comes through from the global report on under-insurance by Lloyds' released this week. And other reports show low per capita income in over populated Asian countries make insurance a costly choice. 

Just sample this data. Netherlands and Indonesia both sit on flood-prone geographies. As one would expect, their appetite for insurance is at par with their relative per capita income levels; Netherlands tops the world league of general insurance penetration as a percentage of GDP (7.7 per cent) while Indonesia is ranked 40th (0.5 per cent), as per the Lloyds’ report. But in both countries the insurance coverage for their population has declined in the five years since the first report was published in 2012. The dip for Netherlands is more at 1.8 per cent, than Indonesia’s 0.1 per cent.  

This is the point, the report “A World at Risk: Closing the insurance gap” puts across. Countries under-insure and they do so even when they have periods of rising prosperity. The report estimates the current global insurance gap at $162.5 billion, just marginally down from $168 billion in 2012 when the largest insurance syndicate in the world issued its first report. The global insurance gap, or under-insurance, is the “difference between the amount of insurance coverage that is economically beneficial and what is actually purchased”, says Geneva Association, an international think tank of the insurance industry. Low per capita income makes buying of insurance a costly choice.

Where India stands

China and India make up almost two-thirds of this gap—China’s insurance gap is $76.4 billion and India is $24.6 billion. Indonesia is next.  Between them, the three countries also account for nearly 39 per cent of the world population. So, just as a motor car owner who pays less premium than she should pay for her car has to dip deep into her own resources in the event of an accident, a country with an insurance gap has to mortgage more of its GDP to pay for recovery when something like a flood or a cyber meltdown strikes. After a major loss, the country has to to fend for itself often by raising additional taxes from its own people. It could mitigate some of that if it is able to dip into an international insurance pool instead. 

Of course, there is a business case here for the insurers too. As more countries, especially in Asia, perceive the risk and reach out for more insurance cover, global reinsurance giants like the Lloyds' syndicate would discover more opportunities. 

One of the reasons poorer countries buy less insurance is the high cost of reinsurance. Early this year, after plenty of back and forth, India has mandated that at least 5 per cent of all insurance policies from Indian markets have to be offered to national reinsurer, GIC Re. The sector regulator, Irdai has mandated a waterfall mechanism even for foreign companies. This is meant to keep the cost of insurance low so that the public buys more cover. General insurance penetration in India is less than 1 per cent of its GDP. 

Shankar Gargiparthy, India Country Manager, Lloyds agrees that per capita income plays a part in low insurance penetration but he does not agree that costs of re-insurance play a role in it. “Insurance companies need to seek out reinsurance cover before writing policies. Also to cut corners it does not help if those policies are peppered with exceptions. Those create absence of trust in the population when there is a massive loss”.

Portents are favourable for 2019. As mega losses have been lower this year the world over (Kerala floods and typhoon Michael notwithstanding), reinsurance pricing in global markets where GIC Re plays along with Lloyds' and Munich Re is expected to decline across the globe. In January 2019, when renewals for policies come up for review, a Reinsurance News report quoting JP Morgan analysts notes that lower catastrophic losses over the third quarter of 2018, along with ongoing over-capitalisation and the robust appetite of alternative capital markets like India, has created this benign combination. 

Paradoxically, as a country like India moves up the development chain, the losses it can suffer from climatic events such as typhoons, floods, earthquakes or cyber crimes rise. “India suffers, as its neighbour Bangladesh does, from flooding and earthquakes in the north around the Himalayas, but being a far more developed economy, it has significantly more GDP potentially at risk in absolute terms,” the Lloyds' report points out. It notes that Asia suffers more floods than any other continent -- more than 600 since 2008 -- with four of the top 10 most serious floods since 2008 occurring in China. 

Insuring against cyber threats 

In the case of cyber security, a key reason for the level of under-insurance is a similar lack of understanding of the cyber threat and how cyber insurance can help. “One of the biggest reasons for not purchasing cover is that potential buyers do not understand their exposures,” the report notes. While Japan, Australia, South Korea, and the Philippines demonstrate their willingness to buy the right insurance to cover these risks, both India and China lag. 

Yet the costs can be terrible. Citing the Equifax case, where credit card data was massively hacked in the US, the second Lloyds' report notes that “breach-related costs are now predicted to hit $439 million for Equifax, of which only $125 million will be covered by insurance. 

Despite the level of threat, another report by Munich Re issued this year points out the world has insured itself only against 30 per cent of catastrophic losses. It also makes the same point Lloyds' highlights that the protection is skewed in favour of developed economies. “This global trend masks huge differences between the various country income groups. Progress in terms of shrinking the gap has basically been limited to high and upper middle-income countries”. So while Bangladesh is the country with the least penetration at 0.2 per cent of GDP, “in Japan, a country with its own fair share of risk exposures, insurance penetration is 2.3 per cent of GDP”. Both countries figure in the Lloyds' list of ten countries that face the highest risk of natural calamity, but while it is 0.83 per cent of its GDP for Bangladesh, it is 0.29 per cent for Japan. And, Bangladesh's economy is about a twentieth of the size of the Japanese economy. 
 

India has fortunately dropped out of this infamous list since the last report of Lloyds' in 2012. “India is the only country that has dropped out of the top 10 countries with highest expected annual losses as a percentage of GDP since the last report. This can be explained by the relatively low number of natural catastrophes in India in recent years, with the only significant property losses in Chennai, set against a rapidly-growing economy. Its place has been taken by the Philippines, which rises up the table in part due to a devastating typhoon that hit the country in 2013. 

Still, between the two Asian giants, India remains more at more risk than China for two other reasons. Its low per capita income, about a third less than China, means a catastrophic loss can push more of India’s population into destitution. Also, the economy being located more in the tropics, is more susceptible to climate change-imposed vagaries. For both China and India “The combination of high GDP at risk and a newly emerging culture of insurance adoption means these countries rank highly in absolute losses”, it adds.