Much work needed by insurers to realise AEC dream

The Asia Pacific region is underinsured at both the personal and commercial levels and barriers to entry for regional and international risk capital remain high in many territories. This stifles growth and development in risk transfer and management and thus holds back the region’s overall growth prospects. For these reasons one would assume that regional and international insurance and reinsurance leaders would be highly excited about the potential of the AEC. But Hans-Peter Gerhardt, recently appointed group chief executive of ACR Capital Holdings, the leading Asian insurance and reinsurance group, said that insurers, reinsurers and international and regional customers should not allow themselves to become overexcited too soon. There is still much to do before the AEC can be considered a single insurance market comparable with the European Community, and much market cooperation, through the creation of a regional disaster pool, for example, is needed to achieve the end result.hideIn a note published at the end of December by ACR on the creation of the AEC, Mr Gerhardt pointed out that ASEAN leaders have agreed that any liberalisation in the financial services industry must suit the member states’ different national policy priorities and varying stages of economic and financial sector development. “Under the AEC Blueprint, the first sectors to be opened up—air transport, e-commerce and infrastructure, healthcare, logistics and tourism—do not include insurance. There are currently no set timeframes regarding liberalisation pace for insurance and other financial services sectors,” pointed out Mr Gerhardt. The German national, formerly chief executive officer and founding member of Paris Re, which was acquired by Partner Re in 2009, recently took charge at ACR following the decision by John Tan to step down for health reasons. Mr Gerhardt has five strategic tips for fellow insurance and reinsurance executives active in the region or keen to expand on the back of the formation of the AEC. First, he advised insurers to be wary of premature expansion abroad because this is by no means a level playing field yet. “For players from relatively mature ASEAN markets, a regional expansion strategy is tempting given the AEC’s anticipated liberalisation agenda. Regional diversification can, however, easily translate into ‘diworsification’ if there is underestimation of the challenges, including the lack of familiarity of local regulatory environments and failure to build effective local distribution networks, which can cause companies both financial and reputational losses,” he said. Mr Gerhardt advised fellow professionals to consider the European experience in this this context. “It took a total of some four decades from trade liberalisation in goods to the opening up of markets for foreign, EU-based insurers to the final materialisation of the vision of a single market,” said Mr Gerhardt. “Barriers to market entry for the EU, such as a lack of brand awareness and customers’ reluctance towards utilising foreign providers, had proven almost insurmountable. The most visible impact was observed in mergers and acquisitions. Insurers clearly preferred to buy into existing franchises which, though risky, were seen as offering higher chances of ultimate success compared to the costly venture of planting a company’s own brand into uncharted territory,” he explained. Mr Gerhardt said that the rise of the digital age and fact that many AEC insurers have experience of bancassurance might help to fast-track their regional growth to an extent. But that still does not mean it will be easy. “While the digital age that we now live in may render the historical parallels of the EU of less relevance, it should also be noted that countries in the ASEAN are in various and vastly different stages of digital development. In general, insurers with superior marketing and distribution capabilities are expected to be best placed to capture the potential of cross-border expansion,” he said. Second, Mr Gerhardt does see good opportunities in cross-border trade, such as transport, and advises insurers to go for them. “Cross-border cargo insurance is already widely liberalised across ASEAN. Additional liberalisation, combined with increased demand as a result of the free flow of goods within ASEAN, present further opportunities. To fully capture these, forging bespoke partnerships in underwriting, servicing and claims management is seen as a feasible strategy,” he said. Next, Mr Gerhardt advised insurers in the region to prepare for heightened competition. He said that market liberalisation will translate into higher degrees of market competition and domestic insurers could respond with price competition or pursue the more strategic alternative of product and services differentiation. “This is of particular relevance to smaller domestic insurers with a simple and commoditised product suite, as they are the likeliest to come under increasing competitive pressure in the short run. For them, it makes sense to explore the possible scope for product innovation and an enhanced (after-sales) services proposition, alleviating the pressure of a commoditised market,” said Mr Gerhardt. Just as in Europe, this will inevitably lead to consolidation in the market. The ASEAN market hosts more than 500 insurers and is generally considered fragmented and overcrowded, said Mr Gerhardt. The reinsurer’s fourth item of advice is for the market to explore a regional disaster pooling scheme. Mr Gerhardt pointed that, on average, some 2% of ASEAN’s combined gross domestic product is wiped out by natural disasters each year and only a fraction of these losses is insured. He argues that to help counter this “enormous” insurance gap, there is arguably a need for a regional disaster pooling system to provide member states with more effective protection and resilience against natural calamities. To help make this happen, the market needs more and better data. “AEC countries may want to develop and promote a regional platform for collecting and disseminating historical loss and current risk exposure information. Industry-supported academic efforts towards open-source modelling of disaster risk will prove useful in this context,” suggested Mr Gerhardt. The reinsurer said that the experience of existing schemes with parametric solutions should also be taken into account, such as that of the Caribbean Catastrophe Risk Insurance Facility, the Pacific Catastrophe Risk Insurance Pilot and the African Risk Capacity. “With much improved data quality and