Insurers to Face Hurdles in Rapidly Growing Far East Markets

The South Asia and East Asia insurance markets will continue to grow steadily in 2011 and easily outpace the rest of the world’s regions. But insurers must choose their opportunities carefully and move quickly to take advantage of this expansion, according to Ernst & Young’s Global Insurance Center 2011 Far East Insurance Outlook.

 

“Insurers need to keep in mind that Asia-Pacific is a highly diverse market when it comes to the economic progress of various countries, as well as the factors that drive their insurance markets,” says Jeff Malatskey, Insurance Practice Leader, Ernst & Young, Asia. “Asia-Pac features mature regions that are more saturated by insurance products. But developing and emerging markets can be found that offer tremendous growth potential, but only for insurers who are ready to commit financially over the long term.”

 

According to Ernst & Young, insurers that take advantage of consumer demand for insurance outside the established agency and independent  financial advisor channels will gain a competitive advantage in terms of both increasing  production volumes and more effectively managing expenses.

 

The report says that Asia-Pacific regulators will use the SII framework to guide their thinking in areas like enterprise risk management (ERM) and internal models. Additionally, several countries have implemented risk-based capital (RBC) frameworks, leading  some insurers to seek new capital infusions, reduce growth rates, seek a merger, or possibly  even close their operations. IFRS adoption or alignment is either widespread or in progress in  Asia-Pacific, thus enhancing the ability to compare the financial statements of companies within  the region with their counterparts in Europe, Canada and, in the near future, the United States.  IFRS represents the emergence of a global financial reporting language and also facilitates comparison of a company’s performance across jurisdictions. However, it is important to  understand the linkages between IFRS and Solvency II, not to mention potential conflicts.

 

Given the expected growth of Asia-Pacific markets in 2011, insurers will need access to dependable supplies of capital to comply with solvency requirements, support organic growth, and seize merger opportunities, adds Ernst & Young. Many insurers may also need to invest in the development of back-office systems, develop new branch offices and hire staff, among other business activities.

 

Meanwhile, companies seeking expansion within Asia-Pacific confront many challenges, as foreign insurers have made only limited inroads to the local market and insignificant market share. In 2011, the challenge facing local and/or international insurers will be identifying the combination of capital sources that best fits their needs. Some insurers will seek capital through the initial public offering market, while others may turn to reinsurance to reduce the amount of risk held on their balance sheets. Finally, with liberalization of regulations governing the percentage of ownership by foreign insurers, securing capital from abroad remains a possibility, although investors may have reservations about the ability to extract profits and capital from some Asia-Pacific jurisdictions.

 

New and emerging regulations will pressure insurers to upgrade  both IT and employee skill sets in 2011. To provide for growth while addressing new  reporting requirements, Asia-Pacific insurers need to consider investing in advanced technology  solutions. Significant growth potential is possible through mobile banking and tele-insurance  distribution channels, given the large numbers of consumers with mobile phones.

 

Insurers are also urged to pay close attention to natural catastrophe cover. In 2009, more than 60% of deaths from global natural catastrophes were in Asia-Pacific, and as a result, reinsurers are likely to revisit their risk profiles for the region, particularly with respect to countries that have experienced a recent catastrophe. At a minimum, reinsurers will tighten underwriting and begin to differentiate between insurers that can provide detailed information on their exposures, and those that cannot. As insurance penetration in Asia-Pacific increases and the concept of liability insurance gains hold, exposure to liabilities stemming from natural disasters also will grow.

 

Foreign insurers are exploring securing licenses in strong takaful (a form of insurance based on Islamic principles) jurisdictions such as Malaysia and Indonesia.  The strong growth in both business volume and customer acceptance of takaful products suggests that this model is poised to grow further. Now that takaful has achieved acceptance as a business model, several challenges must be addressed, including overcoming talent shortages, given the limited number of Islamic scholars experienced in finance and insurance; competition with conventional insurance for skilled resources; resolving differences between Islamic schools of thought; and the restricted but growing availability of re-takaful.

 

 

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