There are two significant developments taking place in the insurance market in Asia Pacific at present – and both will require close monitoring.
The first was brought to my attention by a colleague who works in private equity (PE) and venture capital (VC) and who had recognised the development of a worrying trend of tech start-up promoters who had become expert in raising funds – but who were not expert in much else.
The modus operandi of these promoters is to try to bully start-up investors to part with their cash almost solely on the grounds of ‘fear of missing out’. They successfully raise some cash through a Series A round of funding which they then splash around remorselessly to buy scraps of market share and then move swiftly onto Series B fundraising trumpeting their growth in market share while glossing over the growing pool of red ink on the balance sheet.
The second round of funding is used in the same way as the first and by the time Series C comes along the valuation of the start-up is in the multi-billion-dollar league.
So alien is this to traditional VC and PE investors that they opt to sit it out – and new capital is raised from non-traditional sources with far less experience in start-up financing.
Reality slowly dawns on these late-stage newbie investors as the promoter retires to his yacht and they begin to wonder why the emperor suddenly appears not to be wearing any clothes.
Substitute the word ‘InsurTech’ for ‘start-up’ and it becomes clear why this is a concern for the insurance industry in Asia Pacific. What traditional VC players know is that only a tiny fraction of start-ups become successful businesses and that such ‘frothy valuations’ are unsustainable.
The second development that could prove to be worrisome for the sector is the news that China will be looking much more closely at overseas listings of Chinese corporates - including tech groups - on security grounds.
From a corporate perspective, it makes perfect sense for Chinese corporates to want to tap the deep capital markets of the USA.
From a Chinese perspective, it makes perfect sense to want Chinese investors to benefit from the remarkable expansion of the domestic economy.
From an American perspective, it makes perfect sense to want to be able to scrutinise the financial robustness of any foreign entity accessing its capital markets.
Market watchers are growing concerned that the recent travails of the Didi Chuxing and Ant Financial IPOs are just the tip of the iceberg and that we may be looking at the creation of two quite separate financial systems with different rules and objectives.
The US is an attractive market for Chinese insurers. In May Tencent-owned InsurTech Waterdrop raised $360m in a New York IPO. In June Hong Kong’s FWD was said to be looking at a listing in the US – while China Life Insurance listed on the NYSE back in 2003. China Pacific Insurance, meanwhile, recently celebrated the first anniversary of its listing on the London Stock Exchange.
Insurance and reinsurance are, at their core, global businesses – because risk is global and pricing it and covering it efficiently from a capital standpoint requires pooling. Domestic pools will be far less robust that global pools.
Asia Insurance Review