Innovation and partnership in a changing risk landscape
While the Asia insurance industry is expected to sustain strong growth in the years ahead, Martyn Parker, Swiss Re Asia Division Head, highlights some emerging risks, challenges and opportunities amid the changing macroeconomic and regulatory landscapes. Innovation and partnership are cited as the key drivers for long-term success.
Asia as a whole is expected to sustain strong premium growth in the coming years, whereby the emerging markets with relatively low insurance penetration rates are expected to continue to outperform as they did in the past decade (Figure 1). The improved economic fundamentals will translate into rising insurance demand, underpinned by further property ownership, higher household income, accelerating urbanisation and rising retirement needs in selected markets.
However, the market and risk landscape has changed as a result of the global financial crisis, which could impact the Asian insurance market going forward, bringing new challenges and opportunities.
Changing macroeconomic landscape
On the positive side, there is a further shift in the balance of economic power to the East, particularly to those robust emerging markets in the region. However, the need to push forward supportive fiscal and monetary stimulus during and after the financial crisis will have major fallouts.
- While most Asian markets are still enjoying strong fiscal positions, there is mounting pressure to improve public finance and lower the ratio of national debt to GDP. The need to balance central government budgets, for instance, could result in a soft patch of public spending thus negatively impacting on insurance demand going forward.
- Interest rates across the region were pushed to extremely low levels during the peak of the financial crisis in order to ensure sufficient liquidity and maintain investor confidence. However, this also impacted the investment yield of insurance companies, as well as the level of dividend payable to participating policies. In some cases, negative spread has re-emerged as a pressing concern of insurers.
- Inflation is accelerating in many Asian markets. There is still significant uncertainties regarding the future trend of inflation in Asia and it is very likely that developed and developing markets will see diverging trends. Alongside higher inflation, interest rates are also expected to increase. This will impact life and non-life insurers differently, depending on their investment strategies and portfolio mix. Reinsurers will also need to discuss this in depth with their clients going forward.
- After the financial crisis, many Asian markets have been striving to rebalance economic growth by being less reliant on exports to mature markets. This is happening in the form of a strong push towards infrastructure construction as well as encouraging consumer spending. Insurers in the region will need to adapt their business focus to the shifting economic drivers in their markets. For instance, rising domestic consumption could well support further strong growth of personal lines of insurance in some markets (Figure 2).
Evolving insurance and regulatory landscape
Despite Asia having weathered the global financial crisis without major insurance insolvencies, regional regulators are nonetheless cognisant of the need to shore up their prudential supervision of insurance companies, particularly in regard to solvency standards. On the one hand, the migration from Solvency I-type standards towards RBC-type regimes is continuing. On the other hand, regulators have put forward various proposals to improve the resilience of current solvency systems.
- Looking forward, solvency regulation in the region will continue its move from single to multiple risk factor based. Asian regulators will continue to supplement existing solvency regimes (mainly RBC regimes) with various forward-looking criteria (eg risks sensitivity analyses, scenarios and stress tests etc) to better enable insurers/regulators to detect potential solvency shortfalls. While Japanese insurers will certainly see their solvency levels decline significantly due to the implementation of new RBC standards, it is also likely that insurers in other markets will be faced with stronger capital needs arising from the application of stress and scenario tests.
- At the same time, insurance supervision in Asia is moving towards better consumer protection, alignment with international accounting standards (eg IFRS), and more liberal entry and investment regulations. It is expected that liberalisation and deregulation on insurance business will continue in Asia, notwithstanding concurrent efforts to tighten solvency regimes.
- Capital requirements will go up, accompanied by better enforcement. Many markets have already implemented RBC as the preferred solvency standard. Others, including the Philippines, Thailand and South Korea, are following their examples. This is going to put additional pressure on insurers' capital level (on top of the growth story), fuelling demand for sophisticated risk management, for regulatory compliance, for consumer protection and for proper disclosure.
- There could be pressure to consolidate the domestic markets, particularly for some fragmented markets where smaller companies would find it difficult to comply with the tighter solvency standard. Alongside market liberalisation, cross sector investment will continue to increase, leading to the possible emergence of large financial conglomerates in emerging Asian markets, such as China.
- The resilience demonstrated by Asia is attracting more foreign players to the region. At the same time, Asian markets have moved on to further liberalise the local insurance markets. More insurance M&A is expected in the coming years in the region, which will likely transform competition.
Innovation and partnership: Key drivers for success
So, what do all these changes mean to the insurance industry in Asia? Changes bring risks and opportunities. While it is important for the industry to have a better understanding of the current risks we are facing, it is equally crucial to have a forward-looking mindset, technical vision and commitment to master emerging risks and come up with innovative solutions for turning these risks into business opportunities. Innovation is not only needed for staying competitive, but also necessary for survival.
Innovation and advancement can be best achieved and multiplied through collaborative partnerships. At Swiss Re, we are committed to leveraging our global and local experience to partner with our clients to tackle risks and capture rapidly growing opportunities in Asia. A recent example of innovation is our collaboration with the Vietnam Agribank Insurance Joint Stock Company to introduce an index-based insurance programme. A first in Southeast Asia, it will initially cover loans to rice farmers in up to 10 provinces in Vietnam, with the potential to expand the scheme to the entire country.
We look forward to exploring risks and opportunities with you in 2011 and beyond.
Figure 1: Regional insurance markets at different stages of development
Figure 2: Rising domestic consumption favours personal lines
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