Financial and economic growth may be greatly aided by the insurance sector’s participation. Reduced uncertainty and the effect of significant losses might drive capital spending, creativity, and competitiveness in the industry. Let us look at how can developing countries improve their insurance industry?
Insurance firms, as money markets with lengthy investment horizons, may contribute to the supply of long-term instruments for business investment and home financing. There is evidence that the insurance sector’s development is causally related to economic growth.
The findings indicate that per capita income, population size and density, demographic patterns, wealth inequality, the size of the public pension system, state control of insurance firms, the accessibility of private credit, and religion all influence life sector premiums.
In addition to these factors, the non-life sector is impacted. Though some of these factors are structural, the findings indicate that the insurance sector’s growth may also be impacted by a variety of policy variables.
Risk transfer and indemnification provided by the insurance market, both as a financial intermediary as well as a supplier of risk transfer and indemnity, may assist to economic development by enabling varied risks to be handled more effectively as well as mobilizing domestic savings.
Over the last decade, insurance market activity has grown at a quicker rate, especially in developing nations, owing to the process of liberalization and financial integration, raising concerns about the effect on economic development. The author examines the link between insurance market activity (including life and nonlife insurance) and economic development.
He provides compelling evidence of a causal association between insurance market activity and economic development using the extended technique of moments for dynamic models using panel data for 56 countries for the period 1976–2004.
Both life and nonlife insurance have a causal influence on economic growth that is both positive and large. In the case of life insurance, high-income nations drive the outcomes. In the case of nonlife insurance, on the other hand, both high-income and low-income nations influence the outcomes.
The link between financial development and economic growth has received substantial attention throughout the past decade. The majority of research has focused on the banking industry and financial markets. The insurance industry has gotten less attention. Although banking, insurance, and the securities markets are all intimately connected, insurance provides rather diverse economic tasks, according to Brainard (2008).
In this light, it requires special consideration and examination. In recent research, the link between the insurance industry and economic development has garnered more focus from academics. The insurance–growth nexus study has produced no compelling explanation for the link between these factors.
Researchers have disagreed on the nature of causation, whether insurance development results from economic growth, economic growth results from the insurance sector or both factors result from each other.
A realistic assessment of the density and penetration of insurance services in light of economic development enables consideration of the most suitable market strategy. Due to a lack of specific techniques for measuring insurance sector progress, researchers developed a novel way by developing previously used methodology for other objectives.
Recently, researchers developed common insurance indicators like penetration and density to aid in the evaluation of market potential. While the insurance sector’s potential contribution to economic development has been acknowledged, the insurance–growth nexus has not been researched as thoroughly as the banking sector’s.
Additionally, the last decade has created additional obstacles. The bull market has not benefited life insurance. Global penetration declined to 3%, while premium growth in the majority of developed nations lagged behind GDP, averaging slightly around 2% each year.
Interest rates have been reduced globally, reducing investment portfolio returns. Recently, the COVID-19 epidemic has pushed global interest rates even lower than they were during the 2007–08 global financial crisis, resulting in an outsized effect on the life insurance stock compared to the rest of the market.
Numerous indicators point to a bright future for the life insurance market over the next decade. Demand from customers is at an all-time high. Indeed, the COVID-19 pandemic has reaffirmed the critical role of mortality protection. The pace of public pension replacement is dropping, while healthcare expenses are increasing trends that have been exacerbated by the COVID-19 issue.
Additionally, economic and demographic developments will act as tailwinds. Global middle-class growth is accelerating, bringing more earnings, increased financial wealth, and increased risks to handle. By 2030, the entire baby boom generation will be 65 or older,1 and many will likely outlast their retirement resources.
The impact of digital disruptors in other sectors has pushed the insurance industry to raise the bar as well. Numerous areas allow for personalization, which may help enhance client connections.
A move toward population-based health management. While life insurers have historically placed a premium on mortality protection, anxiety about mortality risk has waned in many countries, resulting in a decline in demand for core products.
Despite the recent surge in online life insurance research prompted by COVID-19, the long-term drop in mortality risk is anticipated to continue. In the following decade, as life expectancy grows and health patterns shift, insurers will play a more important role in their customers’ health.
There will be a 50% increase in the number of individuals aged 60 and above between 2015 and 2030. This is a prediction as to how can developing countries improve their insurance industry?
Additionally, non-communicable diseases that are more directly associated with lifestyle and behavior, such as diabetes, heart disease, and lung cancer will account for 71% of all yearly deaths worldwide and will continue to account for a growing share of mortality risk.
These characteristics, we think, will encourage life insurance and annuity makers to engage clients in the shared-value economics of healthy living in order to boost policyholder lifespan.
Technology will be critical in this change. The explosion of data and linked devices, especially wearables, will continue to make it simpler for life insurance firms to take an active role in molding consumer health, which will benefit everyone. With this data, life insurance firms may send timely, targeted reminders or alerts on food, illness management, medical visits, local health services, and physical exercise.
Customers are becoming more eager to share their data in return for personalized services; internationally, six in ten customers feel comfortable sharing personal information with their insurer in exchange for cheaper rates.
During the epidemic, this tendency has intensified. Consumers are more ready to disclose data acquired on their watches connected to their heart rate, according to research. In recent months, life insurance firms have shifted their focus away from in-person physical examinations and toward more thorough inquiries and medical records, which are not achievable with physical distance.
Development inside current markets will be difficult; however, life insurers may leverage acquisitions to expand into new regions, adjacencies, and products. Cross-border transactions may give access to emerging markets with a greater growth rate, such as those in Latin America and Asia.
Additionally, as the global middle class expands to six billion people by 203011, strong wealth- and asset-management solutions will become increasingly important, especially in nations such as China, where the sector is seeing tremendous growth. Numerous life insurance firms have already grown into such asset management subsidiaries, which naturally complement the industry’s fundamental skills.
Others may find it more feasible to operate capital-light, fee-based enterprises in areas relevant to their other talents. Regardless of the association between return on equity and price-to-book, such investors reward firms with a greater return on equity.
Life insurance firms may also use acquisitions to support technology and capabilities development. Over the last decade, insurance has grown in popularity, attracting over $4 billion in worldwide venture capital financing in 2018.
The segment’s growth is being fueled in part by the rising popularity of internal venture capital funds formed by life insurance firms. These funds enable access to cutting-edge start-ups and act as a natural “buy” rather than “build” entry point for cutting-edge technology.
As a consequence, life insurance firms may have access to the cutting edge of disruptive innovation. If a complete acquisition is not possible, another alternative is to hire personnel from insurtechs and other start-ups with stronger digital and analytical skills.