Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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Emerging markets matter Change is in the air, but long‑term opportunities abound for insurers in this complex landscape
Contents Introduction 3 Regional summary 5 Analysis by region Asia 13 Latin America 23 Middle East—Africa 27 Europe 31 Conclusion 35 Snapshot opportunities and risks by country 36
Foreword Rapid technological innovations and vast flows of funds are binding the globe ever closer together, and savvy insurance executives recognize that uncovering opportunities to cultivate new insurance premiums in emerging markets can represent a powerful force to accelerate revenues. Evaluating these opportunities has become more complex, however, after the sudden decline in the prices of energy and other commodities softened the market for many developing economies trying to scale globally. As a consequence, insurance executives must be nimble, regularly evaluating and refining their strategies to identify which international markets are most likely to offer the best return on investment. EY and Oxford Economics developed this report to highlight the potential for insurance growth in 22 countries around the globe. We have created a risk- opportunity matrix to illustrate the most attractive markets for investment and those that pose the greatest risks. This sequel to Waves of change: the shifting insurance landscape in rapid growth markets, released in 2013, is designed to help executives better understand the challenges of this complex market landscape. As our findings reveal, the contribution of emerging markets to insurance premium growth will remain significant over the long term. Insurers need to identify and develop new premium revenue streams, even if some former standouts will confront significant economic challenges that may hinder growth in the near term. Shaun Crawford Rohan Sachdev EY Global Insurance Leader EY Global Insurance Emerging Markets Leader
Brazil, which in our last report appeared on the road to sustainable growth, is now likely to record negative growth over the next three years and is no longer a very attractive investment target.
Introduction Global insurers know: emerging markets matter. Indeed, over the next five years, emerging markets are expected to be the main drivers of premium growth in both life and non-life insurance markets. As the growth prospects for insurance • Rapid technological transformation, in many mature markets remain which offers financial access and modest, global carriers have logically greater empowerment to millions of turned their attention to the abundant new consumers, especially through opportunities emerging markets smartphone and tablet devices present. As recently as 2014, Asia • New micro-insurance and takaful and Latin America achieved double- products, designed to serve markets digit growth in insurance premiums that were once considered too compared to a mere 5% growth in the burdensome to cover developed world, reinforcing the view that emerging markets were poised • The massive room for catch-up in the to become an increasingly important rate of insurance penetration across source of global insurance growth. all types of coverage in emerging markets 2015 proved turbulent, however. Few predicted that the rapid collapse • A flurry of regulatory changes, in oil and commodity prices, the which will accelerate opportunities slowdown in China’s growth rate, and for growth by foreign carriers in There is rapid room for catch- the rapid appreciation of the US dollar many markets. As regulators move up in emerging markets, as would combine to generate adverse to strengthen solvency, protect consequences in a number of important penetration rates are low. consumers and encourage the markets, leading to weaker economic development of new products output. These forces have diminished simultaneously, foreign carriers can the short-term outlook for insurance offer a mix of technologies and talent premium growth in a number of key that accelerates premium growth even emerging markets. faster than overall economic output. That does not mean the prospects in The challenge today is for insurers emerging markets have evaporated. to determine how best to target their Powerful secular trends should generate investments. significant new growth opportunities Mindful of the opportunities and also for insurance over the longer term in of the potential risks, EY is revisiting emerging economies, even if the short- Waves of change: the shifting insurance term outlook may appear challenging. landscape in rapid-growth markets, These powerful trends, which will gather first issued in 2013, to better capture momentum regardless of the short-term the potential for insurance growth in outlook, include the following: 22 individual markets. Working with • A growing urban middle class that is Oxford Economics, we have once again beginning to achieve critical mass, compiled a matrix that helps global especially in the fast-rising megacities players understand which markets are across Africa and Asia poised for the most significant premium growth and which can be considered the least risky. Emerging markets matter | 3
China remains the dominant engine of insurance market growth in emerging economies over the coming five years, even though the degree of its openness to foreign firms remains in question.
Regional summary Asia will account for the lion’s share of insurance premium growth in emerging markets through 2020, contributing nearly 90% of the total. China alone, despite a likely near-term deceleration in GDP growth, remains the biggest opportunity of any emerging market — and with relatively low risk (see Figure 10). Indonesia is Asia’s next Figure 1: Distribution of most promising opportunity, but it comes with higher risk. insurance premiums by region Africa and the Middle East, while far Outlook for growth: Contributions to total emerging behind Asia in terms of projected Asia still dominates markets insurance premium premium growth over the next five growth, 2015-2020 (% of total) 12+60+12642T In terms of overall growth in insurance Advanced Asia emergers: Singapore, years, nevertheless hold significant premiums, Asia will continue to grab Korea, Hong Kong potential. Indeed, Nigeria scores second the headlines. only to China for opportunity (see Figure 9), and new requirements to insure Consistent with our forecast of three people and businesses in countries years ago, China remains the dominant like Saudi Arabia and the United Arab engine of insurance market growth in Emirates (UAE) could light a fire under emerging economies over the coming those markets. However, the oil price five years, even though the degree of collapse, volatile commodities markets its openness to foreign firms remains and foreign-exchange troubles in Africa in question. mean the region comes with high risks. Even with an expected slowdown in Similarly, although the political disaster overall output to somewhere around in Brazil has cast a pall over all of Latin 6%, China is projected to account for Advanced Asia emergers 11.7 America, insurers can look forward almost 60% of expected emerging- China 