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May 2019

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Rapid growth markets: Waves of change: A new lens on insurance market growth

Source: Asia Insurance Review | May 2014

For most of the past decade, focussing on the BRICs seemed a simple strategy for insurers seeking to expand their business in rapid-growth markets (RGMs). 
Mr Shaun Crawford of EY explores whether this is still the case.
 
Globalisation is driving business for today’s insurance executive. Opportunities for global expansion into new markets represent a powerful force accelerating the growth in insurance premiums today — especially as economic performance languishes in much of the developed world. As a result, we believe that insurance executives must regularly evaluate and refresh their strategies to identify which international markets are most likely to offer the best prospects for focus and investment.
 
As regional markets around the world become more interconnected and complex, however, understanding how best to optimise the balance between opportunities and risks in individual countries remains a significant challenge. Even in a world linked closer together by macroeconomic trends, mobile phones and the internet, regulatory and cultural differences persist, and even nations that share a common border may diverge markedly when it comes to future risk.
 
To help executives better understand the rebalancing now taking place across the insurance landscape in rapid-growth markets (RGMs), we look to highlight future growth opportunities in specific countries around the globe focusing on key markets, regulatory trends and new marketing innovations, as well as seek to offer perspective on potential market risks.
 
RGMs still growing strongly
While some large economies, such as the BRICs (Brazil, Russia, India and China), appear to have entered a period of slower growth, the overall contribution of RGMs to insurance premium growth will continue to be very 
significant.
 
That makes it ever more important for global insurance executives to consider markets that might not previously have attracted their attention, especially as new waves of liberalisation and rapid consumer adoption of new technologies open additional markets to foreign firms.
 
This shifting insurance landscape presents significant opportunities for international growth.
 
Analysis of growth opportunities
In 2007, the average growth of the BRIC economies was 9.6%. Today, however, growth in these economies has slowed markedly, especially in Brazil and India. According to recent forecasts from Oxford Economics, the average growth rate of real GDP in the BRICs was 4.3% in 2012, and that rate is expected to rebound only modestly, to about 5.6%, between now and 2018. Growth in other RGMs will be affected by this deceleration.
 
Nevertheless, significant opportunities persist across the range of RGMs. Assessing the potential of each market demands an analysis of the growth opportunities, as well as the latent risks within each individual economy. We have developed the matrix (Figure 1) to rank and segment the insurance sectors in 21 RGMs. 
 
As the matrix illustrates, countries such as China, the United Arab Emirates, Thailand, Malaysia and Mexico offer intriguing near-term growth potential, with modest risk. Nations such as Turkey and Indonesia offer even higher growth potential but also exhibit greater risks.
 
Building the matrix explained
The ranking matrix developed above plots 21 RGMs based on an analysis of their potential risk and opportunity. It is designed to help insurance executives weigh the opportunities against the risks of doing business in individual economies, and the analysis reflects a variety of indicators and forecasts. These included the following:
 
Insurance premium growth. A model was used to forecast insurance market premium growth, drawing on historical data on insurance penetration, including underlying economic growth rates, income per capita, automobile ownership, share prices and demographic factors, such as the rate of population ageing.
 
Regulatory change. Multiple regulatory factors that can affect insurance market growth were analysed, including pension policies, health policies, tax policies and insurance-sector regulation. 
 
Macroeconomic volatility. The impact of macroeconomic shifts on insurance premium growth was assessed, including private consumption, income and unemployment.
 
Liquidity risks. Shifts in liquidity and current account positions were assessed as they can affect the availability of capital, as well as exchange and interest rates. The tapering of quantitative easing expected to begin in 2014 will reduce global liquidity and is likely to hurt balance of payments in some emerging economies. 
 
Corruption risk. Corruption can expose insurers to fraud-related losses. To represent broader risks in the business environment, the Corruption Perceptions score assigned by Transparency International, based on multiple surveys, were collated for each RGM in the study. Each market was then assigned two scores: one for opportunity, determined by the degree to which regulatory, demographic and economic factors are expected to accelerate growth in that insurance market over the next two to three years; and another for risk, based on the extent to which macroeconomic issues, liquidity and corruption risks may cause problems for insurance firms.
 
Understanding the matrix
China merits the highest risk-adjusted opportunity ranking, largely because of its immense scale. 
 
Rapid growth in income and in home and auto ownership, combined with an aging population and government support for the insurance sector, is generating substantial prospects for insurance growth. 
However, foreign insurers still face significant investment restrictions, making entering and operating in this market challenging.
 
Malaysia and the United Arab Emirates are both Islamic nations where rising incomes, a sustained construction boom and the increased adoption of sharia-compliant insurance products are creating new opportunities. Saudi Arabia’s adoption of a health insurance system and the increasing sales of both conventional and sharia-compliant insurance policies are also expected to boost the insurance sector.
 
As our rankings illustrate, there are always trade-offs between opportunities and risks. Chile offers a favourable mix of opportunity and risk, albeit on a much smaller scale, because of its strengthening insurance sector and investor-protection regulations. Although Hong Kong ranks lower for opportunity, it is also less risky than any other RGM; an ageing population should spur growth in savings-type products such as annuities.
 
Turkey offers a higher level of opportunity than any other RGM in the study but, at the same time, it also presents significant risks because of its large external deficit and political instability. As with China, the Turkish Government is determined to grow the insurance sector and offers a supportive policy environment. Yet, Turkey’s exposure to Greece and the wider Eurozone crisis, as well as its dependence on international capital flows, means the risk of a significant economic downturn cannot be ruled out. 
 
Colombia is also notable as a 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.
 
Key factors influencing market selection
When investing in RGMs, insurance executives will want to carefully consider four important waves of change:
1. The speed of regulatory change.
Some RGMs, such as South Africa and Mexico, are moving quickly to adopt new insurance regulations and may surpass advanced economies in the stringency of their risk-based regulation or consumer protection requirements.
 
2. Customer adoption of insurance products. 
The rise of social media and the growing popularity of overseas educational experiences are among the forces breaking down traditional barriers to insurance penetration. Many markets where traditional cultures tended to limit adoption of insurance products, such as Vietnam and Saudi Arabia, are now experiencing rapid premium growth.
 
3. Government fiscal policy. 
Offering tax incentives for insurance products can significantly affect how customers choose savings and pension services. At the same time, a lack of confidence in public pension and welfare schemes can encourage adoption of private insurance alternatives.
 
4. Government attitude.
In most RGMs, the government considers the insurance sector “strategic”. This is in part because of the crucial role insurance plays in facilitating savings, investment and entrepreneurship. Understanding the government’s goals for the sector’s long-term development is therefore crucial. Some governments will focus on the potential growth benefits of insurance development and seek as much foreign expertise as possible in developing the insurance sector. Others will wish to have the insurance market dominated by domestic companies over the long term.
 
Prospects for future growth
Insurance executives actively weighing investments in new markets today will also want to consider future growth prospects. While it is difficult to predict how governance, market volatility and sovereign risk will change in individual countries over the medium term, the chart below illustrates the projected economic growth in RGMs through 
2020. 
 
Our projections indicate a significant renaissance in Brazil and slowdowns in Indonesia, Malaysia and the United Arab Emirates. These forecasts also reinforce the view that China will continue to play an outsized role in driving premium growth in international markets.
 
Mr Shaun Crawford is Global Insurance Sector Leader at EY. 
 
*Taken from “Waves of change – The shifting insurance landscape in rapid-growth markets”. Contact EY for more information.

 

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