At a time when commodity markets are slowing down, when China and the United States are quarreling to reshape global supply chains to their benefit, with climate change adversely affecting emerging markets and the coronavirus outbreak threatening business continuity worldwide, Latin American economies need to focus on fostering economic dynamism and sustained growth. To this end, developing a healthy and robust insurance market will facilitate entrepreneurship and build socioeconomic resiliency in the region.
By allowing innovators to pool business risk as they develop new solutions for one of the world’s most promising emerging markets, Latin America, the spread of insurance products geared toward small and midsize enterprises has the potential to be a gamechanger for the region. Likewise, many of Latin America’s traditional economic drivers, such as ecotourism and agriculture, can find the empowerment needed to grow and take bold risks against the backdrop of global climate change or pandemics with security provided by insurance.
However, developing a Latin American insurance industry to address the region’s need for resiliency and entrepreneurship is easier said than done. First of all, national governments need to get on board and facilitate the conditions for a new insurance private sector to develop and grow. Most Latin American economies already have some sort of insurance industry operating domestically, but most of them are geared toward servicing large and mainly multinational companies operating in the retail, financial and commodities sectors. Thus, democratizing insurance in Latin America will require governments to find a delicate balance between regulating a safety net that will hopefully benefit all aspects of society and not overstepping their reach to the point that this new sector is stifled.
To achieve this democratization, governments should leverage the region’s advantage of already having national regulatory entities whose members are mainly career civil servants, in some cases appointed by either the legislative or the executive branch.
Though most regulators in Latin America are not ready for a digital insurance economy, and despite the fact that legislation is either outdated or inexistent as it relates to facilitating a dynamic insurance market, one key advantage that Latin America does have is that the insurance industry throughout the region is mostly regulated by national technocratic entities. This stands in stark contrast to the US, for instance, where each state regulates insurance within its jurisdiction. The national and technocratic nature of insurance regulators in Latin America at least centralizes the decision-making for a substantial transformation. It would only take a handful of visionary policymakers to liberalize the region’s insurance industry.
The control of the region’s national insurance market by a handful of omnipotent overseers is indeed a double-edged sword. Most of these regulating entities are composed of appointed and nominally apolitical boards, in many cases serving multi-year fixed terms. Therefore, these regulators are not subject to what could amount to pressure from elected political actors either seeking to maintain the status quo benefiting a handful of multinational insurers or to transform this sector of the economy to one that is dynamic and innovative.
Moreover, in order to properly function, these national boards or commissions must also be empowered to sanction non-compliant carriers that jeopardize market integrity, to set reserve standards so that carriers are able to deliver payouts in case of a crisis, to enact dynamic regulation that is up to date with global technological advances, and to enforce minimum standards that maintain market competitiveness.
Leapfrogging to a New Business Model
During the 1990s and early 2000s, China famously leapfrogged telephone landlines directly toward the incorporation and adoption of wireless cellular networks because of a fast-growing economy, a nascent middle class and because the country never developed a fixed-wire phone network. Similarly, Latin America faces a unique juncture in which it can move straight to the next generation of parametric and smartly quoted insurance products that automatically profile a client and provide coverage options.
As a region, Latin America too has adopted wireless smartphones en masse and can bypass the era of traditional insurance agents and painstaking policy quotes. Going directly to consumers’ handheld devices via mobile applications and with clear and concise terms of service is the most efficient way to gain market share and drive cross-market penetration.
In this regard, parametric insurance that leverages big data triggers, technological integration and automated payouts is both a cost-saver for carriers and a confidence-builder for everyday consumers, who would otherwise question the true necessity and value of the service. Particularly, such a business model represents a win-win for insurance carriers and customers in the more emerging of Latin America’s national markets, where underwriting non-parametric coverage would be too complex and resource-intensive.
In a region where mobile penetration reaches almost 70% of the population but insurance reach is below 5%, the coverage gap is evident, meaning carriers need to adapt distribution channels to the digital age. Countries and governments seeking to benefit from promises of empowered entrepreneurship and strengthened resiliency should welcome the digital age of mass coverage, lobby for legislation that facilitates a dynamic marketplace and urge the appointment of regulators daring to open the gates to the age of Latin American insurtech.
The views expressed in this article are the author’s own and do not necessarily reflect Fair Observer’s editorial policy.
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