59.2 to healthy premium growth in several market premium growth by 2020, or India 11.5 regional markets, notably Chile, where some US$280 billion of the additional Rest of emerging Asia 5.8 foreign carriers enjoy a dominant US$480 billion by which premiums are projected to expand in the period. India Africa 4.0 market share. Risks are higher in Mexico, Colombia and Argentina (see and South Korea should each see their Latin America 2.4 Figure 14). In Argentina’s case, fiscal annual premium levels rise by around Middle East and Turkey 2.7 improvement and greater regulatory US$50 billion by 2020. Russia 2.6 coherence could set the stage for long- Figure 1 summarizes our view of term insurance sector growth. premium growth in rapid-growth Source: Oxford Economics, Haver Analytics Russia and Turkey, Europe’s two markets over the next five years, emerging markets, face major economic highlighting the outsized influence China and geopolitical challenges. In the will bear relative to all other markets. former, low oil prices have brought GDP growth to a screeching halt, while the Syrian refugee crisis continues to rock the latter. In the longer term, these two large, diverse nations will see the secular trends benefiting other emerging regions, from urbanization to In this publication, “China” refers to the tech adoption, play out on a grand scale. mainland China market, and “Hong Kong” refers to the Hong Kong special administrative region of China. Emerging markets matter | 5
Figure 2: Premium growth by country Total insurance premium growth, US$m Total insurance premiums in 2020 vs. 2015 China India South Korea South Africa Indonesia Russia Malaysia Mexico Singapore Hong Kong UAE Chile Turkey Argentina Saudi Arabia Thailand Colombia Vietnam Consistent with our forecast Nigeria of three years ago, China Kenya Uganda remains the dominant engine Brazil of insurance market growth –100 0 100 200 300 in emerging economies. Source : Oxford Economics, Swiss Re While a regional analysis is instructive, Figure 3: Changes in insurance premiums a breakdown by individual markets also highlights specific areas of opportunity. Total insurance premium growth, US$m In addition to the markets noted Total insurance premiums in 2015 less total insurance premiums in 2013 above, South Korea, South Africa and Malaysia are markets where a rising China middle class and the advent of new India internet and mobile platforms will Brazil help boost the prospects for growth of South Africa insurance coverage. Russia It is instructive to illustrate the degree Mexico to which the prospects in specific Indonesia markets today differ from the forecast Thailand in 2013. Figure 3 contrasts future Hong Kong potential growth in insurance premiums Estimated, February 2016 Turkey with previous forecasts. As the data Forecast, September 2013 Malaysia makes clear, prospects for insurance UAE growth in Brazil, South Africa and Russia have weakened considerably, Colombia while the outlook in nations as diverse Chile as Indonesia, Mexico and Turkey have Saudi Arabia also deteriorated because of political Vietnam setbacks and adverse prices for oil and Nigeria other commodities. Kenya –$50 –$25 $0 $25 $50 $75 $100 Source : Oxford Economics, Swiss Re 6 | Emerging markets matter
China is projected to account for almost 60% of expected worldwide premium growth by 2020. Figure 4: Changes in growth projections for emerging markets The relationship between deteriorating commodity prices and lowered economic GDP growth in emerging markets projections for emerging markets Percent change over previous year is fairly straightforward. In many of these markets, commodity-price 9% spikes drive exports, employment, foreign investment and government 8% spending. When commodity prices 7% suddenly collapse, economic activity and Forecast investment also fall. So 2015 marked 6% September 2013 a year of recession in many of these markets, and aggregate growth across 5% emerging markets is likely to fall by one February 2016 or two percentage points by 2020, with 4% Brazil and Russia likely to experience 3% particularly sharp retrenchment. Not all emerging markets are expected 2% Forecast to see a significant slowdown in overall economic growth. Notably, output in 1% Mexico and Kenya will likely exceed 0% previous estimates, while in economies like Nigeria and Indonesia, the pace 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 of economic growth between now and Source : Oxford Economics, Haver Analytics 2020 has been trimmed by only about one percentage point. Figure 5 shows the potential overall slowdown for growth in emerging markets. Emerging markets matter | 7
Urbanization will continue to Figure 5: Slower underlying growth expected in emerging markets boost opportunities Many emerging markets will remain GDP growth slower across emerging markets attractive for insurers because their Average annual GDP growth (%) urban populations are rising and the overall level of insurance penetration 12% 2005–2015 remains low. This suggests real opportunities to educate a rising 2016–2020 10% middle class on the financial benefits of insurance as a means to boost sales. 8% As Figure 6 illustrates, continuing urbanization in nations like Indonesia, 6% Mexico, Turkey, Colombia and Nigeria suggests major growth opportunities 4% for the insurance industry, as the rate of insurance penetration lags the rapid 2% urbanization taking place. 0% Exchange rates pose concerns Russia Turkey Brazil Argentina Saudi Arabia South Africa South Korea Hong Kong Mexico UAE Thailand Chile Colombia Malaysia Kenya Singapore Nigeria Indonesia China Uganda Vietnam India For foreign insurers, the exchange rate outlook is also important, and for many emerging markets, the rise of US interest rates and lower oil prices have led to further deterioration. Brazil is expected to be affected the most, with Source : Oxford Economics, Haver Analytics depreciation continuing through the rest of the decade. Russia’s exchange rate will likely bottom out in 2016, appreciating modestly in subsequent years. However, this retrenchment will Figure 6: Urbanization will boost insurance sales be less significant in markets with an exchange rate fixed to the US dollar Insurance density and urban population, 2015 (such as Hong Kong, Saudi Arabia and the UAE) or with a tightly managed float 700 (such as China). While expansion in rapid-growth markets 600 Insurance premia per head of population Chile has encountered some unexpected head winds, the risk profile for many markets 500 Malaysia in our survey has also deteriorated. The risk index constructed in this report, 400 Argentina which is based on analysis of political uncertainty, the ability of a nation to pay Thailand Brazil 300 its international debts and trade risks, China Saudi Arabia accounts for currency volatility as well as overall economic conditions. 200 s" Mexico ter a dop Colombia rly 100 "Ea Vietnam Indonesia Turkey, Russia Kenya Uganda India Nigeria 0 0% 20% 40% 60% 80% 100% Proportion of population living in urban areas 8 | Emerging markets matter
