Insurance for all in the Pacific

Our new report – “Best Practices in Index Insurance for Insurance Regulators and Practitioners in Pacific Island Countries” – is important for insurance stakeholders in the Pacific and beyond. It resonates across the region as indications emerge of a vibrant insurance movement, driven by growing interest from insurance companies to explore mass markets, as well as support from governments and banks. power stations.

In May, the acting Secretary General of the Pacific Islands Forum, Dr. Filimon Manoni, spoke of the need for “fit for purpose” disaster risk financing instruments to help Pacific Islanders better cope with natural disasters, through parametric (or index-linked) insurance proposed as a potential solution. Traditionally, access to insurance in the Pacific has been limited to middle- to high-income urban dwellers, but there is now a trend to also include low-income rural dwellers.

Several challenges need to be addressed for the growth and development of the insurance industries in the Pacific. The Fiji Financial Services Demand Survey 2020 showed that only 15% of adults have access to some form of insurance. A survey conducted in Tonga in 2014 produced similar results: only 13% of Tongans have access to some form of insurance. Samoa, at 21%, is doing better than its neighbours; but in Vanuatu the coverage is only 5%.

These markets are currently dominated by indemnity-based insurance products. Indemnification products generally insure against physical losses such as house fires or car accidents, and payments are made after the damage has been assessed. In the Pacific, compensation products are not priced for mass market consumers and are targeted primarily at higher income groups. Product distribution channels are also not accessible to consumers who live, for example, on remote islands far from insurance agencies located in urban centers.

This means that in a region highly vulnerable to natural disasters, most people lack the financial protection that insurance provides. When disaster inevitably strikes, the most vulnerable often cannot afford to cope financially and are pushed deeper into poverty.

Index insurance offers opportunities to address some of these issues. With index insurance, payouts to the insured are triggered by a predetermined index which is used as a threshold, and the amount of the benefit is also determined by the value of the predetermined index. There is no need for individual assessment of losses, as is the case with damage insurance. These features improve transparency, help avoid disputes, and can reduce costs.

Our Pacific Climate Change Adaptation and Insurance Program recently launched the Pacific’s first parametric climate and catastrophe risk microinsurance. This product offers combined coverage against high winds and heavy rain, with maximum payments of up to $2,000 with a premium of 10% per year. Payouts are triggered based on predetermined events, such as a minimum level of rainfall or the strength of a cyclone, without the need to verify losses.

The pilot phase in Fiji saw 1,388 households register for the program, and the aim is to onboard a further 4,000 before the start of the 2022 cyclone season in November. Similar programs will launch in Tonga and Vanuatu later this year, followed by Solomon Islands and Samoa in 2023. Once approved for full market roll-out, they will be underwritten by three private insurers and will target farmers, fishers , market vendors, MSMEs (micro, small and medium enterprises) and social assistance recipients.

This is a promising start, with potential for growth and development under good conditions, with benefits for Pacific Islanders and possible replication in other regions. There is additional potential for the development of crop yield indices, hybrid and non-weather natural catastrophe risk insurance products, and others. As our report points out, natural disasters tend to hit areas with little or no insurance coverage, and index insurance could fill that gap.

The report contains crucial information on how to create favorable ecosystems for the development of insurance products, with recommendations on sustainability. It covers all stages of product development – from design to risk identification and consideration, through piloting and testing, consumer protection and market deployment. The publication also showcases best practices from ten different international markets, encompassing different approaches to regulation, legal considerations, consumer education, distribution strategies, and more.

The report contains useful information for central bankers, insurance regulators, policy makers, tax officials, insurance companies, development practitioners and other market participants. Perhaps most importantly, the focus is on consumer protection – including dispute resolution, policy disclosure, transparency and tax exemptions. The report recommends steps to minimize basis risk – the risk that insurance payments will not cover the full cost of the claim event – ​​for higher quality products that improve customer confidence.

The report also provides an overview of the strengths, weaknesses and opportunities of the regulatory environments in Fiji, Samoa, Solomon Islands, Tonga and Vanuatu. These regulatory overviews are underpinned by guidance on legal frameworks, products and policies, market conduct, digitalization, bundled insurance, prudential supervision and enforcement.

This report aims to inform the Pacific region’s insurance sectors, while providing the foundation for the development of innovative products to meet the region’s unique needs. It seeks to maximize the potential of index insurance to provide financial protection to traditionally uninsured people in the Pacific.

Download the report ‘Best Index Insurance Practices for Regulators and Insurance Practitioners in Pacific Island Countries’.

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