Tag Archives: poverty

How Insurance Helps End Hunger, Poverty

These remarks were delivered at the United Nations Sustainable Development Summit on Friday, Sept. 25, 2015.

Good afternoon, excellencies, ministers, ladies and gentlemen. My name is Mike Morrissey, and I’m president and CEO of the International Insurance Society. We are a nonprofit research and idea exchange organization representing life and non-life insurers, as well as regulators and risk management scholars, from nearly 100 countries.

Professor Shawn Cole of Harvard, a world-leading expert in development economics, has said, “Risk is one of the greatest challenges faced by poor people around the world.”

This can be seen as the risk of flood, earthquake, hurricane or cyclone. It can also be experienced as crop failure, livestock mortality, illness or death of a family member or in food or water security. The ability to manage and finance risk is therefore a key element in the development of societies, and thus in alleviating poverty and hunger.

The insurance industry has played a key role in this effort by expanding access to risk protection and risk management advice, for centuries in the developed world, and now very broadly in Sub Saharan Africa, South Asia, Latin America and in other less-developed areas. With nearly one billion people living on about one U.S. dollar a day, this form of social protection is vital, since the poor are often those most exposed, just one loss event away from calamity for themselves, their families and their possessions.

At the UN Insurance Sector Summit, which took place at the ECOSOC Chamber here last June, I sat next to Secretary General Ban Ki-moon as he complimented the insurance industry for its vital role in mitigating and reducing risk and thereby raising living standards where help is needed most. But he also called for the industry to do more in the future, and so the industry continues to innovate in ways that offer more protection for more people, and makes a major contribution to reducing poverty and hunger.

A few examples are worthwhile to make the insurance industry’s role clear.

German Insurer Allianz is a world leader in microinsurance, the protection of low-income people. Allianz provides crop, livestock and other coverage for 125 million farmers in India and China, and participates in the Africa Risk Capacity pool to insure governments against natural catastrophes. Peruvian insurer La Positiva has tailored agricultural coverage for rural farmers who have limited access to communications and healthcare. A new Bermuda-based venture called Blue Marble Microinsurance has developed savings and protection products, among them some linked to poor women’s key life-cycle triggers.

These efforts, and many more like them, link the worlds of finance and development, expanding access to protection from the unique set of risks faced by the world’s poor. Through our industry’s efforts, and through public private partnerships with governments and international institutions to capitalize on both the risk assessment and long-term investing capabilities of insurance organizations, the sustainable development goals of ending extreme poverty and hunger can and will be achieved.

Insurance Risk in Latin America

Latin America’s compound growth remains attractive and yet, overall, insurance penetration rates still remain low in many countries. Particularly in life insurance, despite continuing economic growth and reduced poverty levels, penetration is low, suggesting there is still significant growth ahead for the insurance sector. We have seen significant reforms across the region from both a fiscal and regulatory standpoint, in everything from capital and exchange controls to consumer protection. We believe a key challenge for insurers over the next decade is navigating this rapid acceleration toward modern regulatory and operational realities.

Around the world, regulators are setting the expectation that insurers will raise their game. The trend is clear, toward better risk management, better governance, more precise measurement of capital in a risk sensitive way and more detailed and transparent reporting to regulators.

We presented our first report for Latin America in 2012, focusing on risk-based capital (RBC) and emerging regulations in four markets: Argentina, Brazil, Chile and Mexico. We have expanded our coverage and also added Colombia, Peru and Uruguay to our new overview.

In the past two years, each Latin American market has faced a different journey to a risk- and economic value-based solvency framework. More open markets in the Pacific Alliance (Chile and Mexico) have enhanced their risk management processes, while Brazil is seeking Solvency II equivalence by 2016. Mexico’s new law, modeled on Solvency II, is likely to be implemented ahead
of the rest of the world. Peru and Uruguay have no immediate plans to pursue a Solvency II approach. Although both countries are attracting foreign investment, the market size and number of players are impeding regulation. With Argentina’s high inflation and economic concerns, adopting an RBC framework in the short term is unlikely.