While certain markets in Asia like In other markets, political risks have Singapore and South Korea seem fairly risen. Brazil has experienced a wave of stable, the risk in a number of markets civil protest against the government across Africa has actually increased, as of Dilma Rousseff amid allegations the value of local currencies has fallen of widespread corruption, while relative to the dollar and prices for oil Nigeria and Uganda face potential and other commodities have weakened. trade difficulties. Across a number of the markets covered To help guide global firms seeking to in this survey, the potential for lingering chart their course across a variety of weak commodity demand will likely emerging markets, we have recompiled trigger financial strains as government a matrix that combines an assessment revenues from extraction fees and taxes, of future opportunities for insurance as well as from employment, decline. premium growth with a ranking of This can cause governments to impose potential economic and political risks. additional austerity measures. The most attractive markets, Figure 7: Risk components deconstructed which combine high potential Components of risk in emerging markets growth with relatively lower Each component measured on 0-1 scale, 1=maximum risk risk, are mainly in Asia. Political Trade 3.0 Sovereign 2.5 2.0 Riskiest 1.5 1.0 Most stable 0.5 0.0 Singapore Hong Kong South Korea Chile Malaysia UAE Saudi Arabia China Mexico Thailand South Africa Colombia Indonesia India Turkey Brazil Kenya Russia Vietnam Argentina Nigeria Uganda Source : Oxford Economics, Haver Analytics Emerging markets matter | 9
Figure 8: Risk-opportunity matrix Matrix of opportunity and risk for insurance investment As Figure 8 shows, the most attractive How we created our risk- • Macroeconomic factors and markets, which combine high potential opportunity indexes and matrix supply‑side environment (e.g., labor, growth with relatively lower risk, are We arrived at our risk and opportunity market conditions, strength of mainly in Asia. While China is by far scores by analyzing economic conditions financial sector) the biggest potential growth market, for growth and potential hazards in each Malaysia, Indonesia and India also offer The risk index includes these elements: of the 22 markets in this survey. potentially attractive opportunities. • Macroeconomic risk (low GDP growth, Singapore, Hong Kong and South Korea The opportunity index includes these high inflation) offer low risk, but much smaller growth elements: • Political, regulatory and corruption potential. Brazil, which in our last report • Insurance market size risk appeared on the road to sustainable • Forecast premium growth • Sovereign and trade credit risk growth, is now likely to record negative • Insurance market penetration • Underperformance in technology growth over the next three years and saturation and urbanization and is no longer a very attractive investment target. 0.8 High risk, low growth High risk, high growth 0.7 Uganda Nigeria Argentina Vietnam Russia 0.6 Kenya Brazil India Risk (0=lowest risk, 1=greatest risk) 0.5 Turkey Indonesia Thailand Colombia South 0.4 Africa Mexico Saudi China 0.3 Arabia UAE South Korea Chile 0.2 Malaysia 0.1 Hong Kong Singapore 0.0 Low risk, low growth Low risk, high growth -20% 0% 20% 40% 60% 80% 100% -0.1 US$ Value market growth, 2015-20 10 | Emerging markets matter
Nigeria scores second only to China, as shown in Figure 9. Figure 9: Risk-opportunity ranking by market Opportunity Opportunity Risk Risk Higher score = Higher score = More opportunity score More risk score 1 China 77.4 1 Singapore 2.0 2 Nigeria 67.3 2 Hong Kong 6.8 3 Indonesia 59.0 3 South Korea 17.3 4 India 54.2 4 Chile 17.7 5 Malaysia 52.2 5 Malaysia 23.1 While China is by far 6 Uganda 47.6 6 UAE 25.3 the biggest potential 7 Russia 47.3 7 Saudi Arabia 31.7 growth market, Malaysia, 8 Vietnam 46.3 8 China 31.7 Indonesia and India 9 Chile 39.7 9 Mexico 36.6 also offer potentially 10 UAE 39.6 10 Thailand 36.9 attractive opportunities. 11 Saudi Arabia 37.8 11 South Africa 40.1 12 South Korea 34.4 12 Colombia 40.5 13 Turkey 32.4 13 Indonesia 42.9 14 South Africa 32.3 14 India 44.4 15 Singapore 32.1 15 Turkey 46.9 16 Colombia 31.2 16 Brazil 48.4 17 Mexico 30.6 17 Kenya 56.7 18 Kenya 25.0 18 Russia 57.0 19 Argentina 24.9 19 Vietnam 59.3 20 Thailand 22.1 20 Argentina 65.2 21 Hong Kong 21.5 21 Nigeria 68.3 22 Brazil 8.6 22 Uganda 68.6 Emerging markets matter | 11
Asia India and South Korea should each see their annual premium levels rise by around US$50 billion by 2020.
Analysis by region Figure 10: Risk-opportunity Favorable demographic trends and the ability of new technology to ranking by market, Asia allow companies to leapfrog antiquated infrastructure help explain why Asia remains an important focus for companies looking to boost their investment in emerging markets. In addition, despite a slowdown Opportunity Opportunity in China’s growth rate, which affects many countries in the region, Higher score = score More opportunity expansion in Asia is still projected to exceed growth in the developed 1 China 77.4 world. Moreover, China’s massive adoption of mobile phones and e-commerce offers significant opportunities for innovation to take 3 Indonesia 59.0 root across the insurance industry. 4 India 54.2 5 Malaysia 52.2 As Figure 11 illustrates, both Indonesia and China are expected to 8 Vietnam 46.3 experience annual premium growth exceeding 15% over the next five 12 South Korea 34.4 years, but this statistic understates how much bigger the Chinese 15 Singapore 32.1 insurance industry is relative to any other in the region. 20 Thailand 22.1 21 Hong Kong 21.5 Figure 11: Projected insurance premium growth by country 2015–20 Risk Risk 16+84+D 16+84D 15+85D CAGR, domestic insurance premiums, 2015–20 Higher score = More risk score 1 Singapore 2.0 2 Hong Kong 6.8 16 % 16 % 15 % 3 South Korea 17.3 5 Malaysia 23.1 8 China 31.7 14+86+D 10+90D 8+92+D Indonesia China Malaysia 10 Thailand 36.9 13 Indonesia 42.9 14 India 44.4 14 % 10 % 8 % 19 Vietnam 59.3 6+94+D 4+96D 3+97+D India Vietnam Singapore 6% 4% 3% South Korea Hong Kong Thailand Source: Oxford Economics, Haver Analytics Emerging markets matter | 13
Figure 12: Risk components in emerging Asia Components of risk in emerging markets, Asia Each component measured on 0-1 scale, 1=maximum risk 2.0 Political 1.8 Trade Riskiest Soveriegn 1.6 1.4 1.2 1.0 0.8 There is also a clear correlation Most stable between growth of the middle class 0.6 and an appetite for insurance products. As Figure 13 demonstrates, China, 0.4 India, Indonesia and Malaysia are all expected to see significant expansion 0.2 in the number of households earning in 0.0 excess of US$20,000 per year. Singapore Hong South Malaysia China Thailand Indonesia India Vietnam Kong Korea Source: Oxford Economics, Haver Analytics Figure 13: Middle class rising, by the millions Middle class growth, 2016-20 Additional millions of people living in households with an annual income greater than US$20K 250 200 150 100 50 0 Singapore Hong Kong UAE Kenya South Africa Thailand Vietnam Chile Saudi Arabia South Korea Colombia Argentina Malaysia Brazil Mexico Turkey India China Nigeria Russia Indonesia Source: Oxford Economics, Haver Analytics 14 | Emerging markets matter
