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Emerging markets in transition

As the insurance sector in emerging economies grows, increasing and broadening its penetration, it is often assumed that eventually these markets will emulate their more mature counterparts. Recently Franz Hahn had been asked to provide his view on growths dynamics of emerging markets, which we would like to share with you in a slightly amended version. You will find the original copy in the CEO Risk Forum, a supplement from Reactions published in September 2015.

The attraction of emerging markets

In 2014 the global insurance markets rebounded from their sluggish growth of the post financial crisis years and grew by 3.7% in real terms, well ahead of prior year’s 1.4%. According to industry reports, premiums in mature markets registered an increase of 2.9%. Although the top line improved, the industry is still struggling to address its diminishing relevance, as illustrated by the decline in insurance penetration (premiums as a percentage of GDP) from 9.0% in 2004 to 8.15% in 2014.

Growth in emerging markets however continued unabated. In 2014 premiums were up by 7.4%, identical with 2013. Penetration remained virtually unchanged at 2.7%, still far below mature markets, but at least on a steady long-term growth path. By now emerging markets claim an 18% share of the global premium pie of US$ 4,778 billion. However, when it comes to growth, they lead the game: in 2014 they contributed about 30% to global growth. During the post-financial crisis years emerging markets demonstrated their resilience with an even higher share of premium growth – in 2013 they contributed 84% to global premium growth.

In 2014, Asia’s high-growth markets contributed approximately 10% to global premiums, or US$ 465 billion. Asia accounted for more than 90% of the premium growth originating from emerging markets. However, insurance penetration in Emerging Asia is still a low 3.1%, as compared to 8.15% in the mature markets. This penetration gap illustrates the region’s growth and catch-up potential. According to the OECD, Emerging Asia’s real GDP is projected to grow at an average 6.5% p.a. from 2015 to 2019. The region’s premiums are expected to outgrow GDP by a multiple of roughly 1.5%.

Drivers of insurance growth in Emerging Asia

Besides the favourable economic environment, Asia’s growing middle class, which already amounts to half a billion people – more than the total population of the EU – will be a key driver of growth in personal lines. By 2020 the region is forecast to be home to half of the world’s middle class. As its income and wealth rises and familiarity with and awareness of insurance products increases, life, property and motor are poised to grow rapidly, helped by the privatization of retirement systems and compulsory insurance requirements, respectively.

Furthermore, Emerging and Advanced Asia are among the world’s most exposed natural catastrophe regions. As urbanization progresses – in particular in high-risk areas – and climate change unfolds, that exposure will require additional insurance protection. Already today, eight out of ten countries with the highest annual natural catastrophe losses as a percentage of GDP are located in Asia. In fact, almost 100% of China’s or 80% of India’s and Indonesia’s economic losses from natural catastrophes remain uninsured.

Market access regulations – Light and shadow

One catalyst for insurance growth in Emerging Asia is regulatory change, both in terms of liberalizing markets or enhancing market control. The ASEAN countries, for example, will introduce regulations to allow cross-border sales of certain products. ASEAN members agreed to liberalize the cross-border supply of marine, aviation and goods in international transit insurance to spur intra-ASEAN trade. In a next step catastrophe insurance and reinsurance may follow, as the growing catastrophe risk exposure may exceed available capacity in single states.

Emerging Asia markets also strengthen their solvency regulations as China, for example, introduces an RBC regime, potentially reducing reinsurance demand for non-volatile lines like motor. The China Risk Oriented Solvency System (C-ROSS) will be the most important regulatory change in the region to date. Like Solvency II, C-ROSS is based on three supervisory pillars, intended to better reflect the true risks of an insurer, and following the logic of other three pillars systems considered elsewhere.

Emergence of new products and services

If insurance is to succeed in Emerging Asia, it has to be relevant to policyholders. In particular, insurance products need to meet the requirements of a dynamic and rapidly changing environment of mass usage. In India we have seen the enormous use of micro-insurance as a tool to bring predominately life and health insurance to people who otherwise had no access to insurance protection. Currently 300 million people are covered by micro-insurance in India alone, very frequently in the form of credit life insurance. Thanks to its combination with bancassurance or mobile network providers it facilitates policyholders’ access to loans or credit and thus their integration into the financial system.

Similarly to many other emerging markets, agricultural insurance and index-based weather insurance solutions, sometimes developed in close cooperation with reinsurance partners and governmental as well as non-governmental support, have had widespread success in markets ranging from India to Bangladesh, Vietnam and most notably to China. With strong endorsement from the central government, China has become the world’s second largest market for agriculture insurance in just a few years.

In 2008 China’s agriculture premiums still amounted to US$ 0.9 billion. Five years later premiums already exceeded US$ 5 billion. Another example for innovation in Emerging Asia’s insurance sector is the phenomenal growth of peer-to-peer (P2P) lending in China and its use of insurance in providing a credit cover to protect the transactions. Although the idea of lending platforms is also common in other markets, it really took off in China, addressing an urgent demand for affordable and accessible credit by consumers and small businesses. Within just three years the number of – mostly online – platforms sprouted from 50 to 1,575. According to the Chinese data provider Wangdaizhijia, US$ 16.7 billion worth of loans issued by online finance platforms were outstanding by the end of 2014. As Lufax, the second largest platform and a unit of Ping An Insurance (Group) Co. states, most loans are used for personal consumption or as shortterm working capital. However, it is expected that more and more capital will be used for property and mortgages too.

The internet, online platforms and the advent of ‘big data’ further transform the market. As policyholders register and update their data online, insurers benefit from significantly lower administrative cost, and telematics may need regulatory change. Telematics devices, which monitor the driving behaviour of motorists, could help Asia Pacific’s soaring motor insurance sector to overcome a lack of historical data. The collection of data over time becomes obsolete as thousands of drivers voluntarily provide their data.

But also, the availability of data allows insurers to see correlations that were previously hidden. Finally, similar to product design, distribution is pursuing new avenues or simply leapfrogging established ones. Alternative distribution channels like new bancassurance collaborations or mobile and web-based sales broaden the accessibility of insurance products and stimulate demand. EY found in its Global Consumer Insurance Survey 2014 that 80% of customers are willing to use digital and remote contact channels for interaction with their insurer. As a result, online platforms sprout in insurance too.