Throughout their lifetimes, individuals face a range of risks against which financial tools such as insurance and pensions can provide financial protection. However, they may not always be able or willing to use these protections, whether by choice or lack of available financial protection products. This may lead to financial protection gaps that can leave individuals under-protected and put their financial well-being at risk. Two major protection gaps that have been identified globally are retirement savings and insurance coverage for natural hazards. This report provides an overview of these gaps in selected Asian countries, assesses the drivers and provides policy options to address them based on international good practices.
Protection Gaps in Insurance for Natural Hazards and Retirement Savings in Asia
Abstract
Executive Summary
Asian countries face significant financial protection gaps in natural hazard insurance and retirement savings, leaving individuals under-protected and putting their financial well-being at risk. This report examines the drivers of these gaps and identifies possible approaches to addressing them, focusing on the experiences of Indonesia, Malaysia, Pakistan, the Philippines, Sri Lanka, Thailand and Viet Nam.
Protection gaps in natural hazard insurance are the result of factors that limit the demand and supply of insurance coverage.
The take-up of insurance coverage for natural hazard risks remains low across Asia, despite relatively high levels of awareness and perception of natural hazard risks. This is driven by a limited understanding of the need for and benefits of insurance coverage to protect against these risks and a lack of trust in insurance. Differences in insurers’ approach to offering natural hazard insurance coverage may also lead to misunderstandings about the availability of coverage or the need to acquire specific additional coverage. For lower-income segments of the population and those in high-risk areas, insurance coverage may simply be unaffordable.
Insurers may also face constraints to their appetite and/or capacity to provide coverage to households and businesses for natural hazard risks. Limited access to quality data and risk assessment tools such as catastrophe models can inhibit insurers’ ability to quantify the potential frequency and severity of losses, as well as their ability to price premiums based on risk. In some countries, intensive competition and price-sensitive consumers may be discouraging insurers from charging higher premiums in higher risk areas and leading them to impose higher deductibles, limit the sums insured or exclude coverage for some or all natural hazard risks. Challenges in quantifying natural hazard risk and ensuring adequate pricing have also led to some difficulties in accessing affordable reinsurance coverage, thereby further reducing the appetite of insurers for providing coverage for natural hazard risks to households and businesses.
Increasing the demand for natural hazard insurance coverage will require actions to:
Improve insurance literacy and increase trust in insurance companies and insurance coverage as an effective form of financial protection.
Augment property insurance penetration by expanding the use of digital distribution channels and bancassurance, and by encouraging the development of suitable and affordable insurance coverage products.
Expand the take-up of natural hazard coverage by encouraging insurers to improve consistency and clarity on coverage and exclusions, and by considering the advantages and disadvantages of requiring insurers to offer natural hazard coverage automatically in property insurance coverage.
Ensuring the availability of affordable insurance coverage for natural hazard risks will require efforts to:
Improve access to quality data and modelling tools.
Enhance the ability of insurers to adequately price coverage for natural hazard insurance and the capacity of insurance supervisors to oversee pricing adequacy and fairness.
Support sustainable access to affordable reinsurance capacity, including through capital markets and by leveraging the contribution of national reinsurers.
Consider the potential benefits of establishing public-private insurance programmes.
Protection gaps in retirement savings result from the lack of participation in pension schemes, and when individuals do participate, from insufficient pension benefits that may not cover them for their entire lifetime in retirement.
The participation of working-age individuals in mandatory and voluntary pension schemes is low in most of the countries analysed. Several factors contribute to this. First, most mandatory pension schemes only cover formal employees. Due to low labour force participation rates, particularly among women, and widespread informality, many individuals are left without access to mandatory pension schemes. In addition, certain employers, in particular smaller ones, may be exempted from registering their employees, while others do not comply with their obligation to do so. Second, the availability of voluntary pension schemes may be limited because few employers and providers offer access to occupational and personal pension plans. Third, individuals may not make use of the existing vehicles to save for retirement because of a lack of awareness of the need to save for retirement and of the different products available to them, a lack of financial incentives, or a lack of affordability.
The retirement income that individuals participating in the pension system can expect to receive may not always be adequate. Short contribution periods, in particular due to low retirement ages, and the possibility to withdraw savings before retirement, are the two main drivers of lower-than-expected pension benefits from defined contribution pension schemes. Moreover, restrictive investment limits and conservative investment strategies expose pension funds to concentration risk and may lead to lower performance in the long term. Defined benefit pension schemes may provide adequate retirement benefits to those fulfilling all the requirements, but a combination of high service period requirements and lack of portability between different pension schemes may reduce the share of members eventually entitled to pension benefits. In addition, contributions may not be reflective of expected benefits, leading either to a lack of incentives to contribute or to increased risks to sustainability. Lastly, many retiring individuals may lack protection from longevity risk.
Addressing financial protection gaps in retirement savings requires a range of measures to better align the rules of the pension systems with their objectives, enhance the availability of savings and retirement income vehicles, and expand their take-up by individuals. This includes to:
Expand the coverage of mandatory pension schemes, implement automatic enrolment for voluntary pension schemes, and improve financial incentives and financial literacy on pensions to increase participation rates.
Align contribution levels with expected benefits and increase contribution periods, in particular by extending retirement ages.
Provide investment choice to members with appropriate default options and improve portfolio diversification.
Improve the portability of pension entitlements.
Limit early withdrawals of retirement savings to exceptional hardship circumstances.
Design payout options in line with people’s needs in retirement, in particular by ensuring the availability of lifetime retirement income solutions.