China’s massive adoption of mobile phones and e-commerce offers significant opportunities for innovation to take root across the insurance industry. China Rating: Higher growth, Recently, a division of Alibaba, the giant lower risk e-commerce company, announced a With the world’s largest population major initiative to build an internet- and a rapidly expanding middle class, based health insurance program aligned China will remain the prime focus of with China Taiping Insurance and others. attention for many global insurers, The Insurance Association of China even if the torrid underlying growth has estimated that online insurance The Insurance Association of the past decade is likely to be premiums grew 260% during the first tempered somewhat. half of 2015. of China has estimated that online insurance premiums Based on macroeconomic projections However, China’s insurance regulators and risk analysis, mainland China have raised alarms about potential risks grew 260% during the first remains the single most attractive in the industry, as aggressive stock half of 2015. market in the region, if not among purchases by domestic insurers and all emerging markets globally. sales of high-return products could Nevertheless, the transition from damage the country’s financial system. an investment and export-oriented Moreover, other large Chinese firms economy to one more focused on have become aggressive overseas consumer-led growth is likely to investors in an effort to move Chinese prove beneficial to insurers, as is funds out of the country. For example, the rapid adoption of mobile and Anbang acquired the South Korean web-based commerce. unit of Allianz, while PICC Property & Casualty Co., a unit of state-owned As China faces the challenges of a People’s Insurance Company of China rapidly aging population, growth in health insurance is likely to be strong. Emerging markets matter | 15
22+78+T (PICC), agreed to buy Deutsche Bank’s Regulators are building more analytical nearly 20% stake in China’s Hua Xia tools to improve efficiency and accuracy, Bank for up to 25.7 billion yuan. consequently pushing insurance 21.7 % companies to rely more on their PICC has already demonstrated profits analytical capabilities. A risk-sensitive can be made in auto insurance, as insurance solvency regime (C-ROSS) also Chinese regulators have introduced became effective in January 2016. pilot projects in six provinces and cities, giving insurers greater flexibility to set premiums, including the creation of risk-based pricing. While these new Hong Kong premiums generated lower profits, Figures from Hong Kong’s incentives for good driving also created Rating: lower growth, Office of the Commissioner fewer claims.1 lower risk Foreign insurers continue to face Buyers from mainland China have of Insurance (OCI) show that an uphill battle entering the market exerted significant impact on the Hong in the first nine months of Kong insurance market. Figures from despite continuing, albeit slow, market 2015, mainland Chinese liberalization. According to the China from the OCI show that in the first spent HK$21.1 billion, Insurance Regulatory Commission nine months of 2015, mainlanders representing 21.7% of new (CIRC), overseas life insurers’ market spent HK$21.1 billion, representing premiums, compared with share declined to 5.6% in 2013 21.7% of new premiums, compared compared with 8.9% in 2005. Foreign with just 9% in 2011. Mainlanders are just 9% in 2011. property and casualty (P&C) insurers being attracted by the wider choice of have not fared any better, having failed policies, higher investment returns and to grow market share from 1.3% since the perceived security of dealing with 2005. Frustrated and disillusioned global international brands with a long by the slow pace of deregulation and history and sophisticated reputation. increasing local competition, some firms The Chinese government has stepped reduced ownership in their China joint up efforts in recent months, however, ventures about five years ago. New to limit such sales by making it harder York Life quit China completely in 2011, for policyholders to move their money and in 2015, Insurance Australia Group out of China, so some uncertainty (IAG) decided to abandon what had been will remain. planned as an aggressive foray into the Moreover, a series of new regulatory market. policies taking shape within Hong Kong For P&C insurers in China, the market- is also affecting the prospects of market based pricing reform will benefit big players, both large and small. New laws companies significantly through better are intended to boost competition, and segmentation. Small companies need the new Guidance Note on Underwriting to be innovative to grow premiums and (GN15) has forced many firms to alter profitability through specialty insurance. the ways they structure and market investment-linked assurance schemes. For foreign firms, developing a robust Hong Kong is also preparing to revamp digital strategy to capitalize on the use its solvency regime to accommodate of mobile devices for transactions offers a risk-based capital (RBC) framework. a significant opportunity. Established In addition, the rollout of a new insurers are already trying to promote regulatory body, the Independent more internet interactions between Insurance Authority, will generate policyholders and agents, to improve some uncertainties. cross-selling business opportunities. And some new insurers are trying to develop an internet-only business model. 1 PICC P&C no car crash, Financial Times, 30 March 2016 16 | Emerging markets matter
Malaysia is expected to see significant expansion in the number of households earning in excess of US$20,000 per year. 50+50+T Malaysia 50% Rating: higher growth, This suggests that as an “early lower risk adopter,” Malaysia could be seen as Sharia-compliant takaful insurance has a potential test pilot for insurance gained a firm foothold in Malaysia, and innovation, as consumers embrace foreign insurers have been attracted the digital era, forcing insurers to to the market’s growth potential, as rethink their distribution strategies and the insurance sector is still relatively partner relationships. under-penetrated. Moreover, the Liberalization of the motor insurance growth of mobile technologies will market is also expected to promote compel incumbent firms to rethink greater pricing flexibility and A recent study by AIG Asia- their distribution strategies, as digital competition as carriers move toward Pacific estimated that the operations and offshoring of back-office risk-based premiums that take a driver’s functions could recast the competitive cyber insurance market could record into account. Liberalization is grow by 50% this year. landscape. Malaysia is notable because, expected to begin in July 2016, but it as in Chile and Thailand, the ratio of will be carried out in phases to allow insurance premiums generated per both the introduction of new products capita is actually higher than the global and market-based rates. Expansion in average, based on the urbanization rate the takaful market is also likely. of the country and the widespread use of mobile technologies. Emerging markets matter | 17
