 By Shaun Crawford, Global Insurance Sector Leader at EY
The concept of a shrinking world is not a new one. As technology develops and travel is made faster and easier, the world’s markets are becoming closer and more connected. Insurers are now turning their attention to growth following the financial crisis and as global insurance companies recognise the increased competitiveness of developed markets, they are increasingly looking to a new wave of RGMs. For a long time the BRIC countries offered the most significant foreign growth opportunities, but new emergers such as Mexico and Indonesia are now starting to demonstrate real promise. China, of course, continues to play a dominant role in driving premium growth in international markets.
But, a host of new emergers now also offer valuable long-term opportunities. Opportunities for global expansion into new markets represent a powerful force accelerating the growth in insurance premiums today – especially as economic performance languishes in much of the developed world. But, expanding into unknown territories comes with risks as well as growth opportunity. EY recently produced a risk-opportunity matrix, ranking 21 rapid-growth markets in terms of their future prospects for insurers. The matrix is based on projected economic and premium growth until 2020, and includes factors such as financial stability, regulatory change, macroeconomic volatility and liquidity risk.
High growth, low risk
Our analysis concluded that China, Mexico and Thailand will offer the best risk-versus-opportunity potential for insurers between now and 2020.
China, despite a recent modest economic slowdown, continues to boast extraordinary income growth, which is encouraging car and home ownership, and as a result, is expanding the general insurance market. In addition, their aging population is driving higher demand for life and health insurance products. However, while some regulatory restrictions have been relaxed, market entry remains difficult for foreign firms, especially given existing Foreign Direct Investment (FDI) rules.
Across the Pacific Ocean, Mexico is possibly China’s biggest challenger. Having undergone a period of extensive liberalization in recent years, Mexico is now arguably the most open market to foreign insurers. What holds Mexico back is the pace and unpredictability of local regulatory change, which means that for some insurers, the risks are still too high. However, with Mexican regulators set to implement their version of Solvency II ahead of Europe, they are clearly getting a hold on regulation, which will drive confidence for overseas firms looking to grow abroad.
Thailand offers intriguing near-term growth potential, with only modest risk. But, unlike other markets, such as Malaysia and UAE which also fall into this category, Thailand’s future growth prospects are also strong. However, the 2013/14 Thai political crisis will do no favours for attracting foreign investors.
Interesting new emergers on the Asian continent are Malaysia and the UAE. Although these markets are not experiencing the same speed of growth, as small Islamic nations, where rising incomes, a sustained construction boom and the increased adoption of sharia-compliant insurance products are creating new opportunities, there are niche areas to be explored. Both could provide significant opportunities for foreign insurers.
High growth, higher risk
For investors who are willing to take on higher risk to achieve their international growth targets, India and Brazil remain important markets. With one of the world’s largest populations, India is second only to China in terms of forecast absolute growth in insurance premiums, and has seen considerable investment over the past decade, although with very mixed results. Brazil, which is third in terms of market size, is currently rated as the most accessible of the BRICs for foreign insurance companies following a program of liberalisation.
One of the major issues for India, however, is that it is weighed down by a challenging and fast-changing regulatory environment, which has proved somewhat obstructive in attracting investors. Coupled with strict FDI requirements and issues with supply chain fraud and agent effectiveness, India has a number of financial challenges to deal with before it can expect stronger foreign expansion. However, the recent change in Government has significantly increased confidence for overseas insurers looking to invest.
On the Asian subcontinent, Indonesia also offers an extremely strong economic growth picture, second only to China and Vietnam. However, foreign insurers are finding it challenging to obtain licenses, so acquisition is the main entry route.
On the other side of the world, Colombia ranks relatively high in terms of opportunity, and only moderately on the risk scale. Despite low interest rates, the insurance market in Colombia has expanded at greater than 10% annually over the past four years and offers high growth potential due to relatively low insurance product penetration. The significant regulatory liberalisation that took effect in 2013 has also helped to create new opportunities for foreign firms.
The African continent also offers positive growth for foreign insurers, although on more of a long term basis. With the forecast explosion of a middle class population in Central and Eastern Africa, the number of insurers starting to take strategic investments in domestic businesses, as well as forging new business alliances, is likely to pick up.
Conclusion
While investment in RGMs will continue to be vital for global insurance firms, outsized returns will not come easily. The wave of regulatory change across the world, evolving consumer buying habits, and the rate of social media engagement, as well as macroeconomic factors, such as the impact of quantitative easing, are all things that are easy to overlook initially, but which are absolutely critical when deciding to enter and grow in a new market. It will be the companies that use this information to carefully tailor products and develop market-entry strategies suited to particular economies and their cultures that will see the greatest rewards.
Shaun Crawford is the Global Insurance Sector Leader at EY, and lead author of the Waves of Change: The shifting insurance landscape in rapid growth markets report.
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