Since 2007, ASEAN has set in motion an ambitious plan to spur further economic growth in the region through the formation of an EU-style single market, while mindful of the problems faced in Europe. The target is to make ASEAN Economic Community (AEC) a reality by the end of 2015. But will a unified market be realised? Asia Insurance Review tracks some of the progress and the likely future scenario for insurers.
For one week last month, Southeast Asia became the centre of international relations as the region played host to three high-profile gatherings – namely the 25th APEC Summit in Bali as well as the annual ASEAN Summit and the East Asia Summit which were hosted by Brunei.
ASEAN’s clout as an international grouping continues to grow and as the ten member states work towards greater integration, the formidable goal of an ASEAN community similar to the European Union seems a plausible and enticing prospect.
One of the key planks of realising an ASEAN community is the pursuit of economic integration in the form of the ASEAN Economic Community (AEC) which aims to fuse the member states into a single market by the end of 2015.
But unlike the EU, ASEAN does not envision central bureaucracies like the EU Commission or the European Central Bank, but rather is focused on removing trade and business barriers.
Since the start of the grouping back in 1967, its leaders have come to realise that ASEAN is greater than the sum of its individual parts. Creating a common market with 600 million people and a combined annual gross domestic product of US$2.1 trillion would unleash the vast economic potential of the region.
ASEAN has never been devoid of critics who deride it for its ‘soft’ stance in the face of indiscretions by certain member states over the years, or the slow pace in which agreements are reached as a result of its emphasis on consensus-building. Similarly, the pursuit of an integrated economic community has had its share of detractors.
So can the AEC come to fruition by the end of 2015 as targeted? And what would be the plausible outcome for the region’s insurance sector amid the proposed era of freer movement of goods, services and capital?
The AEC Blueprint
The work in realising an economic community is guided by the AEC Blueprint which outlines four key pillars: a single market and production base; creating a competitive economic region; fostering equitable economic development and integration into the global economy.
The first component relating to the single market aims to reduce barriers to ensure freer flow of goods, services and capital. Looking at the financial services sector, member countries have undertaken to progressively liberalise restrictions in sub-sectors relating to banking, insurance and capital markets by 2015.
It covers the four modes of supply for the delivery of services in cross-border trade as defined by the WTO – namely cross-border supply (Mode 1), consumption abroad (Mode 2), commercial presence (Mode 3), and movement of natural persons (Mode 4) [see table in “What is Trade in Service?”].
In recognising that member states are at varied stages of financial sector maturity, liberalisation through the ‘ASEAN minus X’ formula allows countries that are ready to proceed to go ahead while others can join in later. This allows member states to pace their liberalisation efforts while ensuring orderly financial sector development and maintenance of financial and socio-economic stability.
Insurance sector
Where the insurance sector is concerned, the following is the list of sub-sectors identified for liberalisation by 2015 and the member countries that are committed to it.
| Insurance sub-sectors identified for liberalisation by 2015 and member commitment |
| Insurance sub-sectors |
Member Countries |
| Direct Life Insurance |
Indonesia, Philippines |
| Direct Non-life Insurance |
Brunei, Cambodia, Indonesia, Malaysia, Philippines, Singapore and Vietnam |
| Reinsurance and Retrocession |
Brunei, Cambodia, Indonesia, Malaysia, Philippines, Singapore and Vietnam |
| Insurance Intermediation |
Cambodia, Malaysia, Indonesia, Philippines, Singapore and Vietnam |
| Services Auxiliary to Insurance |
Brunei, Cambodia, Indonesia |
Looking at the insurance sector in the region, life insurance has a relatively large market in ASEAN 5, whereas general insurance dominates the insurance market in the BCLMV (Brunei, Cambodia, Laos, Myanmar, Vietnam) members. And compared to the banking sector, the insurance industry is substantially more open to foreign investors.
In fact, the majority of ASEAN countries are already in compliance with the AEC blueprint benchmark for foreign equity participation. Foreign ownership in insurance companies can be as high as 80% in Indonesia and 70% in Malaysia.
