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| ZAR News |
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| Source: www.fanews.co.za |
| INSURERS TURN TO EMERGING MARKETS FOR NEW BUSINESS (By Gareth Stokes) |
Monday 16 January 2012 |
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Website wikipedia.org defines an emerging economy as a nation exhibiting rapid growth and industrialisation. The powerhouses emerging market regions include Asia (dominated by China and India), Latin America (mainly Brazil) and Africa. Multinational businesses are flocking to these regions to benefit from some of the best GDP growth rates on offer. Insurance companies are among these 21st Century pioneers. The latest Swiss Re sigma study - Insurance in Emerging Markets: Growth Drivers and Profitability - concludes: "Insurance in emerging markets has experienced strong growth over the past decade and the outlook for the next decade remains promising." The study focuses on Asia and Latin America which are singled out as the two fastest growing emerging market regions.
An obsession with new business
Global insurers are struggling in their traditional developed-world markets. The level of new business is being hampered by less than impressive post-recession economic performance while low interest rates erode profits. These restrictive conditions have forced companies into emerging markets, where insurance premiums have expanded by 11.0% per annum (in real terms) over the past decade! This compares with the flat 1.3% annual growth achieved in industrialised economies. South Africa achieved approximately 6.5% per annum new premium growth over the past five years. "Due to their size, industrialised countries are in absolute terms still the main insurance premium contributors, but emerging markets are catching up fast," notes Oliver Futterknecht, co-author of the study. Demand for insurance is shifting from industrialised nations, where new nominal premium came in at around $120 billion through 2010, to emerging markets with $109 billion!
Premium growth has been strongest in emerging Asia and Latin America. Business has prospered in these regions due to sound economic environment, improvements in insurance regulations, product innovation, and the leveraging of multiple distribution channels. "The healthy economic environment with low inflation has had a positive effect on insurance premium growth in Emerging Asia and Latin America," says Futterknecht. Global insurers are flocking to emerging markets for much the same reasons that South Africa's telecoms companies are expanding into Africa. Cellular giant MTN was among the first African pioneers after realising its domestic market was reaching saturation point!
The sigma study attributes emerging market new business growth to greater competition, product innovation, improved distribution channels and insurance-enabling regulatory measures in those regions. Bancassurance - an area of concern in South Africa - was flagged for special mention. "Its rapid growth has been driven mainly by regulatory reforms in key emerging markets including China and India," comments Amit Kalra, the other co-author of the sigma study. "In India, bancassurance premiums made up 22% of new business premiums for private sector players in 2010. With a growing middle class and over 70 000 bank branches, bancassurance in India has plenty of room to expand."
The Holy Grail - turning premium to profit!
New business doesn't guarantee profit. Life and non-life insurers plying their trade in fast-growth emerging markets are learning this lesson the hard way. Only 54% of the 174 life insurers conducting business in the emerging Asian and Latin American sample reported consistent profits between 2006 and 2009! And only 20% registered profit margins (net profits divided by direct premiums) in excess of 10%! The disappointing trend persists in non-life markets where 49% of insurers recorded negative underwriting margins (underwriting results divided by direct premiums), with around 36% reporting margins in the range of 0% to 10%. "Low profitability may indicate an overly aggressive focus by insurers on top-line growth rather than profitable growth," comments Swiss RE.
How can insurers address this problem? Swiss RE believes new entrants to these markets will have to focus on ownership structures, affiliations with existing financial conglomerates and economies of scale, among others. Kalra observes: "In the life sector, domestic insurers and foreign branches and subsidiaries generally achieve better profitability than joint ventures. The success of domestic life insurers could be due to their large distribution networks, their local market expertise, and possibly lower costs resulting from economies of scale. In comparison, many joint ventures have only a short operational history and are still incurring heavy start-up costs. The picture in the non-life sector is less certain, as there are no apparent differences among insurers of different ownership structures."
This is interesting news for the likes of Sanlam and Discovery, two South African companies with financial services ventures in the Indian and Chinese marketplaces respectively. Sanlam bought an effective 26% of Indian financial services group Shriram for some R1.9bn, while Discovery scooped 20% of China's Ping An Insurance Company.
Right market, right time
These companies are entering the right markets at the right time. Over the next decade emerging markets will chip in with more than half of global insurance premium growth. Non-life premiums will grow at rates twice that of the developed world while life premium will power ahead too. "Going forward, insurers will need to place great importance on professional and disciplined underwriting to benefit from the healthy growth outlook in emerging markets and operate on a sustainable basis. Capital management will also be vital to support growth and comply with tightening solvency requirements," says Kalra.
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| Key Market Indicators |
| As at 22 February 2012 |
| Indicator |
Close |
Move(%) |
| BRENT |
123.39 |
1.43% |
| GOLD |
1761.30 |
1.51% |
| USDEUR |
0.76 |
0.01% |
| USDZAR |
7.74 |
0.85% |
| EURGBP |
0.84 |
0.36% |
| USDJPY |
0.80 |
0.01% |
| USALB |
2.01 |
-2.43% |
| STEFI |
2.67 |
0.02% |
| BA RATE |
5.52 |
0.00% - |
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