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European Insurers Should Consider Asia Expansion

Posted on Mar 08, 2012 by Sergio Ulloa ()

A new report published by prominent international ratings agency Moody's Investors Service this week urges European insurance companies to expand their business eastwards into Asia, as their collective presence in the region at present is too limited to affect their overall financials. This current situation, Moody's explains, has a credit-neutral effect on insurer credit profiles, but if these same companies can expand profitably in the Asia Pacific region in the coming years, credit implications might turn positive over the longer-term. Moody's new special comment, titled 'Most European Life Insurers Face a Long Road in Asian (ex-Japan) Markets,' notes that despite their relatively strong position at home, most of Europe's leading insurance groups have been slow to expand their operations into Asia. While this inability to leverage relatively strong capital positions and industry expertise into a greater advantage and presence across the world's fastest growing insurance markets has not perhaps had any detrimental impact on European insurer finances so far, a failure to gain momentum at this juncture could prove to be an opportunity lost over the longer term. "For most European insurers, their current presence in Asia ex-Japan remains too small to affect their overall financials, and thus their credit profiles", explains Antonello Aquino, Moody's Senior Vice President and author of the special report. Moody's expects this to soon change however, with European insurers looking eastwards to improve their credit profiles and offset the stagnant market forecasts in their home markets. A profitable strategic expansion plan for Asia will remain a particularly attractive option for European insurers, due to the added geographical diversification and profitability benefits it could bring to their portfolios going forward. What has prevented these insurers from making the move until now? Moody's report explains that restrictive national regimes, unexpected intra-market regulatory changes, and embedded (some would argue extortionate) insurance product guarantees have proven to be some the most daunting obstacles international insurance companies have faced when trying to expand their brand successfully in the Asia ex-Japan region so far. The report uses the example of Taiwan's insurance market, which has seen a European insurer exodus in recent years due to the high level of product guarantees and the downward pressure this places on margins. Taiwan's insurance trade has remained sluggish in the aftermath of the global economic crisis, with the market further restricted by previous business secured at interest rates which are no longer sustainable for firms. New accounting rules that raise capital requirements on insurers, together with strict local regulators and general market volatility, have led many international insurance groups to question their continued presence in the country. More recent trouble for multinational insurers can be found in the Indian insurance market, where numerous legislation changes have lead to a protracted decline in life insurance sales, the country's key growth driver. New regulations that restructured popular unit-linked insurance policies in the third quarter of 2010 have significantly impacted the life sector, resulting in a sharp drop in first-year premiums, and have forced life insurers to turn towards more conventional, lower-margin products. Additional rulings on charges and agent productivity have made underwriting profitability and distribution difficult and could pose additional challenges for life insurance companies in India down the line. Moody's points to these examples and more to demonstrate that success in Asia, perhaps moreso than elsewhere in the world, will be determined by the insurer's ability to manage evolving regulatory environments, maintain insurance product and service innovation, and control their distribution networks going forward. These are "the hallmarks of successful insurers in Asia ex-Japan," added Mr. Aquino. While the Asian insurance sector's prospects for growth appear bright in the long term, the market's unique idiosyncrasies need to be addressed in order to attract and sustain the necessary investment and innovation required to take business to the next level. According to the Moody's report, European insurers' overall presence in the Asia life insurance market (excluding Japan) remains quite limited, with combined market share coming in just below 10 percent of total regional annual premium equivalent (APE) as of 2010. The rating agency further suggest that profit contribution from Asia has remained modest on most European insurer balance sheets, accounting for around 5 percent on average, with the noted exception of British insurance giant Prudential Plc, who have developed a substantial presence in most major markets in the region. Prudential are now even considering moving headquarters from London to Hong Kong to reflect how important Asia has now become for the company. In the conclusion, Moody's explains that Asia ex-Japan is by now means a monolithic, uniform insurance market, and that certain countries in the region will continue to present more attractive growth opportunities to European insurers than others in the short-to-medium term. While Asia collectively certainly is a large and fast-growing insurance market, international insurers are still likely to find large variations in business attractiveness and ease of access across the continent's assorted economies. According to Moody's analysis, Vietnam, Indonesia, Thailand and the Philippines offer the highest level of potential for foreign insurers in Asia at present, despite the notable risks often associated with emerging insurance market development and evolution. The findings in Moody's study reflect similar conclusions made by other agencies earlier this year. In Deloitte's 2012 Global Insurance Outlook, the consulting firm agrees that the most attractive avenue for international insurers going forward could be emerging insurance markets, which offer faster-growing economies and rising incomes for more sustainable premium growth opportunities. With US and Western Europe economies unlikely to generate pronounced business prospects in the short-to-medium term, insurance companies should look to offset the anticipated shortfall in their home markets by entering potentially lucrative emerging markets, with China, India and Brazil being the most attractive destinations. The Deloitte report recognized that while doing businesses in emerging markets often comes with it's own considerable business challenges, including burdensome regulation, poor infrastructure, and cultural differences, the irresistible demand for greater insurance coverage and financial security amongst these countries' expanding middle class populations will provide sufficient growth opportunities to international insurers with adequate resources to adapt and expand. According to Insurance Information Institute's 2010 statistics, the ratio of general insurance premiums to GDP is just 1.5 percent in Brazil, 1.3 percent in China and around 0.7 percent in India. By comparison, the insurance penetration rate is 4.5 percent in the United States, 4.1 percent in Canada and between 3.1 to 3.7 percent in the major European economies. These differences translate into a trillion dollar coverage gap between West and BRIC nations, plenty of room for new insurance companies to come in and capitalize on these still largely untapped insurance markets. Companies Mentioned Moody's Moodys Moody's Investor Services provides credit ratings, research, credit risk management, and other services for more than a hundred thousand commercial and government entities around the world. Deloitte Deloitte Deloitte is the world's largest private professional services organization. The consulting firm, founded in 1845, now has over 170,000 staff, working out of 140 different countries. Deloitte provides audit, tax, consulting, enterprise risk and other financial advisory services through its many member firms.
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