Singapore insurers to tap Far East markets in 2011:Ernst & Young

Insurers must choose their opportunities carefully and move quickly to take advantage of the expansion in South Asia and East Asia.

According to Ernst & Young's Global Insurance Center 2011 Far East Insurance Outlook, the South Asia and East Asia insurance markets will continue to grow steadily in 2011 and easily outpace the rest of the world's regions.

“Insurers need to keep in mind that Asia-Pacific is a highly diverse market when it comes to the economic progress of various countries, as well as the factors that drive their insurance markets,” said Jeff Malatskey, Insurance Practice Leader, Ernst & Young, Asia. “Asia-Pac features mature regions that are more saturated by insurance products. But developing and emerging markets can be found that offer tremendous growth potential, but only for insurers who are ready to commit financially over the long term.”

Ernst & Young has identified three key issues that will influence insurers looking to share in this growth in 2011:

1. Adjusting and expanding distribution strategies amid shifting demographics and consumer buying patterns: The traditional agency distribution model for selling life and health insurance in Asia-Pacific is increasingly challenged by the development of alternative sales channels. The insurers that take advantage of consumer demand for insurance outside the established agency and independent financial advisor channels will gain a competitive advantage in terms of both increasing production volumes and more effectively managing expenses. But some insurers will need to retool their existing distribution models and adopt more flexible sales approaches that leverage new or rapidly shifting technologies. In Singapore, bancassurance market share is estimated at 27%.

“The trend suggests that there is significant opportunities in bancassurance, as no country in Asia-Pacific has bancassurance market levels approaching like some European countries, which are well above 60%,” remarked Graham Handy, Insurance Advisory Practice Leader, ASEAN.

Bancassurers, for example, are seeking to expand their distribution networks beyond sales at bank branches, and are beginning to make headway selling products through ATMs, online banking systems and call centers.Internet distribution also continues to grow in popularity in the region, primarily as an insurance research tool but increasingly as a source of new business. The evolution in both traditional and alternative distribution channels has encouraged a sharper focus on customer segmentation strategies, and as a result, many multinational insurers are investing in sophisticated analytical tools to better understand their customers. By clarifying customer expectations, they hope to craft a more efficient delivery mechanism in each customer segment.

2. Developing strategies to shape and comply with the heightened pace of local and global regulatory and accounting developments: During 2011, regulations will continue to evolve in the wake of the financial crisis. As a result, insurers must quickly identify the potential business impact of these changes, and change their strategies accordingly. It remains crucial for insurers to stay abreast of proposed changes to local and regional regulations, as well. For example, many Western European insurers have established a presence in Asia-Pacific, and with them Solvency II (SII) requirements and more advanced International Financial Reporting Standards reporting mandates. Their use provides an opportunity for local regulators to evaluate the value-added benefit of moving toward more global solvency and accounting frameworks. Asia-Pacific regulators will use the SII framework to guide their thinking in areas like enterprise risk management (ERM) and internal models. Additionally, several countries have implemented risk-based capital (RBC) frameworks, leading some insurers to seek new capital infusions, reduce growth rates, seek a merger, or possibly even close their operations. IFRS adoption or alignment is either widespread or in progress in Asia-Pacific, thus enhancing the ability to compare the financial statements of companies within the region with their counterparts in Europe, Canada and, in the near future, the United States. IFRS represents the emergence of a global financial reporting language and also facilitates comparison of a company’s performance across jurisdictions. However, it is important to understand the linkages between IFRS and Solvency II, not to mention potential conflicts.

“The coming changes from IASB’s new standard in IFRS 4 insurance contracts will post a challenge to insurers in the region, not only in the finance and accounting area but from the entire business perspective,” highlighted Yap Swee Gek, Insurance Practice Leader, Singapore.

3. Developing dependable capital sources required to support accelerating business growth: Given the expected growth of Asia-Pacific markets in 2011, insurers will need access to dependable supplies of capital to comply with solvency requirements, support organic growth, and seize merger opportunities. Many insurers may also need to invest in the development of back-office systems, develop new branch offices and hire staff, among other business activities. The strain on capital from these investments will be combined with the liabilities assumed from the issuance of new policies. Insurers seeking to acquire other companies will need significant internal capital or access to credit and/or equity markets to raise the funds to close a transaction. However, companies seeking expansion within Asia-Pacific confront many challenges, as foreign insurers have made only limited inroads to the local market and insignificant market share. In 2011, the challenge facing local and/or international insurers will be identifying the combination of capital sources that best fits their needs. Some insurers will seek capital through the initial public offering market, while others may turn to reinsurance to reduce the amount of risk held on their balance sheets. Finally, with liberalization of regulations governing the percentage of ownership by foreign insurers, securing capital from abroad remains a possibility, although investors may have reservations about the ability to extract profits and capital from some Asia-Pacific jurisdictions.

In addition to the three issues outlined above, insurers will need to pay close attention to these tactics in 2011:

• Operational improvements: New and emerging regulations will pressure insurers to upgrade both IT and employee skill sets in 2011. Insurers in developing markets, and relatively new insurers in mature markets, may lack the internal technical expertise, as well as the infrastructure—data management, IT platforms, actuarial and accounting skills—to effectively manage costs and support strong levels of growth. To provide for growth while addressing new reporting requirements, Asia-Pacific insurers need to consider investing in advanced technology solutions. Significant growth potential is possible through mobile banking and tele-insurance distribution channels, given the large numbers of consumers with mobile phones.

• Natural catastrophe cover: Whereas natural disasters in emerging markets have not significantly influenced the insurance markets, in some areas this picture is rapidly changing. In 2009, more than 60% of deaths from global natural catastrophes were in Asia-Pacific, and as a result, reinsurers are likely to revisit their risk profiles for the region, particularly with respect to countries that have experienced a recent catastrophe. At a minimum, reinsurers will tighten underwriting and begin to differentiate between insurers that can provide detailed information on their exposures, and those that cannot. As insurance penetration in Asia-Pacific increases and the concept of liability insurance gains hold, exposure to liabilities stemming from natural disasters also will grow.

• Takaful opportunities: Foreign insurers are exploring securing licenses in strong takaful (a form of insurance based on Islamic principles) jurisdictions such as Malaysia and Indonesia. The strong growth in both business volume and customer acceptance of takaful products suggests that this model is poised to grow further. Now that takaful has achieved acceptance as a business model, several challenges must be addressed, including overcoming talent shortages, given the limited number of Islamic scholars experienced in finance and insurance; competition with conventional insurance for skilled resources; resolving differences between Islamic schools of thought; and the restricted but growing availability of re-takaful.

• Regional hubs: Some mature markets like Singapore, Hong Kong and Australia are seeking to become regional hubs for the Asia-Pacific region. Governments are looking to offer generous incentives such as tax concessions and salary subsidies, which are likely to fuel even greater interest in the region.