The challenge to understanding Latin America remains that most insurers in the region are not well-prepared for the expected changes in governance, risk management, capital requirements and reporting. At EY, we believe that effective risk management and the ability to quantify and price risks accurately are a core competence for a successful insurance company. We also observe globally that the leading insurers will typically look to define their own vision for their capabilities in these key areas, rather than simply following the iteration of each piece of regulation. Leading firms will also typically go on to deploy these capabilities more quickly and effectively across their businesses at the point of decision making, and being ahead of competitors in this way is a source of clear commercial advantage.

Argentina

The Argentine insurance market has made minimal progress in its approach to RBC in recent years. As other Latin American countries take steps toward Solvency II equivalence, Argentina is only superficially addressing this issue. In a country experiencing high inflation, tight regulation and fluctuating economic market concerns, RBC is only one in a long list of initiatives on the regulatory agenda of the Superintendencia de Seguros de la Nación (SSN).

Nevertheless, insurance is a fast-growing industry that continues to show resilience in premiums and tolerance for expansion in a challenging environment. Annual growth percentages are measured in Argentine pesos, so the inflation rate has a significant impact on those figures. As of 30 June 2013 (last fiscal year-end), there were 184 companies (108 in property/casualty) writing insurance in Argentina – with 29 new companies added in the past two years. International players continue to make acquisitions to enhance their positions in the industry. Growth has been most prominent in workers’ compensation and motor insurance, producing increases of 42% and 35%, respectively, from June 2012 to June 2013.

Brazil

The Brazilian insurance market continues to achieve double-digit growth. The industry is witnessing a series of mergers and acquisitions and the arrival of multinational insurance and reinsurance companies, mostly from Europe. In addition, the sector experienced the largest initial public offering in the world last year, when BB Seguridade raised approximately US$5.75 billion in the BOVESPA stock exchange.

Although national bancassurance players dominate the Brazilian insurance market, international insurance companies continue to grow at a higher rate through M&A and strategic alliances.

Given the continuous growth in the market, the Brazilian regulator, Superintendência de Seguros Privados (SUSEP), is working with the European Insurance and Occupational Pensions Authority (EIOPA) to achieve Solvency ll equivalence in Brazil. This will facilitate the investment of European insurance companies in Brazil and Brazilian companies in Europe. SUSEP will sign an agreement that will adopt Solvency ll rules partially or fully by 2016, based on a comparative study that EIOPA will perform to measure Brazilian regulation against the Solvency II regime.

Chile

The insurance market in Chile continues to shift from its present regulatory framework to a more sophisticated RBC approach to solvency assessment that better reflects current industry risks. New methodology proposed by the Superintendencia de Valores y Seguros (SVS) is an important step toward building an integral and holistic RBC model.

The Comframe capital framework implementation requires each risk category to be managed individually, with most supervision on a product-by-product basis. Most insurers will need to improve their risk function or implement a holistic approach to risk management. Also, local skilled resources are scarce for the level of technical knowledge imposed by this regulation. Many will need to develop better data analytics, systems and precise risk measurement if they are to increase capital efficiency and profitability.

Chile is one of the more stable markets in the region, primarily because of tight controls over insurance products and asset portfolios. This stability is essential in a market that offers rich growth potential. While the ease of doing business in the country presents an opportunity, product expansion remains an emerging challenge due to a lack of insurance product awareness and consumer perceived value.

Colombia

Colombia enjoys strong economic growth and enormous potential for financial stability over the next three to five years. GDP growth is about 4% a year, ahead of the average for the region. This is driven by stronger activity from foreign investors, a stable macroeconomic environment and a growing middle class. The free trade agreements that Colombia has engineered with major world markets are one example of the tremendous potential the country offers.

Insurance regulation is moving toward a more risk- and economic value-based solvency framework, with tightened capital market regulations. As a result, Colombia is ahead of many global rapid growth markets in reforming regulatory processes, protecting investor rights and cross-border trading to increase the ease of doing business for small companies.

