Peak Re study identifies morbidity risks as the most pressing insurance need in Emerging Asia

Driven by socio-demographic trends as well as an exceptionally rapid adoption of technology, emerging Asia is set to remain one of the most exciting and rewarding markets for domestic, regional and global life and health insurers. Currently the market, which among others includes China, India, Indonesia, Malaysia, Pakistan, the Philippines, Thailand and Vietnam has a combined premium volume of US$ 448 billion, or 17% about the global life insurance market. From 2012 to 2017 the market has grown by 14% annually. Going forward, it is expected to further expand and continue to outpace GDP growth.

Although primarily focused on Asia’s and the global non-life reinsurance markets, Peak Re takes a keen interest in supporting Emerging Asia’s Life insurance market. As these markets have been shifting from savings to more insurance protection-oriented products, Peak Re sees a tremendous opportunity in showcasing its proven risk management expertise and to further demonstrate its relevance to the region’s societies which are faced with a rapidly increasing prevalence of chronic diseases and changing mortality patterns.

Peak Re therefore commissioned the Emerging Asia Life Insurance Pulse 2019, a study based on in-depth interviews with insurance executive operating in the region. Conducted by Dr. Schanz, Alms & Company, the study published in early March, suggests a buoyant outlook for risk protection products which mitigate families’ exposure to non-communicable and critical diseases. The main drivers include regulatory and public policy encouragement and a generally anaemic condition of savings and investment products. Also, virtually all executives expect digital technologies and advanced analytics to further accelerate premium growth, as a result of improved outreach to underserved segments of the population, enhanced product appeal and lower transaction costs.

Morbidity considered as the single most important protection gap

The most frequently mentioned protection gap in emerging Asia relates to morbidity: Increasing environmental pollution, changing lifestyles and aging give rise to a rapid growth of cancer, diabetes and cardiovascular diseases. Millions of families are viewed as being exposed to such calamity which, if it affects the main breadwinner, could throw them back into poverty.

According to the executives polled a lack of awareness is the main reason for this type of underinsurance, which is defined as people buying less insurance than economically beneficial to them. Cultural obstacles were identified as the second most relevant roadblock to insurance buying. Many customers still rely on traditional family ties or government support for protection. Others expect a “return” from insurance and do not believe that “peace of mind” as such is worth a regular premium payment even if claims fall short of it.

Affordability ranks third as major parts of the population still do not enjoy the excess income needed to purchase insurance. This challenge is exacerbated by high costs of distribution.

Graphic 1: Emerging Asia’s insurance premiums by type (2012–2017, life versus non-life, in US$ billion)

Source: Dr. Schanz, Alms & Company calculations based on Swiss Re sigma explorer data; Emerging Asia comprising of Bangladesh, Brunei, China, India, Indonesia, Cambodia, Laos, Sri Lanka, Myanmar, Mongolia, Macau, Malaysia, Nepal, Pakistan, Philippines, Thailand, Vietnam

Digitalisation tops corporate strategic agendas

The study asked the executives polled to share those areas that rank highest on their corporate development agenda for the next 3-5 years. Not surprisingly, digitalisation emerged on top. Efforts concentrate on distribution and policy administration as well as, to a lesser extent, automated underwriting and claims settlement. Product innovation and diversification came in second. Many of today’s existing life and health products still reflect insurers’ current capabilities rather than customers’ real needs. Talent development is the third most frequently mentioned strategic priority. The aggravating lack of talent in the insurance industry is viewed as the single most serious threat to the future development of life and health insurance in emerging Asia.

Life and health insurance premiums expected to continue outgrowing GDP

An overwhelming majority of 86% of executives believe that life and health insurance premiums will continue outpacing GDP growth. In light of the rapid incidence growth of non- communicable and critical diseases, in combination with people’s increasing awareness of the need to protect their and their families’ incomes, fixed- benefit health products were identified, by the vast majority of interviewees, as the fastest growing life and health product line in emerging Asia.

In terms of growth dynamics direct online sales stand out, albeit from a low base. Citing the region’s young and technology-savvy population most executives spot a great potential for online in simple and easy to understand areas such as term life and personal accident. Having said this, there is a broad consensus that customers will continue to demand and value human interaction and relationships, except possibly for short-term and simple products.

Term and whole life as well as fixed- benefit health insurance identified as most profitable areas

For most executives, term and whole life insurance is the most profitable product line. The price elasticity of demand is relatively low, not least because of still dominant agency distribution. The picture is different for savings-type life insurance policies: More than three quarters of the executives participating in the survey report current profitability levels below the average of the past three years. The main concern is the protracted low interest rate environment.

Margins on health insurance products which offer fixed benefits for critical illnesses, cancer, diabetes or in the form of hospital cash are viewed as attractive by most executives. Over the past few years, demand for such products has increased substantially, on the back of growing awareness, better education and higher disposable incomes. Besides savings business, medical (reimbursement-type) insurance is viewed as presenting the most serious profitability challenges. 56% of the executives polled consider the current level of margins as being below the average of the past three years. By many customers medical insurance is seen as a ‘commodity’, similar to motor insurance. Additional competitive pressure arises from endemic medical inflation, partially due to a lack of public policy efforts to curb surging hospital costs.

Stable profitability outlook for term and whole life as well as health insurance

48% of executives expect margins on term and whole life insurance business to remain stable over the next 12 to 24 months. The outlook is slightly more optimistic for savings products. 30% of the executives polled expect higher margins as interest rates seem to have crossed their low point. On the other hand, regulatory developments exert fundamental pressure on savings- type business. Risk-based solvency regulations, similar to Solvency II, in combination with new accounting standards (IFRS 17) are weighing on earnings. Under such regimes, the economic valuation of insurers’ assets and liabilities can make it uneconomical to offer long-term guarantees and assume financial market risks on behalf of policyholders – a key element of life insurers’ traditional value proposition.

As far as fixed-benefit health products are concerned, 56% of the executives polled do not foresee any major changes to profitability over the next 12 to 24 months. The outlook for medical reimbursement products is less favourable than for fixed-benefit health insurance given this line’s comparatively commoditised nature and a frequently limited scope for repricing.