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CEO focus: Uniting a fragmented ASEAN: What it means for insurers

Source: Asia Insurance Review | Feb 2014

Southeast Asian states have targeted 2015 to create a more integrated economic region, and the effect on the insurance industry is potentially wide-ranging in the long run – from regulations, distribution, products, talent to operating cost base, amongst others. We lay out the future scenario of what the ASEAN Economic Community would mean for the insurance sector, and questions CEOs have to answer as they move ahead in a market aiming for greater cohesion.
By Ridwan Abbas
The idea of a single market is dawning upon the Southeast Asian region as it inches closer to its pledge of creating a unified ASEAN Economic Community (AEC) in 2015. Granted that the 10-member ASEAN states are still a long way from achieving true economic integration and liberalisation, a vision has been set and the bloc is committed to realising it one step at a time. 
It has been said 2015 should be seen as a milestone towards that journey rather than a strict deadline. But how should insurance leaders prepare themselves as we approach this landmark and beyond? And what are the changes that could occur in Asia’s insurance sector in this march towards a more integrated regional market?
Potential changes 
Given the economic significance of the financial services sector, member states have been given greater leeway on the pace in which to liberalise their financial services regime. Nonetheless since 2008, the bloc has passed five reform packages for the financial services segment. 
Comparatively, the liberalisation scope for the insurance sector is greater compared to the banking industry. The essence of these initiatives is to create an integrated insurance market across ASEAN. 
Mr Jeff Pirie, Executive Director & AEC Leader at Deloitte Southeast Asia said the end game should lead to fewer barriers in conducting business in each of the markets. 
“Integrated does not mean uniform, instead it means that there should be few impediments to providing service (which may involve establishing a presence) in each of the countries within ASEAN. Overall, everyone expects the changes to mean higher growth in insurance in ASEAN.” 
Regulations – differences remain but moving in right direction
Changes on the regulatory front is on the cards with the AEC providing a boost to speed up reforms in areas such as capital and solvency requirements. In the long run, it would translate to an improvement in the financial strength of insurers and encourage a healthier playing field. The immediate future may however see smaller players being forced again to consolidate. 
The Financial Services Authority in Indonesia, by far the region’s largest market, is already coaxing the industry towards greater preparedness in anticipation of a more competitive environment. 
“We have asked the industry to prepare for the AEC by asking them to strengthen their capital, knowledge, human resources, IT and product innovation,” said Dr Firdaus Djaelani, CEO, Non-Bank Financial Industry Supervision, Financial Services Authority (OJK). 
As part of the liberalisation process in the region, Mr Steven Dewhurst, Insurance Partner at DAC Beachcroft, expects detarrification measures to be introduced in various markets. 
“Short-term regulatory changes we can expect are detarrification of motor and fire business, as well as country-specific changes to the regulation of specific lines of business which are core to other aspects of trade within the single market. 
“Progress has already been made on both, for example detarrification is being considered by various countries and the MAT (Marine, Aviation & Transport) business already receives different treatment from a regulatory perspective.” 
Looking at the big picture, one cannot escape the fact that ASEAN states are in differing stages of development, with disparate economic policies and growth agendas. Given this reality, Swiss Re’s Chief Economist in Asia, Mr Clarence Wong, believes the momentum towards liberalisation will start off being bilateral in nature. 
“When liberalisation eventually begins, likely to be after 2015, we expect more advanced ASEAN countries to allow a partial opening up of their markets on a bilateral basis, allowing the cross-border supply of simple insurance products between two countries,” he said. 
Distinct nature of ASEAN markets
Traditionally, a single market provides the opportunity for better economies of scale through diversificaton, leading to lower relative risk exposures and capital cost. The economic benefits of the AEC could also boost the middle class ranks amongst the emerging ASEAN states. Companies with existing economies of scale are primed to benefit more from the reduced trade barriers. 
One such player is Singapore-based Great Eastern, with the AEC boosting the prospects of aspiring pan-ASEAN insurers. 
“Although the AEC does not specifically focus on the insurance industry, it is expected to boost growth and prosperity in the 10 ASEAN countries. As a market leader in Singapore and Malaysia and with an established footprint in Indonesia, Vietnam and Brunei, Great Eastern is well-positioned to leverage this expected growth and the rise in the middle class,” said Group CEO Chris Wei. 
While greater integration and harmonisation allows for a more efficient and streamlined operating model, the very distinct nature of each ASEAN market cannot be over-emphasised. 
Aside from very different levels of economic development, culturally the countries differ substantially and insurance must be customised for the specific consumers, channels and markets, said Mr Alan Merten, Director & Market Leader, Southeast Asia, Towers Watson. 
“While AEC agreements could facilitate aspects of doing business, they are unlikely to change the nature of end consumers and insurers will need to continue to act locally,” he added. 
Prospect of increased competition
The introduction of a more liberalised market would improve industry standards, while also increasing the competitive pressures with the likely influx of more foreign players into Southeast Asia. 
“Markets which have historically been highly regulated and protected will most likely attract foreign competitors,” said Ms Sharon Ooi, Head of P&C Reinsurance, SID, Swiss Re. She added industry profits may come under pressure as a result, but also sees positives for the industry. 
“Small insurers may be forced to merge with others or close down, but on the other hand this is also a catalyst to improve market efficiency on a longer term base,” she said. 