Recent rules that allow foreign insurance companies to establish branches and operate as local insurers have changed the complexion of the Colombian market. Global industry players are entering, buying local insurers or considering start-up companies. This should encourage increased capacity, product diversification and greater competition. Colombia’s premium growth was US$8b in 2013, and rate reductions of as much as 10% were expected for property and life/accident insurance in 2014.

Mexico

The Mexican insurance market is the second largest in Latin America. As of December 2013, gross premiums totaled $334.19 billion Mexican pesos or approximately US$25.6 billion, an increase of 11% over the prior year; this increase includes the effect of a large biannual policy of the government. Despite having one of the lowest proportions of insurance penetration in the region (almost 2% of GDP), Mexico continues to grow above the country’s nominal GDP. New insurance laws and Solvency II regulations are leading to market consolidation, as well as growth in specialty and consumer product lines. The high demand for life insurance is reflected in individual life premiums, which rose 23% in 2013, following a 19% increase in 2012, basically for the success of some savings products.

The regulatory framework in Mexico is evolving toward a more sophisticated risk-based capital approach. A proposed Solvency ll – type insurance law has been under review by the Mexican regulator, Comision Nacional de Seguros y Fianzas (CNSF) and the Mexican association of insurance companies, Asociacion Mexicana de Instituciones de Seguros (AMIS) since the second half of 2008.
The Mexican Congress approved the new regulation in April 2013. Quantitative impact studies and qualitative impact studies are moving forward, and new accounting principles are under discussion. Legislation in the country continues to advance and is likely to be implemented ahead of the rest of the region.

Peru

Peru’s steady economic growth and expanding middle class are attracting new business and opening doors for insurance companies. The Peruvian economy is supported by rapid growth in investment, low inflation, strong economic fundamentals and an annual GDP growth rate of nearly 6%. The country has an investment rating in Latin America that is second only to Chile and offers a favorable legal framework for foreign investors. The financial sector, including insurance, is second only to mining (gold, zinc and copper) in direct foreign investment.

In the last decade, insurance industry sales in Peru have grown more than 200%, from PEN2,700 million (approximately US$776 million) to PEN9.069 million (approximately US$3.36 billion) in 2013. As of December 2013, 40% of total net premiums were from general insurance, 14% from accident and health, 21% from life insurance and 25% from the private pension fund system. It is important to note that only approximately 16% of the urban population has private insurance and 18% has health insurance – and this number has stagnated over the past five years.

The insurance market is highly concentrated in Peru, with 2 of the 15 insurance companies accounting for 60% of total gross written premiums. Overall, insurance penetration rates remain low, as they are in many other Latin American countries.

Uruguay 

Uruguay is a small country with stable economic growth, expanding tourism and rising disposable income. It was one of the few countries in Latin America that was able to avoid recession in 2008, and it continues to grow, with an economy based largely on exports of commodities like milk, beef, rice and wool. Some of world’s largest banks and financial institutions maintain branches there, and it was fortunate not to experience the impact of the global financial crisis or ensuing government intervention.

Although the Uruguayan insurance market is highly competitive, it has no more than 15 companies competing for market share. The largest in the country is Banco de Seguros del Estado (BSE), a government-owned insurer with about 65% of the market share as of December 2013.

Gross written premiums for the insurance industry totaled UYU21.6 billion (US$1.1 billion) in 2012, with a CAGR growth rate of almost 19%. Motor insurance and general liability insurance were leaders in the non-life segment. An increase in demand for pension products contributed to the significant growth in the life segment.

For the full report from which this excerpt is taken, click here.

Medicaid Expansion – A Hand Up Or A Handcuff?

Medicaid has several components, but at its core it is a health insurance program for the poor. States can differ, but most provide for those below the poverty level. Federal health reform requires expanding Medicaid to those earning up to 138% of the poverty level (about $25,000 for a family of 3). The U.S. Supreme Court has ruled that each state can accept or reject the expansion of Medicaid. Like other states, Georgia must make that choice. This analysis addresses the human impact — not state financing, our national debt, or deficit spending. The key question: Is Medicaid expansion beyond the poverty level a “hand up” or a “handcuff?”

