Communities in developed and developing economies alike must be better informed on the function of insurance, according to Butch Bacani, the head of the United Nations Environment Program’s (UNEP) Principles for Sustainable Insurance initiative.

“We need to continuously educate different stakeholders, be it communities or governments and civil society, on the nature of insurance,” he said. “The business of insurance is quite distinct from other financial institutions.”

Insurance for low-income populations has become more sophisticated in recent years, he says, with microinsurance now including products such as credit life insurance, crop cover and health insurance.

But financial literacy is a challenge. “We are looking at communities that are unfamiliar with the concept of insurance,” Mr Bacani says in a video interview with Insurance Council of Australia CEO Rob Whelan.

“We need to make sure they understand the principles of insurance, what the business is all about, what it can do and what it cannot do.”

This also applies to consumers in developed economies.

“The whole business is founded on trust between the client and the insurer. That has to be maintained and that’s something that has been important across markets.”

Mr Whelan says ICA is developing a website to explain insurance in simple terms.

But there needs to be more focus on risk management, not just risk transfer, Mr Bacani says.

There is an untapped opportunity to use insurance industry expertise to manage and mitigate risk, for example in building codes, flood zones and wind zones.

“If you are able to help communities cope and manage risk in a more resilient way you are also making communities and economies more resilient, and making insurance more accessible and affordable,” he said.

The Principles for Sustainable Insurance program was launched in June to provide a global best-practice framework to manage risks. The UNEP Finance Initiative is now working to implement the principles worldwide.