25+75+T Singapore Thailand 25 Rating: lower growth, Rating: lower growth, % lower risk As one of the world’s most open moderate risk The long-term growth prospects for insurance markets, Singapore serves as insurance premium growth in Thailand, a gateway to the rest of Asia for many Southeast Asia’s second-largest foreign firms. While Asia’s middle class economy, remains strong, the result of is increasing, it is also aging rapidly, with an aging population, the rising levels of citizens over 60 years old expected to household wealth and a low penetration triple, to some 1.3 billion, by 2050. Life rate — just 4.1% for life insurance and The population of Thai insurance and retirement planning are 1.7% for non-life policies, according to residents over the age of 60 attractive opportunities. the Thai General Insurance Association will rise to 25%. In the past year, the government has (TGIA). The country remains subject to political uncertainties, however, as allowed insurers to sell products directly the military continues to govern after to consumers. These products, known pitched civil conflict. as direct purchase insurance, include life and disability coverage and are Within the next 20 years, the population sold without commission but have not of Thai residents over the age of 60 will yet taken a large share of the market. rise to 25%. Because of the relative lack Moreover, as Singapore seeks to position of public hospitals, many middle and itself as a regional software and IT hub, upper-class consumers rely more on demand for cybersecurity insurance is private health insurance for access to expected to skyrocket. A recent study private facilities. by AIG Asia-Pacific estimated that the Thailand is also experimenting with new cyber insurance market could grow digital strategies to empower insurance by 50% this year, as more businesses consumers. Claim Di, a Thai start-up look to mitigate the high reputational whose mobile app allows drivers to and financial risks associated with report claims and connect directly cyber breaches. to their insurance providers, secured With the government regulator moving US$2 million in venture-backed funding to incorporate RBC standards for last year. The company will also offer insurance providers, most are being roadside assistance, a call center for required to increase their capital providers and a navigation service to bases significantly. The Monetary speed investigators to the scene of an Authority has also made the Own Risk accident to assess damages. and Solvency Assessment (ORSA) With a slowdown in car sales mandatory for all insurers in Singapore, expected, some providers are moving which has led to an increased focus on more aggressively into marine robust enterprise risk management and infrastructure insurance. But (ERM) frameworks. The government the bancassurance model remains has also directed insurers to specifically an important channel for life assess the risk from cybercrime in their insurance sales. annual risk assessments. 18 | Emerging markets matter
Just 6 million out of 90 million Vietnamese own life insurance, indicating there is major room for potential expansion. 15+85+T Vietnam Rating: moderate growth, However, companies in Vietnam are higher risk already experimenting with using 14 Non-life insurance premiums grew by mobile phones to collect premiums. One about 14% in 2015, while life insurance premiums were projected to grow by project, sponsored by Manulife Vietnam, works with the Vietnam Women’s Union % nearly 30%, to a value of about US$1.7 to provide a micro-insurance product, billion, according to government My Companion, to poor women in rural estimates. Nevertheless, insurance areas. After four years, it has covered penetration in the country is low; just 6 more than 130,000 women across 15 million out of 90 million Vietnamese own provinces, the vast majority of whom life insurance, indicating there is major now have mobile phones. room for potential expansion. Non-life insurance premiums Further liberalization of the insurance grew by about 14% in 2015. The unpredictable pace of economic market could create more opportunities reforms within Vietnam has made the for foreign investors. market less attractive than others within this fast-growing region. Regulations normally require foreign firms to set up joint venture operations with Vietnamese counterparts. In February 2016, for example, Vietnam’s Bank for Investment and Development signed a cooperation deal to promote life insurance with MetLife. Emerging markets matter | 19
Indonesia Rating: higher growth, OJK has actively introduced new check on the progress of their cars via moderate risk policies and regulations in recent an app that allows them to see pictures As the world’s single largest Muslim years. This includes a new insurance as the repairs progress. nation, Indonesia offers global firms a law in 2014 that gives policyholders The current low-interest-rate major opportunity to develop sharia- priority if a conventional or sharia environment has contributed to a compliant, takaful insurance programs. insurer or reinsurer is liquidated or difficult operating situation for foreign becomes bankrupt. Other changes insurers in South Korea, however, and By 2020, an additional 40 million people include optimizing domestic reinsurance some foreign players have exited the are projected to join Indonesia’s middle capacity and regulating tariffs for market. In April 2016, Allianz sold its class — at nearly 140%, the highest property and motor insurance. A business to Anbang, the acquisitive growth rate in percentage terms among new law also bars the Indonesian Chinese group that failed in its bid to nations in our survey. No wonder government from bailing out acquire Starwood Hotels, following foreign insurers like AIG and Sun Life commercial banks when they face earlier exits by HSBC and ING. Some have begun to expand their presence in financial problems. of these firms offered high-interest- the country. rate guarantees to policyholders in the While Indonesia clearly offers opportunity for firms that want to pioneer micro-insurance and mobile South Korea past, which are no longer profitable. In addition, new Solvency II rules in Europe require insurers to set aside more capital payments, the acceptance of these Rating: lower growth, to cover such interest-rate guarantees, innovative products has been relatively lower risk potentially crimping future earnings. slow. While an estimated 60% of With leading industrial companies like Indonesia’s population has access to Other foreign insurers such as ING, Hyundai and Posco and technology a mobile phone, less than 5% were HSBC and Standard Chartered have innovators like Samsung leading aware of the concept of mobile money. reduced their exposure to the market its global economic growth, South Moreover the economic slowdown in recent years, while Chinese insurers Korea can no longer be considered over the past year has caused a seem interested in establishing a an emerging economy. In fact, the retrenchment in purchases of life larger foothold. penetration rate for insurance in South insurance products. Korea is relatively high, at approximately Although the Financial