Mr Clarence Yeung,who was Group Chief Operating Officer, ACR Capital Holdings during our interview with him, concurred with the prospect of increased foreign competition in the region. 
“Southeast Asia will become even more attractive to foreign insurers such as the Japanese and Koreans who face slower growth opportunities back in their home territories.” 
On the flipside, he said: “The anticipated integration will likely also result in greater correlation between ASEAN nations in terms of business cycles. As such, insurers with revenues concentrated in the region might experience greater volatility.” 
Importance of having regional champions
The financial strength and expertise of multinational insurers would naturally give them the upper hand to benefit from a more integrated market. Local companies, given their relative weakness, run the risk of falling further behind. 
“There are far too many under-strength domestic insurers in ASEAN at present. In my view, if a fully-harmonised single market were to be created within the next five years, almost all of those domestic insurers would be unable to exploit the opportunities it presents because they lack the resources to do so, and the competitive advantage would be handed to the multinationals,” said Mr Dewhurst. 
“ASEAN needs to financially nurture home-grown players over the next few years, who can develop regionally and take advantage of all the opportunities that a single market has to offer,” he added, pointing to the likes of Maybank’s Etiqa in Malaysia as having the potential to grow their scale. 
Downside risks
While there are many positives to be gained from the AEC, there are also several downside risks facing insurers. 
One example relates to a heightened level of enterprise risk which has to be adapted to suit the different contexts of each ASEAN country. 
“A multi-location business is much harder to supervise than a single location business, so there are heightened governance challenges, both for management and regulators. Another challenge lies in resolving the tension between a preference for a one-size-fits-all approach to governance and risk management across jurisdictions, with the fact that ASEAN comprises a very diverse spectrum of jurisdictions, each with their own peculiarities which need to be addressed sensitively,” said Mr Dewhurst. 
On the other hand, Mr Pirie pointed out the challenges in building up scale which requires the right skill to execute. 
“There are evidently risks if one chooses to expand, both from over trading and from missteps along the way. There is also the real risk of diseconomies of scale where bigger sometimes means less agile, more costly and less efficient,” he said. 
“The single market is a classic risk/reward scenario. Get it right and you will benefit significantly; get it wrong and you could risk financial failure,” Mr Dewhurst concluded. 
How can CEOs prepare? 
So how can industry leaders prepare as the region looks to enter a period of transition in an integrating marketplace? And more importantly, how do they compete given the changing macro dynamics. 
Mr Anupam Sahay, Head of Insurance Practice for Oliver Wyman in Asia-Pacific, said domestic insurers for a start have to fully understand and prepare for potential changes to the capital, regulatory, risk and competitive environment. 
As for the international and regional players, he said: “It’ll be important to engage constructively with the regulators who will shape the emerging ASEAN sub-region, and build a deeper pool of mobile Asia executives capable of operating across borders in diverse market environments.” 
The need to be proactive in the regulatory process was also highlighted by Mr Merten to ensure that future rules are fit for purpose. 
“CEOs need to stay abreast of developments and try to work through their local industry bodies and with regulators and government to influence for positive developments and, for example, to help to ensure that the practicalities of doing business are taken into account,” he said. 
Assessing strategies
Mr Mohit Mehrotra, Deloitte Southeast Asia Financial Services Industry Strategy and Operations Leader, said that over time, CEOs would need to reassess their business model in light of the new realities which the AEC presents. 
“A fundamental re-look at business model and operating model will be critical to assess whether they should be in a defence mode or an attack mode. What segments they should focus on, which will be cross-border? What segments will be difficult for others to address given the unique capabilities insurers might have and/or develop? Does it make sense to develop a regional middle-back office?” he asked. 
Mr Yeung feels there is an opportunity for direct insurers with ambitions to expand to collaborate with their reinsurers. 
“Reinsurers who have a good understanding of the individual local markets across the region, can share their experiences gained from dealing with local cedants, either in terms of technical understanding of local underwriting practices, or other general operational challenges, such as operating cost base and distribution systems.” 
Again while the AEC provides opportunities for a more streamlined operation in the region, Ms Ooi emphasised the need to act local. 
“Products which sell in home markets may not be popular or even accepted in other countries, due to differences in social and cultural differences. Therefore insurers need to examine the markets carefully and develop tailor-made products which suit local needs.” 
The AEC’s impact on the insurance sector is going to be gradual rather than immediate. The extent and pace at which things would occur remain unclear, such as when true cross-border insurance activities will be possible, the prospect of harmonised entry requirements into ASEAN markets and the freedom of movement of talent across jurisdictions. 
However, the goal towards greater integration provides authorities an impetus in raising the base standard and efficiency in the region. It would also make the region a more attractive marketplace in the long run. 
“In the near term, the AEC is unlikely to have a major impact on market strategy decisions for direct writing insurers, but for those companies not in ASEAN today or those with only one ASEAN market in their portfolio, the attractiveness of an ASEAN investment boosted by the possible future opportunities from the AEC may mean that a hold and/or invest decision makes sense,” said Mr Merten. 
From now on, every player would have to “up their game”, whether to defend home markets or leverage on the AEC to expand within the region.


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