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Favourable economic environment drives growth in emerging markets

Profitability continues to pose challenge, states Swiss Re.

Insurance in emerging markets has experienced strong growth over the past decade and the outlook for the next decade remains promising. Nonetheless, given the expectation of persistent low interest rates at least in the near future, achieving profitable growth will become increasingly challenging in emerging markets, according to the latest Swiss Re sigma publication.

Premium growth has been strong

Emerging Asia and Latin America contributed the most to emerging market premium growth in the past ten years. Many factors have driven this premium growth, including a sound economic environment, improvements in insurance regulations, product innovation, and a leveraging of multiple distribution channels.

In an attempt to encourage healthy competition, certain markets have reduced state involvement and taken insurance-enabling regulatory measures. Product innovation has also driven fast-paced growth in certain insurance segments, including microinsurance and takaful. The use of multiple distribution channels has also helped insurance to reach a broader audience in emerging markets.

Bancassurance, for example, a concept that was virtually non-existent prior to the year 2000, has gained importance in many countries, especially for the distribution of life insurance. Its rapid growth has been driven mainly by regulatory reforms in key emerging markets including China and India.

Amit Kalra, the other co-author of the sigma study, said: “In India, bancassurance premiums made up 22% of new business premiums for private sector players in 2010. With a growing middle class and over 70,000 bank branches, bancassurance in India has plenty of room to expand.”

Despite strong premium growth, profitability poses a challenge

Although insurers in emerging markets have seen stellar premium expansion, achieving profitable growth is far from the norm. For example, in non-life markets, 49% of all non-life insurers in the sample emerging markets recorded negative underwriting margins (underwriting results divided by direct premiums), with around 36% of non-life insurers reporting margins in the range of 0% to 10%.

Low profitability may indicate an overly aggressive focus by insurers on top-line growth rather than profitable growth. The Swiss Re study examined profitability in emerging markets, and explores whether ownership structure, affiliation with financial conglomerates, or economies of scale can tilt profitability upward.

Outlook: strong growth and fierce competition

Between now and 2021, more than half the growth of the global economy is expected to come from emerging markets. Non-life insurance premiums in emerging markets are foreseen to grow more than twice as fast as in industrialized countries.

Even though they face strong competition from domestic insurers, many international insurers plan to actively pursue opportunities in the rapidly growing emerging markets. Banks are also likely to leverage their branch networks to further penetrate these markets. However, with interest rates expected to remain at low levels for an extended period of time in both developed and emerging markets, insurers will find it increasingly difficult to achieve profitable growth.

Creating a favourable environment to improve profitability

“Going forward, insurers will need to place great importance on professional and disciplined underwriting to benefit from the healthy growth outlook in emerging markets and operate on a sustainable basis. Capital management will also be vital to support growth and comply with tightening solvency requirements,” added Kalra.

Policymakers can play a strong role in strengthening private sector incentives by devoting sufficient resources to the legal, educational and regulatory infrastructure. They can also support insurance-specific efforts by allowing private pensions, making health or workers’ compensation insurance compulsory, and introducing and enforcing other obligatory lines of business. Compulsory third-party liability insurance, for example, ensures that funds are available to compensate accident victims, and compulsory earthquake insurance helps to avoid adverse selection.

To read more about emerging economies in Canadian Insurance Top Broker’s BRIC Report, click here.