availability, a regional risk pool for natural calamities will become more feasible,” he said. And fifth, Mr Gerhardt advised ASEAN insurers to make sure their voice is heard on a regional level to help ensure they play a constructive role in the development of regional regulations. “As most insurance-specific AEC rules are yet to be established and industry-relevant decision processes are increasingly moving from the national to the supra-regional level, AEC insurers need to have their collective voices heard,” said Mr Gerhardt. He suggested that one way of achieving this would be to set up a thinktank-style platform that could design, commission, coordinate, supervise and execute strategic research of pan-AEC relevance. This platform should pursue a clear outreach agenda, disseminating insurance information, data and intelligence as well as organising executive and expert meetings, said Mr Gerhardt. The reinsurer advised ASEAN insurers to look at the The Geneva Association as an example. He added that the ultimate aspiration should be to become the preferred industry port of call for AEC governments, lawmakers and regulators, based on research that is authoritative and relevant for society at large. “In the long run, AEC has the potential to reshape the region’s insurance markets. Its leaders are well advised to respond to these expected changes early on. The spectrum of responses does not only include strategic measures at corporate level, such as the pursuit of a regional expansion agenda or the adoption of a product and services differentiation strategy. Equally important are collective measures on industry level as well as public-private partnerships,” concluded Mr Gerhardt. AEC: The formation of a $2.5tn market The Association of Southeast Asian Nations (ASEAN) was effectively formed on 8 August 1967, when five leaders—the Foreign Ministers of Indonesia, Malaysia, the Philippines, Singapore and Thailand—sat down together in the main hall of the Department of Foreign Affairs building in Bangkok, Thailand and signed a document. ASEAN explains that it was a short, simply worded document that contained just five articles. It declared that the aims and purposes of the association were based on cooperation in economic, social, cultural, technical, educational and other fields, and in the promotion of regional peace and stability through “abiding respect for justice and the rule of law and adherence to the principles of the United Nations Charter”. The document stipulated that the association would be open for participation by all states in the southeast Asian region subscribing to its aims, principles and purposes. It proclaimed ASEAN as representing “the collective will of the nations of southeast Asia to bind themselves together in friendship and cooperation and, through joint efforts and sacrifices, secure for their peoples and for posterity the blessings of peace, freedom and prosperity”. ASEAN today has 10 members as Vietnam, Lao, Singapore, Brunei, Cambodia and Myanmar have joined. It has become an incredibly powerful trading bloc that represents a huge market worth more than $2.5tn. Collectively, the region is the seventh largest economy in the world and, with a population in excess of 622 million people, represents the third biggest market base in the world, behind only China and India. The first ASEAN Economic Community (AEC) Blueprint was signed in November 2007. It has served as the masterplan to chart the region’s journey towards the formal establishment of the AEC on 31 December 2015. The AEC says that it is built on four “interrelated and mutually-reinforcing characteristics”. These are: A single market and production base. This will be created through a single market and production base through free flow of goods, services, investment, skilled labour and freer flow of capital. A highly competitive economic region. AEC wants to create a business-friendly and innovation-supporting regional environment through the adoption of common frameworks, standards and mutual cooperation across many areas, such as in agriculture and financial services, and in competition policy, intellectual property rights, and consumer protection. It also supports improvements in transport connectivity and other infrastructure networks. A region of equitable economic development. The AEC aims to create initiatives that encourage small and medium-sized enterprises to participate in regional and global value chains. It will also push efforts to build the capacity of newer ASEAN member states to ensure their effective integration into the economic community. A region fully integrated into the global economy. This envisages ASEAN’s full integration into the global economy pursued through a coherent approach towards external economic relations, and with enhanced participation in global supply networks. AEC made some big steps forward in 2015. The body explains that intra-ASEAN import tariffs have been virtually eliminated and formal restrictions in the services sector gradually removed. Cross-border trading processes have been simplified, including customs procedures and rules of origin, harmonisation of technical regulations and mutual recognition arrangements. This is reducing trade costs across the region. Cross-border movement of skilled people and professionals has been facilitated. Common frameworks, standards and mutual cooperation in various areas, such as in agriculture and financial services, and in competition policy, intellectual property rights, consumer protection as well as SME development have been adopted. Also, various initiatives that help narrow the development gap among and within ASEAN member states have also been implemented. The formal creation of the AEC is, however, only the beginning. The body has a big plan, with a target date of 2025. “The formal establishment of the AEC in 2015 is not a static end goal, but a dynamic process that requires continuous reinvention of the region to maintain its relevance in an evolving global economy. The AEC Blueprint 2025 has therefore been adopted to guide ASEAN economic integration from 2016 to 2025,” stated the AEC. “Looking at the decade ahead, ASEAN will strive to build on the early gains from the AEC 2015 as well as be forward looking in anticipating new opportunities and challenges. The post-2015 agenda would thus include a clear strategy to address any unfinished agenda from AEC 2015 which are deemed critical in deepening regional economic integration,” concluded the AEC.

Much work needed by insurers to realise AEC dream

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