Unlike other income levels in America, getting ahead is less likely if you are in the bottom 20%. The Economic Mobility Project of the Pew Charitable Trusts shows 65% of children born in the lowest 20% of incomes stay in the bottom two quintiles.

Upper Limit of U.S. Income Quintiles: 2010
Lowest 20% Second 20% Third 20% Fourth 20% Lower limit of top 5%
$20,000 $38,043 $61,735 $100,065 $180,801

If the core philosophy of Conservatives is producing upward economic mobility and Progressives are for helping the poor, why have both ideologies failed the poorest among us? Scott Winship, a researcher at the Brookings Institute has said, “The bottom 20% in the U.S. looks very different from the bottom 20% in other countries.” Americans are more likely than foreign peers to grow up with single mothers. In poor communities, drugs, alcohol, violence, and ineffective primary and secondary schools represent a huge barrier to economic mobility. The United States also has uniquely high incarceration rates, and a longer history of racial stratification.

With all those challenges, the Brookings study showed that regardless of race or ethnic background, if you stay in school at least through high school, don’t have a child until you’re married and over 21, and work full-time at any job, your chances of being poor are only 2 percent and your chances of joining the middle class are 74 percent.

More than other countries, poor Americans have to educate and work their way up from the lower levels. The United States provides many benefits for the poor, disabled, and unfortunate. No one of any rational political or ideological persuasion is opposed to helping those in need.

The key part of Medicaid is also called “Temporary Assistance for Needy Families” or TANF. Under health reform Medicaid would be expanded to 18-20 million new lives. Other health reform subsidies through exchanges are available up to 400% of the poverty level (about $92,000 for a family of 4). Programs affecting larger percentages of the population can create an attitude of entitlement and a culture of dependency that traps segments into intransigent generational poverty.

A study of entitlement programs in Colorado illuminates the concerns for Georgia and other states. Programs are available to low income families to provide housing, food, healthcare, educational, and other subsidies. A single mother with two children making $25,000 could be eligible to receive about $18,000 in government benefits.

Maximum Available Tax and Benefit Programs

Medicaid expansion and other health reforms add new subsidies for low and middle income families. Using the same example of a single mother with two children, Medicaid expansion to 138% of the poverty level can provide an additional $7,500 in benefits to those making $25,000.

Health Benefits

What are the effects on real people as they try to advance economically? The marginal effective tax rate from federal income taxes, payroll taxes, and state income taxes, for a single mom with two children earning $25,000 is about 29.4 percent. If one includes other programs, SNAP (food stamps), state children’s health insurance program, and the new health reform subsidies, the marginal tax rate rises to 54.5 percent.

If benefits like Temporary Assistance for Needy Families, federal housing subsidies, and WIC (nutritional program for Women, Infants, and Children) are considered, the marginal tax rate is as high as 81.9 percent because families lose even more benefits due to higher earnings.

Who would work harder, take that extra job, or seek a promotion when most of the added earnings would be taxed away or government benefits are reduced? The destruction of initiative can be the inevitable consequence of expanding Medicaid with an additional $7,500 (for a total of over $18,000) to someone making $25,000, but providing nothing to a similar family making $75,000.

Clearly, even the most compassionate among us can see that accumulated effects of entitlement programs can break the spirit of personal responsibility and the motivation for upward mobility. Medicaid expansion and the new health reform subsidies to over 50% of the population are likely to produce the same dependence and economic barriers to upward mobility already evident in the lower 20%.

The standard of living in Georgia is directly related to its citizens’ ability to produce goods and services others want to purchase. Subsidizing able-bodied populations does not create economic growth for those individuals or for the state. In our compassion to help those in need, we tend to look away from the politically driven expansion of those programs and the debilitating dependency culture they enable. Georgia has apparently decided not to play that destructive game. Good for us.

As we look to the future and better ways to solve the problems of healthcare and health insurance, maybe Georgia can create an island of opportunity within a sea of growing dependency. Maybe we can remove the handcuffs of those chained to the programs and ideas of the past and offer a hand up rather than a handout.