Why insurance in developing economies Like Sri Lanka should be bought, not sold

In developing economies like Sri Lanka, insurance sectors often face significant challenges in terms of market penetration and public perception. Traditionally, in Sri Lanka insurance has always been a product that has to be sold.

However, in today’s increasingly unpredictable world, insurance should be viewed as an actively pursued financial rather than a product people are pressured to purchase. 

The traditional approach of insurance as a hard sell

The statement ‘Insurance is sold, not bought’ typically means insurance agents and companies have to take an active role in convincing people to purchase policies. This is largely due the lack of understanding and awareness about the true value of insurance. In Sri Lanka, the concept of insurance is often viewed skeptically as an unnecessary expense rather than a safety net. 

This perception is partly due to a lack of financial literacy, as many individuals are unaware of how insurance can protect them from financial adversities in the face of unforeseen events.

Moreover, the statement also implies that insurance is perceived as a luxury item rather than a necessity. In a country where many people are struggling to meet basic needs, investing on insurance products may be out of reach or irrelevant. This fact was proved recently with statistics that showed insurance penetration in Sri Lanka declined to 1.1% in 2023, from 1.3% in 2021.

Why insurance should be bought

To understand why insurance should be bought rather than sold, it is important to understand the fundamental purpose of insurance. That is providing financial protection against risks. In developing economies like Sri Lanka, where economic uncertainty and vulnerability to natural disasters are frequent, insurance offers a critical safety net. If people begin to view insurance as a proactive measure for these kinds of vulnerabilities, they are more likely to appreciate its value and integrate it into their financial planning.

Empowering individuals through financial literacy

When people are educated about the benefits of insurance and understand how it can protect their assets and livelihoods, they are more likely to see it as a worthwhile investment. In countries like Sri Lanka, a significant shift in the perception of insurance should be encouraged through facilitating financial education into the public discourse. Financial literacy programs could simply the theories on different types of insurance policies work and why they are important. For instance, life insurance can provide financial security to a family in the event of the breadwinner’s death, while health insurance can cover medical expenses that could be really high. 

Building a culture of risk management

In many developing economies, the concept of risk management is not deeply ingrained compared to more developed markets. However, insurance plays a vital role in managing risks, whether they are related to health, property, or business. If insurance is bought, it reflects a culture of risk management where individuals take proactive steps to safeguard their future. This culture can lead to greater financial resilience, both for individuals and for the economy as a whole.

In Sri Lanka, where natural disasters such as floods and landslides are common, insurance can provide crucial protection for the people. 

Enhancing economic stability

When insurance is bought rather than sold, it definitely contributes to broader economic stability. In developing economies, financial uncertainties can have drastic effects, pushing individuals and families into poverty. Insurance can mitigate these situations by providing financial resources when they are needed most. For example, a life insurance policy can ensure that a family does not lose its home if the primary earner passes away. Furthermore, insurance can support economic stability by encouraging savings and investment among the people. For instance, individuals who purchase life insurance often do so as a broader financial plan that includes saving for the future. This can lead to greater financial discipline and a stronger culture of saving, which in turn supports economic growth.

Overcoming barriers to buying insurance

While arguments for buying insurance is strong, there are several barriers that need to be addressed to make the shift.

One primary barriers is affordability. In a country like Sri Lanka with people experiencing decreasing levels of disposable incomes insurers need to develop affordable products that are tailored to the needs of these low-income consumers. E.g. micro insurance offers low-cost policies that provide coverage for specific risks such as health or property damage. By making insurance more accessible, insurers can encourage more people to buy policies rather than waiting for them to be sold. Another barrier is trust. In many developing economies, there is a lack of trust in insurance companies. This distrust can be due to factors such as the lack of transparency in procedures. To overcome this, insurers must focus on building trust with consumers by improving customer service and handling policy claims fairly and efficiently.

The role of the insurance industry and government

For insurance to be bought rather than sold, the insurance industry and government must work together to create an environment that supports this shift in mindset among the people. By investing in educating the public and promoting the benefits of insurance, the industry can help change the perception of insurance.

The government also has a role to play in promoting insurance as a critical component of financial security. Administrations should enforce regulatory measures that ensure transparency and fairness in the insurance industry along with promoting financial inclusion. For example, the government could provide subsidies or incentives for low-income individuals to purchase insurance.

In developing economies like Sri Lanka, the shift from selling insurance to buying insurance is essential for creating a more resilient and financially secure population. The potential rewards of doing so such as facilitating a stable economy, reducing poverty and enhancing greater financial security certainly makes it as an effort worth striving for.