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South Asia: Economy to drive insurance growth in frontier marts - Swiss Re

Source: Asia Insurance Review | Jun 2016

Insurance growth in the South Asian frontier markets of Bangladesh, Pakistan and Sri Lanka will continue to derive support from stable economic growth, averaging 5-7% over the next five years, according to Swiss Re.
   In its sigma report entitled “Insuring the Frontier Markets”, the global reinsurance giant said other fundamentals, including high natural catastrophe exposures, increasing urbanisation and a rising middle income class, will increase demand for insurance. The implementation of higher capital and solvency standards, among other regulatory measures, will improve market efficiency and encourage consolidation.
   Economic growth has remained fairly robust in the past decade, averaging at around 6% in Sri Lanka and Bangladesh, and 4% in Pakistan. However, the near-term economic outlook for these countries is uncertain given the slowdown in China, the current strong El Nino affecting agricultural output, and financial volatility following the US interest rate rise in December 2015. Still, these markets have also benefited from the shift of manufacturing production from China.
   Bangladesh, Pakistan and Sri Lanka are home to 370 million people. They are middle-low income markets. Total premiums collected in 2015 ranged from US$0.8 billion in Sri Lanka to US$2.3 billion in Pakistan. Penetration is low, reflecting the early stage of insurance development. Apart from low incomes, government initiatives and regulatory challenges are constraining penetration, says the sigma report.
Sri Lanka – Free healthcare and education reduce incentive for insurance
In Sri Lanka, government provisions of free healthcare and education and a pension scheme for public-sector employees have reduced the incentive to sign up for private insurance. 
   At the same time, insurers are facing pressures to meet various new regulatory requirements, including higher paid-up capital, the splitting of composite businesses and the introduction of a risk-based capital regime in 2016. 
Pakistan – Market consolidation possibly on the cards
In Pakistan, a low paid-up capital requirement has led to a large number of small players which lack the resources to invest in underwriting and distribution. 
   Nevertheless, there could be market consolidation with the pending requirement to increase paid-up capital to PKR500 million (US$4.8 million) for non-life companies and PKR700 million for life players by 31 December 2017. In addition, a high level of unpaid premiums (mainly in non-life) remains a concern.
Bangladesh – Many small players
The Bangladeshi market is similarly populated by many small players. For instance, there are 30 life insurers with the majority writing less than BDT500 million (US$6.1 million) in premiums. Consolidation is likely once new rules for solvency and capital take effect.
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