Insurance: Closing the protection gap

This article first appeared in Wealth, The Edge Malaysia Weekly, on February 28, 2022 - March 06, 2022.

"Closing the [mortality protection] gap is a key reason that gave birth to digital insurers in Hong Kong. Another main factor is accelerating innovation in the industry that has been slow in adopting new changes.” - Ngan

-A +A

Narrowing the protection gap — the difference between the money you need and the allotment for emergencies — is one of the many focuses under the Financial Sector Blueprint (FSBP) 2022-2026 launched by Bank Negara Malaysia last month.

This is not surprising, as the importance of closing such a gap is being highlighted by the ongoing pandemic, which has taken more than 5.8 million lives in more than two years globally. The massive floods last December, which incurred losses of more than RM5.3 billion to the country, have also highlighted the urgency of doing so.

The FSBP wants intermediaries in the insurance industry, such as agents, brokers and financial advisers, to accommodate new digital business models to “minimise critical protection gaps among underserved segments by leveraging the outreach potential of their platforms”. This is intended to be done through the review of existing regulatory requirements.

The plan is also to finalise a regulatory framework for digital insurers and takaful operators this year. It could give life to a new breed of insurance operators capable of offering products at more affordable prices for the masses.

Hong Kong, for example, embarked on its digitalisation journey a few years ago, partly through the introduction of digital insurers, to close the city’s protection gap.

“Closing the mortality protection gap is a key reason that gave birth to digital insurers in Hong Kong. Another main factor is accelerating innovation in the industry that has been slow in adopting new changes,” says Fred Ngan, co-founder of Hong Kong’s Bowtie Life Insurance Co Ltd.

According to a news report by South China Morning Post, Hong Kong has a highly competitive insurance market, with more than 160 traditional insurance companies. Yet, the mortality protection gap, which is the insurance protection required by the family should a wage earner pass away, remains huge at US$884.6 billion (RM3.7 trillion).

Dividing the sum to the working population of Hong Kong, the protection gap works out to about US$250,000 a person.

Offering simple products at lower prices online 

Bowtie Life Insurance is the first licensed digital insurer in Hong Kong. Ngan was also one of the speakers at Bank Negara’s MyFintech Week 2022, the central bank’s flagship fintech programme held from Jan 24 to 28. 

He says Hong Kong’s mortality protection gap, despite its many insurance companies, is due to their traditional business model. The more complex products, such as life and medical insurance policies, are sold through agents and brokers. 

These intermediaries tend to sell life and medical insurance policies that are bundled up with a “savings component” to clients instead of the more straightforward, pure protection products without the savings element. It is because the commissions they receive from selling these products tend to be higher. 

In general, insurance policies with a savings component would invest a part of the premium, paid by policyholders, in the stock and bond markets through funds. Depending on their performance, the money invested could generate cash value to policyholders, which they can use to pay their upcoming premium or withdraw for other purposes. In the local context, these products include various investment-linked policies (ILPs).

While insurance policies with a savings component provide policyholders with flexibility, it is harder for the man-in-the-street to grasp the idea of how these policies work. They tend to be more costly and offer less protection to policyholders. “That’s why the protection gap still exists,” says Ngan. 

As such, it is the hope of the Hong Kong Insurance Authority, an insurance regulator independent of the government and insurance industry, that digital insurers operating entirely online without physical branches or agencies can bridge the gap. According to news reports, there are five licensed digital insurers in Hong Kong, including One Degree, Blue, Avo and ZA Insure. 

Ngan says the digital channel is the right channel for players such as Bowtie to sell pure protection products to bridge the protection gap. A reason is that digital insurers are encouraged to sell simpler products that consumers can quickly understand, as human interaction is minimised. More complex products with a savings component are not suitable for the online space. 

Digital insurers can also sell these products at a lower price to the masses, as they do not pay commissions to agents. The cost saving is translated into a lower premium paid by policyholders. 

While it is hard to make an apple-to-apple comparison of how much a pure protection product is cheaper than another with a savings component, Ngan says the difference in pricing can be pretty significant. 

“For instance, our Voluntary Health Insurance Scheme (a government certified scheme that aims to provide better access to private healthcare to enhance consumer protection for medical insurance) has the lowest premium among all ages in Hong Kong. On average, it is about 30% cheaper [than similar products with a savings component]. 

“The amount one can save is quite material over 20 to 30 years,” he says.

Key challenges: Customer service and financial literacy 

There is little surprise that Bowtie’s business — involving mainly the distribution of medical and health insurance policies — has gained tremendous traction in the past two years, with online activities spiking globally as the pandemic engulfed the world. 

According to Ngan, Bowtie’s business grew 10 times in 2020 and three times last year. In more than two years of operation, the company has garnered about 45,000 customers, with one-third of them aged below 30.

“Our customers are young, with an average age of 34. Tech-savvy and well educated, they are from the generation who like to do research, read everything and buy stuff online based on their own decision,” he says. 

While digital insurers are still a tiny force in the insurance market, Ngan believes the trend will continue to gain traction in the coming years, as the direct channel is expected to become increasingly attractive to the younger generation. 

Ngan adds that two crucial factors would determine the success of digital insurers in Hong Kong and elsewhere. Financial literacy is vital, as insurance policies are bought instead of sold online. 

“We have to produce simpler and intuitive products that are easy to understand. Then, there is consumer education. In fact, we have a blog that talks about health and health insurance every month that has generated about two million in organic traffic. We have to support education in a big way,” says Ngan. 

Customer service is another important element to drive more traffic online, especially in helping policyholders make their claims. 

“We invest a lot in customer service and have a dedicated team of very experienced people to help them [make claims]. Our customers can submit their files online through our website or mobile app. They can also call us [if they have questions]. The human touch is still essential [even though we don’t have sales agents],” Ngan says. 

Last October, Bowtie raised US$22.1 million from Mitsui & Co Ltd, one of Japan’s largest trading firms and an investor of IHH Healthcare Bhd, with participation from existing investor Sun Life Hong Kong Ltd. With its financial war chest, Ngan is doubling down to scale its operation in Hong Kong, including setting up physical health centres in the city. 

“We are also looking to expand across Asia, especially Southeast Asia. We are doing presentations and exploring the market. We welcome others to work with us to build the [digital insurance] ecosystem together,” he says.