Services 12%, compared with the global average Authority (OJK, the state regulator) of 8.5% for developed nations. In a launched a joint effort with banking fiercely competitive market, local institutions to promote financial companies like Samsung, Hanwha and inclusion, known as Laku Pandai, a Kyobo Life hold strong positions. recent survey found most people from What South Korea does offer foreign low-income households are reluctant insurance firms is the opportunity to to let individual agents take care of embed in an increasingly sophisticated their savings under the government’s consumer market, develop mobile branchless banking program2. platforms to engage with customers, As Indonesia is expanding its spending and fine-tune products for claim on infrastructure, the life and health processing and back-office functions. sectors should both benefit due to For example, AXA, the French insurer, regulatory requirements attached to is leading innovation in the Korean these projects. auto insurance market by switching to a charge-by-mileage premium system, as well as by providing information on car repairs through policyholders’ mobile devices. “Customers who drive less should pay lower premiums,” the company says. Customers can also http://www.thejakartapost.com/news/2016/03/16/trust-issues-may-hamper-ri-financial-inclusion-campaign.html-0 2 20 | Emerging markets matter
With a giant population and rapidly growing middle class, India has long been considered an attractive investment target for global insurers. 60+40+T India Rating: higher growth, The insurance market in India is ripe modest risk for digital innovation from foreign Now that the cap on foreign direct players, as insurers will need to service 49% investment (FDI) has been increased to a younger and more technology-savvy 49% from 26%, global insurance firms population. To dislodge local firms, have far more incentives to consider foreign insurers can develop new deeper participation in the Indian distribution channels and sophisticated, market, where new investments can specialized products. Investments in boost solvency and penetration rates. IT to optimize operations can also be anticipated in addition to spending on With a giant population and rapidly data analytics and telematics. growing middle class, India has long been considered an attractive The Government’s focus on further Now that the cap on foreign investment target for global insurers. economic reforms and increased direct investment (FDI) Indeed, overall FDI across the country spending on priority areas, including has been increased to 49% hit a record US$42 billion in 2015, and the rural sector, infrastructure and from 26%, global insurance the country’s 7.2% growth rate exceeded employment growth, should also companies have far more that of China. bolster premium growth. Moreover, incentives to consider the new FDI rules and public listing of While the economy is resilient, and deeper participation in the insurance companies should accelerate the administration of Prime Minister consolidation and mergers. Indian market. Narendra Modi has promised to continue to boost investment in manufacturing, challenges to a rapid boost in insurance penetration persist. Emerging markets matter | 21
Latin America In Mexico, P&C firms will gain from the introduction of mandatory liability insurance on federal highway construction and new infrastructure projects.
Improving economic conditions in Mexico and Chile are counterbalanced by the rapid deterioration in Brazil, a country facing both political and economic uncertainties. Rapid reforms now unfolding in Argentina could help spur a new level of growth. Some markets are already seeing significant innovations as the mobile phone and micro-insurance carriers offer new opportunities to innovate. Argentina Brazil Rating: lower growth, Ranking: negative growth, Figure 14: Risk-opportunity higher risk high risk scores, Latin America A new center-right government, led Recession and political upheaval by President Mauricio Macri, has the dominate the headlines in Brazil, as Opportunity Opportunity potential to engineer a real turnaround the scandal-plagued government Higher score = in Argentina, turning it into a rare bright of President Dilma Rousseff More opportunity score spot among emerging markets. But faces impeachment, and the 9 Chile 39.7 progress will take time. By resolving plunge in oil prices has rapidly the long-running dispute with US boosted unemployment. 16 Colombia 31.2 creditors over delinquent payments 17 Mexico 30.6 The Brazilian insurance market for sovereign debt, Argentina has now continues to be very concentrated, with 19 Argentina 24.9 rejoined the global capital markets, 10 major insurance groups representing 22 Brazil 8.6 leading to an upgrade in the credit rating approximately 85% of direct premiums in of many domestic insurers. Moreover, 2013. The domestic insurance industry the administration’s goal of tackling has been liberalized to allow foreign inflation and reducing the nation’s large investment in the emerging growth of Risk Risk fiscal deficit would clearly benefit the Higher score = the nation’s industry, but the sudden More risk score insurance sector, since the constant turnaround in Brazil’s fortunes could run-up in prices has made business dampen foreign interest, now that the 4 Chile 17.7 conditions difficult. 9 Mexico 36.6 risks have grown more pronounced. Under the previous administration, 12 Colombia 40.5 Brazil’s insurance regulator began to the insurance industry was buffeted by encourage micro-insurance strategies 16 Brazil 48.4 constant regulatory changes, including in 2012, and Brazil had been seen rules for reinsurance and restrictions on 20 Argentina 65.2 as a potentially attractive testing foreign investments of local premiums. ground for innovative experiments. So fewer regulations and higher growth For example, IFFCO-Tokio provides a could spark the industry here. However, digital pen to agents working in remote new regulators for consumer protection areas to collect clients’ insurance policy and the implementation of risk-based details, while Caixa Seguros distributes capital measures can also be expected. funeral insurance through sellers of lottery tickets. There will be increasing opportunities for digital operations to emerge in the insurance industry. Insurers are now being compelled to develop an ERM system and risk, and solvency regulations (ORSA) will be in force by 2017. Emerging markets matter | 23
Figure 15: Projected growth rates for insurance premiums in Latin America 11+89+D 7+93+D 7+93D CAGR, domestic insurance premiums, 2015–20 11% 7% 7% 6+94+D 94+D Chile Colombia Mexico 6% -3% Chile has the highest Argentina Brazil insurance penetration and Source: Oxford Economics, Haver Analytics density in the region, and premiums are estimated to exceed 4% of GDP. Figure 16: Risk components in emerging Latin America Components of risk in emerging markets, Latin America Political Each component measured on 0-1 scale, 1=maximum risk Trade Sovereign 2.0 Riskiest 1.8 1.6 1.4 1.2 1.0 Most stable 0.8 0.6 0.4 0.2 0.0 Chile Mexico Colombia Brazil Argentina Source: Oxford Economics, Haver Analytics 24 | Emerging markets matter
