Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY

 
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
Emerging
markets
matter
Change is in the air, but
long‑term opportunities
abound for insurers in this
complex landscape
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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.
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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.
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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
Emerging markets matter - Change is in the air, but long term opportunities abound for insurers in this complex landscape - EY
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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