Sigma 5/2011 - Insurance in emerging markets: growth drivers and profitability

A favorable economic and regulatory climate has spurred insurance growth in emerging markets, but profitability is still a challenge.

Emerging Asia and Latin America have contributed the most to emerging market insurance premium growth, according to Swiss Re’s latest sigma, “Insurance in emerging markets: growth drivers and profitability.”  The report discusses the growth drivers and profitability in these two regions. The study also gives an overall outlook for emerging markets.

Insurance premiums in emerging markets have expanded robustly by 11.0% per annum in real terms over the last 10 years, compared with 1.3% growth in industrialised economies. This trend is expected to continue into the next decade and is attracting the attention of global insurers looking to stretch beyond saturated markets.

According to the report’s co-author, Swiss Re Senior Economist Oliver Futterknecht, various factors have contributed to this growth.

“The healthy economic environment with low inflation has had a positive effect on insurance premium growth in Emerging Asia and Latin America.

In addition, in an attempt to encourage healthy competition, certain markets have reduced state involvement and taken insurance-enabling regulatory measures,” says Futterknecht.

Innovation spurs growth

Product innovation has driven fast-paced growth in certain insurance segments, including microinsurance and takaful.

Co-author Amit Kalra, Swiss Re Manager of Economic Research & Consulting India, states that bancassurance, which was virtually non-existent before 2000, has taken hold in many countries, including key markets China and India.

“In India, bancassurance premiums made up 22% of new business premiums for private sector players in 2010. With a growing middle class and over 70 000 bank branches, bancassurance in India has plenty of room to expand.”

With success comes challenges

But the promise of emerging markets is tempered by the realisation that achieving profitable results in these areas can be challenging due to a myriad of reasons. The use of multiple distribution channels has also helped insurance to reach a broader audience in emerging markets.These include high set-up costs and a long period to break-even in young insurance markets, and the tendency for life insurers to fare better financially than those in the non-life sector. This low profitability may be a sign of an overly aggressive focus by insurers on top-line growth rather than profitable growth.

“Insurance in emerging markets: growth drivers and profitability” also examines the effect of ownership structure, affiliation with financial conglomerates, and economies of scale on the profitability of both the life and non-life insurance sectors.

You can download this latest sigma edition here. You can also listen to the authors discuss the sigma in a new podcast.

Published 20 December 2011