Chile Insurance continues to be one of the most regulated sectors, along with banking, and the local regulator is Rating: modest growth, implementing new regulations to lower risk strengthen both solvency and mandated Among Latin-American nations included reserves. The prospect for insurance in this survey, Chile is notable for its firms to develop digital channels for relative openness to foreign insurers. selling policies and processing claims is Indeed, most premiums in both the life still in its infancy. and non-life sector are sold by foreign firms. While Chile boasts the most stable market in Latin America, the cost of doing business remains high. Indeed, Mexico more M&A activity is likely in the market, Rating: modest growth, as the country moves to embrace modest risk Solvency II regulations. Solid growth and rising consumer and Chile has the highest insurance business demand should mean that penetration and density in the region, growth in the insurance industry is likely and premiums are estimated to exceed to outpace GDP growth again this year, 4% of GDP. A local version of Solvency II as it has for the past several. Due to its Due to its ever-closer can be expected within the next two to ever-closer economic integration with economic integration with three years. Firms are investing rapidly the US since implementation of the the US since implementation in building IT infrastructure to improve North America Free Trade Agreement of the North America operational efficiency. (NAFTA) and a series of liberalization Free Trade Agreement efforts, the economic prospects for the However, new opportunities can (NAFTA) and a series of be expected due to changes in the insurance market in Mexico is among the most buoyant in the region. liberalizations efforts, the health and pension systems, including economic prospects for the implementation of a pension reform While life insurers should benefit from panel that increases retirement ages an expanding middle class, growth insurance market in Mexico is and increases mandatory contributions. in the population of young people among the most buoyant in Meanwhile, reform of the private and rising incomes, P&C companies the region. health care system is likely to produce will gain from the introduction of opportunities for firms selling private mandatory liability insurance on health insurance. federal highway construction and new infrastructure projects. Colombia However, insurance penetration in the country remains low, highlighting the need for companies to develop new Rating: lower growth, products and channels, especially to higher risk tap into lower-income households. A reduction in political violence and New digital technologies are essential civil unrest has helped boost the for the advance of micro-insurance economic outlook in Colombia. Further in the market and to combat fraud. strengthening of a tentative peace Already, some firms like New York Life treaty could be a boon for economic have launched mobile apps that allow growth, especially with the weakness their health insurance customers to in the oil market. Though insurance access a range of useful data about penetration is low, at about 2.5% of their coverage and health network, GDP, the compound annual growth rate and other mobile apps are coming (CAGR) of non-life companies has grown into the marketplace that promise to impressively over the past half-decade, “customize” auto insurance. at approximately 12%, which makes the market’s potential attractive for both Solvency II will probably trigger some local and foreign players. consolidation in the industry. Emerging markets matter | 25
Middle East— Africa A new law requiring compulsory health insurance for all Dubai residents, which will be implemented over two and a half years, is expected to be a key driver for the industry.
Across most of Africa, insurance penetration has traditionally been low, and before the collapse of commodity prices in late 2015, growth prospects for many countries in the region seemed favorable. Indeed, since 2010, the sub-Saharan economies had consistently ranked among the world’s fastest growing. The collapse in oil prices and other minerals has introduced new vulnerabilities, but over the longer term, rapid urbanization, growth in the middle class and the use of mobile technologies offer the potential for faster growth for insurers across the region. Enforcement of regulations to stamp out fraud, corruption and other abuses is critical for the increased growth of this sector, as is enhanced efforts at consumer education. UAE Saudi Arabia Rating: modest growth, Rating: lower growth, Figure 17: Risk-opportunity lower risk lower risk scores, MEA The size of the insurance industry in the Saudi Arabia’s insurance market is now Gulf has more than tripled since 2006, one of the largest in the Gulf, having and insurance premiums have increased grown to rival that of the UAE. The Opportunity Opportunity Higher score = with it. Premiums are projected to traditional prominence of corporate More opportunity score grow by 12% CAGR to 2020. However, business in Saudi Arabia means that 2 Nigeria 67.3 this growth has also spurred increased brokers and agents play a larger role competition and reduced the overall in the Kingdom than in other more 6 Uganda 47.6 profitability of the sector. Insurance developed markets. While growth 10 UAE 39.6 penetration equals about 2.2% of GDP, over the past half-decade has been 11 Saudi Arabia 37.8 making it among the highest in the Gulf. vigorous, the penetration rate is just 1.1%, meaning there is a high degree 14 South Africa 32.3 A new law requiring compulsory health of untapped growth potential in the 18 Kenya 25.0 insurance for all Dubai residents, which market. Premiums are projected to grow will be implemented over two and a half years, is expected to be a key driver for by 9% CAGR through 2020. the industry. In addition, new regulations Because of a lack of product Risk Risk aimed at strengthening governance, differentiation, insurers tend to compete Higher score = More risk score compliance and risk management could on price rather than on value-add spur a round of consolidation. Naturally, services or unique product features. 6 UAE 25.3 the fall in oil prices has also dampened Health insurance has been the primary 7 Saudi Arabia 31.7 the overall growth outlook in the region. generator of premiums. However, the 11 South Africa 40.1 potential of new legislation to require many public facilities like shopping 17 Kenya 56.7 malls, restaurants, and schools to carry 21 Nigeria 68.3 insurance could rapidly expand the size 22 Uganda 68.6 of the P&C market. Emerging markets matter | 27
