Global insurance companies seeking to expand their businesses are increasingly looking to a new wave of rapid-growth markets (RGMs) as well as the BRICs.
According to Ernst & Young’s "Waves of Change: The Shifting Insurance Landscape in Rapid Growth Markets" report, China will continue to play an dominant role in driving premium growth in international markets but new emergers such as Mexico, Thailand, Colombia and Indonesia are offering valuable long-term opportunities.
“The overall contribution of rapid-growth markets to insurance premium growth will continue to be very significant," comments Shaun Crawford, EY’s Global Insurance Leader. "Some of the larger economies, such as Brazil, Russia, India and China, appear to have entered a period of slower growth but they continue to possess high, long-term potential."
Crawford adds that new waves of market liberalisation and rapid consumer adoption of new technologies are opening additional markets such as Mexico and Thailand to non-domestic firms.
However, each market has its own distinct risk profile. Insurers will need to model the risks across all the geographies to clearly evaluate the drivers for growth and pick their targets carefully.
High growth, low risk
According to the matrix China, Mexico and Thailand will offer the best risk versus opportunity potential for insurers between now and 2020. China, despite a recent modest slowdown, continues to boast extraordinary income growth that spurs auto and home ownership. In addition, an aging population will drive the development of life and health markets. However, while some regulatory restrictions have been relaxed, market entry remains difficult for foreign firms.
Mexico has also undergone a period of extensive liberalisation, opening its market to foreign insurers. On some measures, Mexico is the most open insurance market in the study. Yet the pace and unpredictability of regulatory change can be risky for investors.
Thailand offers intriguing near-term growth potential, with modest risk but unlike other markets, such as Malaysia and UAE which also fall into this category, Thailand’s future growth prospects are also strong.
Malaysia and the UAE are both Islamic nations where rising incomes, a sustained construction boom and the increased adoption of sharia-compliant insurance products are creating new opportunities, but both markets are fairly small and so insurers are going to need to look elsewhere for rapid growth.
High growth, higher risk
Brazil and India remain important opportunities given the size of the markets despite recent slowing growth. India is second only to China in terms of absolute forecast growth in insurance premiums. Yet the regulatory environment has proved extremely challenging for investors. In addition, a large current-account deficit and reliance on portfolio-capital inflows elevate liquidity risks.
Brazil is third, behind China and India, in terms of market size. Following a program of liberalisation, Brazil is the most accessible of the BRICs for foreign insurance companies.
Indonesia offers an extremely strong economic growth picture – second only to China and Vietnam in EY’s Rapid-growth markets forecast. However, it is challenging to obtain licenses, so acquisition is the main entry route.
Colombia is also a notable market that ranks relatively high in opportunity and only moderately on the risk scale. Despite low interest rates, the insurance market there has expanded at greater than 10% annually over the past four years and offers high growth potential because of relatively low insurance penetration. Significant regulatory liberalisation that took effect in 2013 has also created new opportunities for foreign firms.
“While investment in RGMs will continue to be vital for global insurance firms, outsized returns will not come easily," says Crawford.
Crawford explains that the wave of regulatory change across the world, consumer buying habits, social media and cultural change, as well as macroeconomics such as the impact of QE, are often easily overlooked but which are absolutely critical when deciding to enter and grow in a market.
"The companies that use this information to carefully tailor products and develop market-entry strategies suited to particular economies and their cultures will see the greatest rewards,” says Crawford.