1. Hong Kong insurance industry pays higher price for regulation
The introduction of the proposed new Independent Insurance Authority (IIA) will significantly increase the costs to insurers and insurance intermediaries of meeting more stringent regulation.
While the consultation phase for the new regulator is under way, 2013 is expected to see the introduction of legislation that will make significant changes to the regulatory environment in Hong Kong. Like other sectors of the economy, insurance in Hong Kong has traditionally been subject to the principle of minimum intervention.
However, the new independent insurance regulator (due to come into force in 2015) will have strong powers to regulate and supervise across the market, and will include conduct of business requirements. In light of the enhanced oversight powers and duties, the IIA may be more vigilant in its supervision of industry practitioners.
All of this – plus new privacy and personal data obligations – will place a high, and increasingly costly, administrative burden on the insurance industry over the coming year.
2. International insurers seek new best friends in Myanmar
The opening up of the insurance sector in Myanmar to local private operations has created considerable interest in the international insurance community who are targeting local firms for co-operation and alliances.
The international insurance market is focusing on Myanmar, with insurers such as Tokio Marine, Sompo Japan, Mitsui Sumitomo and United Overseas Insurance already establishing representative offices there. These, and other international insurers, are after a deeper understanding of the country with a view to accessing one of last untapped insurance markets in Asia Pacific.
Even once the restrictions are lifted, it may still not be possible for any of these international insurers to apply and obtain a licence to write insurance business in their own name. We believe that international insurance carriers will only be permitted to enter the market in conjunction with local private insurers, so each of the existing 12 local partners can expect plenty of attention from potential 'new best friends'.
3. Significant increase in investment by Asian insurers outside domestic markets
In saturated insurance markets, such as Japan, South Korea and Taiwan, regulators are loosening the rules on outward investment by domestic insurers to make it easier for them to capitalise on opportunities elsewhere in the world.
An illustration of this trend was the uptick in outbound activity by Japanese companies in 2012. Some of these were in the growth markets in Asia, for example Mitsui Sumitomo's acquisition of Indonesia's Asuransi Jiwa Sinarmas PT and the purchase by Nippon Life Insurance Co of a stake in the Reliance Life Insurance Co Ltd of India. The acquisition of Delphi, a US based insurer, by Tokio Marine provided Japan's largest non-life insurance group with the ability to expand its presence outside its home insurance market.
Korea Life Insurance, South Korea's second largest life insurance company, expressed an interest in ING Group's Asia Pacific insurance operations and, in May 2012, was shortlisted in the bidding process for a deal that could eventually be valued above US$ 7 billion. This has been followed by plans made by their chief rival, Samsung Life, to develop operations in the insurance markets in Thailand, India and Indonesian in 2012.
Overseas expansion helps to spread risk and balance business cycles, as well as enhance revenue, profit and stability and, in the case of both Japan and South Korea, regulators are actively encouraging this trend.
4. Indonesian market set for substantial consolidation and development
New solvency rules in Indonesia mean that, by the beginning of 2013, insurers need a minimum paid up capital of US$ 7.7 million. With many unable to meet this target, there is likely to be a flurry of M&A activity in 2013, and increased international interest beyond.
Indonesia has seen impressive growth in GDP over the last five years with levels of employment and per capita income rising – a situation that will undoubtedly help drive demand for insurance products. However, in many cases, local insurers are seen as weak, with insufficient business controls, hence the increased regulatory oversight and control.
This will likely drive market consolidation creating more robust businesses that should attract the interest of international insurers. As new licenses are hard to come by, this will likely be in the form of equity investments.
2012 saw some start to this with Japanese insurers Mitsui Sumitomo Insurance, Hitachi Capital Corp and Meiji Yasuda Life Insurance Co all making acquisitions. In June 2012, ACE announced that it was continuing its Indonesian expansion with the agreement to acquire Jakarta based PT Asuransi Jaya Proteksi (JaPro) in a cash transaction worth approximately US$130 million. 2013 and beyond should see other strong players looking at ways to emulate these moves.
5. Sovereign wealth funds focus more closely on insurance industry in Asia
Sovereign wealth funds (SWFs) are increasingly looking to invest in Asian insurance companies to broaden out their financial markets portfolios, and to develop their local markets through strategic partnerships or outright investment.