Figure 18: Projected growth rates for insurance premiums in Africa South Africa Yet insurance penetration remains minimal, suggesting major opportunity for expansion. CAGR, domestic insurance Rating: lower growth, higher risk Kenya today is a hub for commercial premiums, 2015–20 activities across East Africa, and South Africa remains by far the largest 15+85+D 12+88D insurance market in Africa. Nearly Nairobi, the region’s megacity, houses 75% of all African insurance premiums much of the services and managerial are generated in South Africa, as the talent deployed in neighboring Uganda and Tanzania. Strong growth 15% 12% country offers the region’s most mature financial sector. The insurance industry is expected in Kenya’s telecoms and is so saturated, however, that a number information technology sectors, as well of firms hope to expand their revenues as in financial services and retail trade. by entering other sub-Saharan markets. Capital inflows are strong. 9+91+D 9+91D Nigeria UAE Moreover, CAGR for the industry is not Kenya has also been a leader in projected to exceed 8% through 2020. developing a mobile money platform, New technologies, such as mobile, M-Pesa. A number of insurers already online and collaborative tools, are likely employ it to fund basic insurance 9% 9% to play a critical role in expanding the market for insurance, and we expect coverage, though some executives doubt it can ever replace the traditional innovative mobile insurance solutions system of using agents and brokers for to grow faster here than in many other higher-priced or more sophisticated covers. An ambitious crop insurance 8+92+D 6+94D Uganda Saudi Arabia global locations. For example, a start- up called Riovic, a self-styled “Uber of program employing mobile phones has insurance,” seeks to connect businesses been introduced with the support of the with private investors who will back a World Bank. 8% 6% company’s risk. However, new disrupters will not easily Nigeria upend traditional sales approaches. South African firms are already Rating: higher growth, South Africa Kenya investing to bring big data and predictive higher risk analytics into their operations, while Growth prospects for the insurance Source: Oxford Economics, Haver Analytics developing insurance platforms industry in Nigeria seem robust — but designed for the mobile phone. so too are the risks. Just a year ago, A new solvency assessment and observers were touting the prospects management regime will boost capital for Nigeria’s growth after the World requirements, while additional consumer Bank crowned it the continent’s biggest protections are also in the works. economy, surpassing South Africa. With very low penetration of insurance in the country, the potential for growth Kenya is immense. But reduced oil prices and slowing industrial activity have Rating: lower growth, forced a modest downward revision in higher risk growth forecasts. Mobile technology, a stable regulatory Though life insurance represents just environment and an expanding 0.1% of GDP, premiums were growing middle class will be the key drivers at better than 25% CAGR. After the for growth in the insurance industry. collapse of oil prices, CAGR of 15% in Kenya generated insurance premiums insurance premiums is still projected of US$1.8 billion in 2014 (the largest through 2020. in sub-Saharan Africa outside of South Africa), and Oxford Economics expects the Kenyan insurance market to grow to US$2.2 billion by 2018. 28 | Emerging markets matter
75+25+T However, the insurance industry is undercapitalized, fragmented and Uganda too small to take on larger risks. 75% The expansion of insurance sales Rating: modest growth, through mobile phones has been higher risk significant, though. The insurance Today, insurance penetration is less than regulator estimated that about 1% and represents just 0.6% of GDP. 100,000 subscribers were buying Uganda’s insurance market is driven by micro-insurance each month, and an agency network that accounts for an that the customer base had exceeded estimated 60% of premiums. In 2014, 600,000 within six months of the total premiums were only US$200 product’s launch. As nearly half the million. However, Uganda’s underlying growth is among the strongest in Africa, Nearly 75% of all African population of Nigeria is Muslim, the and foreign insurers appear interested insurance premiums are potential for takaful to expand insurance penetration is evident, but not all of in investing. generated in South Africa. the operational guidelines necessary to Uganda’s insurance market is ripe for grow this market have been established. deeper inroads for micro-insurance, Recently, Microcred Nigeria announced especially outside of the capital, a partnership with AXA Mansard to Kampala. Last year, the regulator develop micro-insurance products in proposed new rules that will offer micro- the country. insurance companies greater flexibility and easier access to clients, as they will not have to comply with the high capital requirements of full insurance companies. This should allow more companies to enter the market. Figure 19: Risk components in emerging MEA markets Components of risk in emerging markets, MEA Political Each component measured on 0–1 scale, 1=maximum risk Trade Sovereign 2.0 Riskiest 1.8 1.6 1.4 1.2 Most stable 1.0 0.8 0.6 0.4 0.2 0.0 UAE Saudi Arabia South Africa Kenya Nigeria Uganda Source: Oxford Economics, Haver Analytics Emerging markets matter | 29
Europe A number of foreign companies have entered the Turkish market, and foreign insurers are estimated to generate about two-thirds of non-life premiums.
While most of Europe benefits from a mature insurance sector, this report also briefly examines prospects in two “frontier” markets, Turkey and Russia, where political uncertainty and unsettled prospects with the West will affect insurance investors. In both countries, however, geopolitical turmoil and macroeconomic factors have triggered a downgrade in short-term prospects. Turkey Rating: modest growth, to price-cutting, however, along with a higher risk decline in profitability. As a result, a cap While Turkey has been seen by many on premiums for vehicle insurance is foreign insurance carriers as an likely to be enacted. intriguing insurance opportunity, the A return of political tranquility would Figure 20: Risk-opportunity Syrian refugee crisis and political likely boost investor confidence and ranking, Europe tension within Turkey have also lead to even greater investment in heightened risks over the past 18 the insurance sector, as favorable months. CAGR of 8% in insurance demographics and rising household Opportunity Opportunity premiums is projected through 2020. incomes could be expected to boost life Higher score = More opportunity score Despite the political turbulence of two insurance sales. In addition, household elections, Turkey achieved growth of 4% and health insurance are sectors that 7 Russia 47.3 in 2015, making it one of the stronger- may offer high growth potential. Micro- 13 Turkey 32.4 performing emerging markets. However, insurance is just beginning to take hold growth is expected to cool in 2016, in the country amid continuing conflict with the Kurds, Risk Risk which in turn can be expected to cut into Higher score = More risk score tourism revenues, an important driver of the domestic economy. Currency risks 15 Turkey 46.9 will also remain. Nevertheless, a number 18 Russia 57.0 of foreign companies have entered the Turkish market, and foreign insurers are estimated to generate about two- thirds of non-life premiums. Strong competition in the auto sector has led Emerging markets matter | 31
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