By Richard Fogarty*

Insurance companies have been operating in a tough market since the global financial crisis began in 2008. Investment returns have been constrained by the low interest rate environment. Global sales, meanwhile, are lagging in most regions: total real premiums fell in three of the four years between 2007 and 2011 and in 2012 rose by only a very moderate 2.4 percent. 1)

Despite these challenges, many of the insurance companies we speak to are very optimistic about the prospects for growth in their industry. To understand why, we need to look at the opportunities opening up now in Asia.

Emerging markets are driving growth in the industry – 2012 saw a rise in life premiums of 4.9 percent in these markets, while non-life premiums rose by 8.6 percent with Asia, in particular, driving this rapid growth. Between 2007 and 2011, insurance density (measured in premiums per capita) rose in the region by nearly 50 percent. 2)

The prospects for the future appear even better. Insurance density for non-life insurance in China and India was only US$64 and US$10 respectively – compared to slightly over US$1,000 for Japan and Korea. 3) As for life business, ageing populations in several countries in the region mean there is a growing need for retirement planning products, not least since governments in the region still lack resources to provide an extensive public social safety net. Accordingly, the Asian Development Bank reports that private pension assets in China and India grew by 35 percent annually between 2002 and 2010. This nevertheless still represents a low proportion of national GDP, coming in at under 1 percent. 4)

The potential that these figures represent explains why insurers in this region are particularly upbeat about their prospects for growth. In a survey of more than 300 industry executives conducted by the Economist Intelligence Unit for State Street earlier this year, over half of executives in Asia (52 percent) believed that profits would grow over the next five years. In the rest of the world, the figure is just 37 percent. 5)

Overcoming the barriers

The region therefore presents very real opportunities but as insurers seek to benefit from them they need to keep in mind several challenges posed by Asia’s markets:

Competition is already intense: Global companies interested in the emerging economies of Asia are not dealing with untapped markets. Many – including China and India but also smaller ones such as the Philippines and Malaysia – are already dominated by domestic players, both state-owned giants and smaller firms. At the same time, growing interest in the region is driving up the cost of buying entry into the market or gaining a greater share of it. The value of insurance sector mergers and acquisitions (M&A) in Asia reached a record US$30.5 billion in 2012. 6) Moreover, according to Reuters, Asian insurance firms already trade at twice the price-to-book ratio of those in developed countries and this figure is increasing.

Distribution is difficult in a fragmented market: In our survey, respondents from Asia said that their leading business challenge was strengthening distribution channels (cited by 31 per cent of those surveyed in the region). Companies need the right distribution strategy to meet the specific requirements of each market. The optimal strategy may mean a range of product offerings, including products that are much less common in developed countries such as micro-insurance or, in countries with large Muslim populations such as Indonesia and Malaysia, takaful (Islamic insurance). Reaching a broad range of customers also means considering a wide variety of marketing channels that could run from supermarkets to specialized kiosks.

Enterprise Risk Management (ERM) remains weak: The biggest worry identified by Asia Pacific respondents to the State Street survey was improving their risk management: 87 percent of those surveyed called this a concern and 43 percent said it was a major one. This finding is consistent with other research in the region. A 2012 analysis of Asian insurance firms by the rating agency Standard & Poor’s, for example, found that 9 percent of the 96 businesses assessed had strong ERM, whereas 80 percent of them felt their capabilities in this area were weak or at best “adequate”. 7) The research found that Asian businesses in the sector, especially small and medium firms, lag behind their global peers. Frank Baron, president of the newly-founded Pan-Asia Risk & Insurance Management Association, a professional body for risk managers, told Insurance Times in July 2013: “There is a still a decent number of organizations without a new risk-management framework in place…The challenge is to ensure that this is properly recognized by top management as a must-do.”

Regulation is evolving quickly: So far, multinational insurers have been busy with meeting compliance requirements in developed markets, but it’s an issue that is becoming increasingly important in Asia. The adoption of major new Insurance Core Principles by the International Association of Insurance Supervisors in 2011 is having an impact across a wide number of Asian emerging markets. Both India and China, for example, have substantially revised regulations and shifted toward more risk-based capital requirements. Such change can often have a direct business impact. Swiss Re’s Sigma study of 2012 world insurance trends, for example, explained the sharp drop in total life insurance sales that took place in 2011 in these two markets as the result of new distribution regulations there.

These issues are not insurmountable and Asia’s potential means any efforts to tap this market are worthwhile. Nevertheless, the most successful firms in the region will do more than simply import systems and processes from other regions. The winners will be those companies that develop a deep understanding of local conditions and develop suitably focused strategies to meet the region’s complex requirements.

* Richard J. Fogarty senior vice president and head of State Street Global Services, Japan. He is the president and representative director of State Street Trust and Banking Co., Ltd. (SSTB).

1) Swiss Re, World Insurance in 2012: Progressing on the long and winding road to recovery, June 2013; Swiss Re Sigma World Insurance Database, http://www.sigma-explorer.com/
2) Ibid.
3) Chaplin, Kent, “Market Presentation Asia Pacific”, September 2012, www.lloyds.com/comparecountries.
4) Yuwei Hu “Growth of Asian Pension Assets: Implications for Financial and Capital Markets” Asian Development Bank Institute Working Paper Series No. 360, May 2012 (especially tables 1b and 1c).
5) 2013 State Street Insurance Survey conducted by the Economist Intelligence Unit
6) Reuters, Denny Thomas and Clare Baldwin “Asian insurance M&A gets pricey as region’s promise beckons”, 28 April 2013
7) Standard & Poor’s, Asia-Pacific Insurers’ ERM Lags The More Developed Markets; Australia and Japan Lead In Sophistication. April 2012.