Insurance Underutilization in Emerging Economies: Causes and Barriers

The relevance of the role that insurance plays in the development of the economy is undisputed, and almost any government strives to promote an insurance-enhancing policy. Notwithstanding all good intentions, it remains a fact that insurance has not developed as expected in most emerging economies, or at least this is the overall existing impression among government, industry, and experts. The insurance penetration in emerging economies is about a third of the insurance penetration in the OECD (Organization for Economic Cooperation and Development) countries. This is the most commonly encountered statement in the literature, and a topic of several conferences. Here, I want to dig deeper into this statement and discuss a better tool to measure the development of the insurance sector that takes into consideration the state of economic development of the different countries. I have found that using the world average insurance penetration as a function of income per capita as the benchmark for the insurance development makes sense when trying to understand what a reasonable development of the insurance sector in a given economy should be. Using this benchmark suggested by Zheng, Liu, and Deng1 in their paper “New Paradigm for International Insurance Comparison: With an Application to Comparison of Seven Insurance Markets” shows that while the low development of the insurance industry is a reality in several developing economies, the above statement is not as dramatic as it sounds. I find that developing economies, in spite of the relatively low insurance penetration, do have a well-developed and sound insurance sector in accordance to the necessities of their current economy.