Insurance in emerging markets has “experienced strong growth over the past decade and the outlook for the next decade remains promising,” a Swiss Re sigma study concludes.
However, it also notes that “given the expectation of persistent low interest rates at least in the near future, achieving profitable growth will become increasingly challenging in emerging markets.”
The report -“Insurance in emerging markets: growth drivers and profitability” – focuses on two of the regions that have contributed the most to emerging market premium growth, Asia and Latin America.
As an overall conclusion, the report found that “emerging markets continue to attract global insurers, with insurance premiums having expanded robustly by 11.0 percent per annum in real terms over the last decade, compared with 1.3 percent growth in industrialized economies.
“Emerging markets’ outperformance is expected to continue in the next decade and is attracting the attention of global insurers, who look to emerging markets for profitable growth beyond more saturated mature markets.”
Oliver Futterknecht, co-author of the new sigma study, explained: “Due to their size, industrialized countries are in absolute terms still the main insurance premium contributors, but emerging markets are catching up fast.” In 2010, for example, industrialized economies contributed $120 billion in additional premiums in nominal terms, with emerging markets following closely with $109 billion.
The growth in emerging Asian and Latin American market premiums over the past ten years is mainly a result of “sound economic environment, improvements in insurance regulations, product innovation, and a leveraging of multiple distribution channels,” Swiss Re said.
Futterknecht added: “The healthy economic environment with low inflation has had a positive effect on insurance premium growth in Emerging Asia and Latin America.” In addition governments have attempted to “encourage healthy competition,” which has resulted in certain markets reducing state involvement and taking “insurance-enabling regulatory measures.”
Product innovation has also driven fast-paced growth in certain insurance segments, including micro insurance and takaful. The use of multiple distribution channels has also helped insurance to reach a broader audience in emerging markets.
“Bancassurance, for example, a concept that was virtually non-existent prior to the year 2000, has gained importance in many countries, especially for the distribution of life insurance. Its rapid growth has been driven mainly by regulatory reforms in key emerging markets including China and India.”
Amit Kalra, the other co-author of the sigma study, commented: “In India, bancassurance premiums made up 22 percent 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.”
However, Swiss Re’s report points out that, “although insurers in emerging markets have seen stellar premium expansion, achieving profitable growth is far from the norm.” It posits that such low profitability “may indicate an overly aggressive focus by insurers on top-line growth rather than profitable growth.”
Swiss Re gave the following figures as examples: “Out of around 174 life insurers from a sample of Emerging Asian and Latin American markets, 46 percent of insurers failed to report consistent profits between 2006 and 2009, and only 20 percent registered profit margins (net profits divided by direct premiums) in excess of 10 percent.
“In non-life markets, 49 percent of all non-life insurers in the sample emerging markets recorded negative underwriting margins (underwriting results divided by direct premiums), with around 36 percent of non-life insurers reporting margins in the range of 0 percent to 10 percent.”
The sigma study also “explores whether ownership structure, affiliation with financial conglomerates, or economies of scale can tilt profitability upward.”
Kalra indicated that 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.”
Swiss Re’s outlook for the future of the insurance industry in emerging markets – between now and 2021 – is mostly positive. It notes that “more than half the growth of the global economy is expected to come from emerging markets.” It forecasts that non-life insurance premiums in emerging markets will grow “more than twice as fast as in industrialized countries,” while life premiums “are also expected to outpace those in industrialized countries.”
The report also observes that “even though they face strong competition from domestic insurers, many international insurers plan to actively pursue opportunities in the rapidly growing emerging markets. Banks are also likely to leverage their branch networks to further penetrate these markets. However, with interest rates expected to remain at low levels for an extended period of time in both developed and emerging markets, insurers will find it increasingly difficult to achieve profitable growth.”
Kalra stressed: “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.”
In that regards Swiss Re said: “Policymakers can play a strong role in strengthening private sector incentives by devoting sufficient resources to the legal, educational and regulatory infrastructure. They can also support insurance-specific efforts by allowing private pensions, making health or workers’ compensation insurance compulsory, and introducing and enforcing other obligatory lines of business. Compulsory third-party liability insurance, for example, ensures that funds are available to compensate accident victims, and compulsory earthquake insurance helps to avoid adverse selection.”
Source: Swiss Re
Topics Trends Carriers Legislation
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