SWFs have a war chest of around US$ 3 trillion and, over the last several years, there have been signs that they are committing resources to insurers. In 2010, the Kuwait Investment Authority invested about US$ 1 billion in the initial public offering of AIA group Ltd and a year later The Government Investment Corporation of Singapore purchased a stake in Chinese insurer Taikang Life Insurance.
This trend looks set to continue. In January, 2013 the State Administration of Foreign Exchange, the government body responsible for managing China's US$ 3.2 trillion foreign reserves, established a new investment body called SAFE Co-Financing to assist Chinese companies in investing overseas. It would not be surprising to see some of this flow to mature insurance markets such as Australia which can supply both capital to insure assets owned there and expertise and knowledge. In Malaysia, the national SWF – Khazanah Nasional – is teaming up with Canada' Sun Life Financial to acquire 98% of local life insurers, Aviva Malaysia. Previously Khazanah Nasional supported the launch of Asia Capital Re based in Singapore back in 2006.
As governments in these regions seek to close the gap between the current state of their financial sectors and the sophistication of the international markets, access to valuable resources and skills may be a keener motivation than pure investment returns.
6. Australian insurers up the stakes in Asian investment
The release of the Australian government's Asian Century White Paper in October 2012 articulated the view that Asia is the economic epicenter of the region and pledged greater federal support for businesses looking to expand into the region. Insurers are likely to embrace this ambition.
Government support for businesses wishing to expand into Asia includes regulatory reform to make Australian businesses more competitive, as well as a commitment to make it easier for Asian businesses to transact in Australia, including improving the availability of visas, developing the foreign investment screening process and the reduction of tariffs.
IAG is setting the pace. In July 2012 it announced that it had invested US$ 720 million in five Asian countries, including US$ 500 million in established businesses in Thailand and Malaysia and US$ 220 million building its presence in India, China and Vietnam. Managing Director and CEO Mike Wilkins has said "It remains our target for Asia to represent 10% of the Group's GWP, on a proportional basis, by 2016".
QBE Insurance Group is also taking steps by acquiring Hang Seng General insurance Co. Under the agreements, QBE will become the exclusive provider and underwriter of bancassurance general insurance products to Hang Seng Bank's customers in Hong Kong and mainland China.
7. Distribution in Chinese insurance market set of seismic change
With agents for insurance sales in rapid decline, new rules limiting the number of insurers distributing through bancassurance and the growth of e-commerce, the channels so vital for product distribution are seeing considerable change.
The pace at which insurers are able to penetrate China has always been hampered by the geographic size of the market and their lack of access to distribution. Historically, tied agents were a vital sales conduit (in 2010 there were three million life insurance agents in China) however this channel is now in decline, with concerns over expertise and mis-selling.
New regulations from the China Insurance Regulatory Commission have also been introduced which limit the sale of insurance products in bank branches, and these insurers are now not allowed to have sales representatives on site. Banks are also starting to roll out their own proprietary products.
All of China's major insurers now have e-commerce offerings. Ping An intends to set up an insurance joint venture with Alibaba Group and Tencent, pending regulatory approval, and China Taiping's e-commerce subsidiary has started operations in Shenzhen. The other three major insurers, China Life Insurance, PICC, and China Pingan Insurance have also started to provide online insurance services. All of this will means that the traditional methods for getting products to market will come under intense scrutiny.
8. Inbound investment in China is the short-term focus, while outbound will take much longer
With foreign life and property & casualty (P&C) players only holding 4.3% and 1.2% respectively of the Chinese insurance market in 2012, its sheer size and potential remains a compelling proposition for inbound investment.
Compared to the rest of Asia, China remains an underinsured market, with insurance penetration extremely low at around 2%. While real premium growth is extremely strong, penetration rates are still below most other Asian markets. So, foreign P&C insurers continue to see this market as offering significant opportunities for strong growth.
The opening of the motor third party liability insurance markets in 2012 represents a major opportunity, as does any possible opening up by the regulator of other key areas of the market. For example on the life side, changes on pensions, retirement product, tax incentives and health insurance could allow foreign insurers to leverage their knowledge and expertise. All of this means that China remains a very attractive destination for international underwriting businesses.
Chinese domestic insurers are facing a more challenging regulatory environment, with increasing capital adequacy pressures, significant shifts in distribution and a shortage of local talent. This will mean that, while their longer term goals might include international expansion, in the shorter term the focus will remain domestic.
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