However in comparison, cross-border trade in insurance services is still widely restricted and consumers have significant barriers. This is despite the fact that the blueprint is unequivocal about the liberalisation of this mode of delivery (Mode 1). So there is still somewhere to go before clients can ‘passport’ their insurance coverage throughout Southeast Asia, as done in the EU.
Various stages of liberalisation
Significantly, the level of commitment to liberalisation among ASEAN countries is varied, due to respect for national policy objectives and the level of economic and financial sector development of the individual members.
For example, Singapore has reached the most liberalised stage among ASEAN countries especially in the area of insurance services. However, there are still some restrictions on modes 2 & 3 for insurance intermediation comprising of broking and agency services.
In Myanmar, there are tight restrictions on modes 1, 3 and 4 for both market access and national treatment. The Central Bank of Myanmar and existing domestic laws have determined the approval for commercial presence and movement of natural person in the country. Nonetheless, reforms are underway following the recent opening up of the country. Last month, MetLife announced it that had received regulatory approval to set up a representative office in the country.
While over in Vietnam, great strides in liberalisation have been made for modes 1, 2 & 3 in insurance & related services though mode 4 is strictly limited.
What has been achieved?
A Mid-Term Review of the implementation of the AEC Blueprint was conducted by the Economic Research Institute for ASEAN and East Asia (ERIA) and published in October 2012.
Progress was noted in several areas including lowering of trade barriers for goods and greater facilitation in the movement of skilled labour.
ASEAN has also enhanced its integration with the wider global economy and have in recent times signed free trade agreements with China, Japan, Korea, India and Australia/New Zealand. Negotiations are also ongoing for services and investment agreements with Japan and India.
AEC report card
In tracking its progress, ASEAN has established a monitoring mechanism called the AEC Scorecard to ensure timely implementation of the AEC initiatives.
According to the latest AEC Scorecard published in March 2012, the overall score is 68.2 out of the maximum score of 100. Among the four pillars, Pillar IV, Integration into Global Economy, has made the most progress scoring 85.7. Pillar I, Single Market and Production Base, has the lowest score of 66.5.
The score appears to suggest that challenges with regard to non-trade barriers remain considerable and have yet to be tackled to create a smooth-functioning single market and production base.
Economic spin-offs a net positive for Asian insurers
The liberalisation in the movement of goods and services in the ASEAN region would promote greater flow of business activities and investment in the region. As seen with the European Union, the formation of its single market led to the gradual increase in its share of global foreign direct investment inflows from 34% during 1980-1992 to 41% during 1993-2007.
Increased foreign direct investment and economic activity in the region would naturally mean greater demand for insurance services in Southeast Asia. Economic prosperity would also lead to income growth and usher in a new cohort of middle-class consumers with disposable income - a prime customer base for insurers.
ASEAN states are at differing levels of financial sector strength and maturity, and full-fledged financial sector liberalisation may not yet even be feasible in certain countries without risking a destabilising effect. Hence, financial services liberalisation which promotes the use of a broad spectrum of financial instruments and allows the unfettered presence of foreign financial institutions still has some distance to go before coming into fruition.
AEC is a work in progress and it would be unrealistic to expect a smoothly functioning economic community right from the start. However, the AEC framework has had a positive effect in guiding countries forward, and will have a galvanising effect for business and consumer confidence from 2015 onwards.
From the industry’s perspective, the push towards regional integration sets the ground for the existence of regional champions within the insurance sector. We are already seeing it on the banking side with the likes of Singapore’s DBS Bank and Malaysia’s Maybank actively expanding their footprints in Southeast Asia.
As the AEC slowly takes shape, perhaps the time is ripe for the growth of a truly pan-ASEAN insurer? Ambitious industry players can use this gestation period to cultivate more local and regional talent of international standard to achieve such a goal and push the region’s industry further forward.
After all, this is the Asian century, isn’t it?