The ASEAN Economic Community (AEC) initiative, a plan to develop a single economic market across the ten ASEAN states by 2025, is also likely to benefit regional insurance markets, according to a report published by Zurich-based research firm Dr. Schanz, Alms & Company and reinsurer Malaysian Re.
The ASEAN Insurance Pulse report, based on interviews with regional and international insurers, intermediaries and trade associations throughout the region, concludes that the $23bn non-life market will be one of the main beneficiaries from the plan to engender more economic integration in the region.
In particular, international insurers will welcome the AEC’s ambition to allow the free movement of goods and services, including financial services.
“AEC is a huge regional growth project, not least for the ASEAN insurance industry,” says Zainudin Ishak, President and Chief Executive Officer of Malaysian Re. “In order to capture its full potential AEC depends on the active participation from the corporate sector together with the relevant regulatory bodies.”
“[Our research] shows very clearly that the AEC integration is viewed positively by the ASEAN insurance community,” said Dr. Kai-Uwe Schanz, Chairman and Partner of Dr. Schanz, Alms & Company and author of the study. “The executives polled expect a major boost to their markets through enhanced competition, innovation and governance,”
The only difference of opinion is on how long it will take for these benefits to materialise. Dr Schanz said that almost half of the executives interviewed for the report believe that AEC will be a positive development for their respective companies in the next five years. Another 40% agree in principle, but believe that a five-year time frame might not be long enough for the advantages to come to fruition.
In addition, said Dr Schanz, nearly two-thirds of the participating executives also expect the AEC initiative to improve the domestic insurance markets at large in anticipation of greater competition, more innovation and increased customer awareness.
The most obvious benefit to insurers is the idea that insurance penetration (premiums as a share of GDP) will increase as a result of AEC integration – something that 51% of respondents executives believe.
A lack of insurance penetration has long been a problem in Asia Pacific. Currently, non-life insurance premiums of the ASEAN markets amount to just 1% of regional GDP, roughly a third of the global average. In particular, the lower income ASEAN countries are expected to benefit most from rising penetration levels, states the report.
The ASEAN bloc was first formed in 1967, principally as a way for the smaller Southeast Asian nations to compete with the region’s heavyweight economies of China, Japan and South Korea. There are currently ten states in ASEAN-Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar and Cambodia.
The report also addresses the issue of regulation, something that it is expected to play a significant role in the process of AEC integration. A vast majority (94%) of executives interviewed consider regulatory differences, in terms of minimum capital requirements, solvency regimes and reinsurance regulations as well as insurance and tax laws, to be a major obstacle to AEC insurance integration.
Consequently a similar majority (86%) would welcome a common regulatory framework across ASEAN. How easy this would be remains to be seen given that regulatory consistency remains an issue in other regional common markets across the globe and are often such a source of friction that they threaten the ongoing stability of the market.
The ASEAN Insurance Pulse report also polled the insurance executives on the ramifications of the AEC integration initiative and found that a clear majority (74%) do not expect it to be a threat to their respective insurance businesses over the next five years.
However, 95% of the respondents also expect that the liberalisation of the market will also bring with it extra competition. The report concludes that the “sanguine” view of the 74% that expect no threat in the next five years put that down to an expectation that the implementation of an effective, cross-border regulatory framework will act as the counterbalance to the increased competition.
Another counterbalance to the extra competition is the prospect of an increase in premium growth, meaning that insurers will be competing for a share of a larger market. The report finds that almost two-thirds of insurers in the region expect ASEAN non-life insurance premiums to grow in line with or faster than GDP over the next 12 months.
These expectations are highest in Indonesia, the Philippines and Vietnam where premium growth is expected to continue outperforming the economy at large.
Indeed it is the ASEAN region’s strong non-life premium growth that is considered to be the market’s most relevant strength, according to the survey, followed by the favourable demographics in the region and the quality of existing insurance regulation.
More specifically, a rapidly growing middle-class is expected to be a strong source of support for growth in personal lines but it is the prospect of an effective cross-border market aided by AEC integration that is expected to bolster the region’s commercial insurance market.
According to two-thirds of the polled executives state that current rates in commercial lines are currently below the three-year average – something that the report puts down to global trends of soft market cycle and the abundance of reinsurance capital exacerbated by country-specific trends such as the de-tariffication of large property business or a slowdown in construction activity.
The pricing outlook for the next 12 months is described by the report as “challenging”, especially for commercial lines business. “Competitive pressures continue unabated while the supporting role of tariffs will further reduce,” it states.
More than half (51%) of surveyed executives also believe that technical profitability in commercial lines is below the three-year average. “Relatively low loss ratios, supported by advances in risk management and low levels of litigiousness, continue to mitigate some of the pressure from eroding rates and rising acquisition expenses,” it states.
Furthermore, 69% of executives believe that technical profitability in commercial lines will remain on a downward trajectory over the next 12 months as the effects from further eroding prices are expected to prevail despite stable and still favourable claims patterns.