SWISS RE. Insurers targeting frontier markets must be in it for the long haul: Swiss Re

In a new report produced by Sigma, Swiss Re’s economic research division, insurers are warned that while there is significant first-mover advantage for the insurers that are first to set up in these new markets, the successful ones will be those that adopt a long-term strategy and position themselves for future growth.

“The realisation of growth potential will take years,” states the report. “Investment in frontier markets requires long-term perspective.”

It is no surprise that insurers are turning to emerging markets given the soft market that has persisted in most of the established markets. And while the so-called BRICS economies of Brazil, Russia, India, China and South Africa have accounted for half of emerging market output and 69% of emerging market insurance premiums, insurers’ attention is now turning to smaller and less well developed regions, known as ‘frontier’ markets.

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Frontier markets

The report describes these frontier markets as typically those emerging countries with smaller-sized econ-omies, lower income levels and insurance sectors in the early stages of development. In addition, another important characteristic is “a favourable insurance premium growth outlook, driven by strong fundamentals, impending regulatory change and the influence of some external trends”.

Sub Saharan Africa and the Commonwealth of Independent States account for the majority of frontier markets but there are also a number of Asian states that fit the frontier criteria.

The key attraction of these markets is what Sigma calls “the catchup potential”, which is itself based on a number of socioeconomic and market trends. Annual GDP growth in these markets is forecast to be strong (between 5% and 10%), while insurance penetration remains low at less than 1.5%. Sociopolitical stability and abundant natural and human capital will boost economic growth and, in turn, filter down to the insurance market in the years to come, states the report.

But, warns Swiss Re, the development of these markets may be neither predictable or quick. “Some markets are small and a regional focus may be more appropriate for insurers to build up scale. Frontier markets will likely follow a sequential growth pattern, favouring non-life and commercial business over life and personal lines in the initial years of acceleration in insurance penetration.

“The exception could be personal motor, if supported by enforcement of compulsory third-party liability insurance. Later, as incomes rise, premiums for life products, with their emphasis on savings, are likely to grow more rapidly.”

Insurers are also warned that the development of the insurance market in frontier markets will not always copy the growth of more established Western markets. “Insurance premium growth is non-linear relative to income growth, following an S-curve,” explains the report. “At low incomes, premiums grow along with income; but at middle incomes, premium growth is more rapid than income, before slowing at higher income levels. The same will apply in the frontier markets but other factors will also play a role. For instance, the introduction of enabling regulations like mandatory insurance and more sophisticated solvency systems should expedite sector growth.

“Likewise, the ability to leverage the latest technologies can accelerate insurance sector growth, reducing the time from many years in the advanced markets to just a few years in the emerging countries. As a result, the development path of frontier markets will not necessarily follow that of advanced or other established emerging markets.”

Southeast Asia

The report picks out four frontier markets in Southeast Asia—Cambodia, Laos, Myanmar and Vietnam—which although small have seen significant growth and development in recent years. Since 2000, the four markets have grown by 7.2%. In relative size Vietnam is the dominant country, making up 71% of the collective GDP, followed by Myanmar (18%) and Laos and Cambodia (both 6%-7%).

All four markets have also enjoyed a recent period of political stability—notably, Cambodia has seen a much improved political environment since the opposition Cambodia National Rescue Party ended a ten-month boy-cott of parliament in August 2014.

The insurance market is at an early stage of development in the four countries, with Vietnam the most developed with the highest penetration. At present, the growth is being driven by non-life insurance.

Growth will be helped by a number of insurance-related regulatory developments designed to enable faster sector growth, states the report. For example, a new insurance law took effect in Cambodia in February 2015, while in Myanmar, the insurance market is gradually liberalising after being state-controlled since 1963.

Premium growth however, remains volatile in these four markets due to the small size of the existing premium base, making it susceptible to large fluctuations when major insurance projects go live.

The report picks out a number of major developments that should boost the economies of the four countries and, consequently, help to grow the insurance market—the Association of Southeast Asian Nations Economic Community and its various trade agreements; the One Belt, One Road initiative; and the resulting investment in cross-border construction and infrastructure projects (see Table 2). “The projects will open up new opportunities in engineering insurance and other lines of business,” states the report.

South Asia

Sigma also looks at three frontier markets in South Asia—Bangladesh, Pakistan and Sri Lanka. As with the Southeast Asian frontier markets, these three countries have enjoyed robust economic growth in recent years but also have an underdeveloped insurance market.

Total premiums collected in 2015 ranged from $0.8bn in Sri Lanka to $2.3bn in Pakistan where, unusually, life insurance is more developed than the non-life business. Continued economic growth will help spur the insurance market on, as will high natural catastrophe exposure, increasing urbanisation and a rising middle-class. A number of regulatory measures, including higher capital and solvency standards, will also be beneficial, states the report.

Insurers are no strangers to frontier markets, notes the report, and there have been successes and withdrawals over the years. But there have also been some common patterns in how these frontier markets have grown their insurance sectors, which international insurers would do well to mind, states the report.

These include the fact that non-life insurance will dominate in the early stages of development, accounting for the lion’s share of premiums. This dominance will subside as the market matures, as has been seen in China where in 1980 non-life insurers accounted for almost all of premiums but by 2003 the figure was down to just 31%.

Insurers targeting frontier markets will have to note these trends and also deal with a low awareness of insurance among the population and issues of affordability. Insurers will also to have be scalable so that they can grow as the markets do and they should also have entry strategy for each country—the main question is whether they are able to go it alone or team up with a local player, either as a result of regulatory requirements or as a specific strategy to quickly establish a brand name and market presence.

Finally, while the targeting of frontier markets should involve a long-term strategy from international insurers, they should be prepared for a pace of development that far outstrips the development of the established insurance market.

“The experience of some established emerging markets like India and China shows decades of insurance sector growth can be compressed into a few years,” notes the report. “Technology can also help the industry leapfrog to the latest products or underwriting techniques.”