Asia potential powerhouse for insurers
The inaugural Asia Pacific Insurance Conference is in Singapore on 18-20 October at Raffles City Convention Centre, Singapore. Adelaide-based HWL Ebsworth partner Anthony Hillary outlined some important issues affecting Asia Pacific markets when he moderated a panel session at the AILA National Conference in Adelaide last year. This is an edited version of some of his remarks during the presentation.
The Asian century has dawned.
The phrase "Asian century" is said to have arisen in the mid-to-late 1980s. Twenty years later, it is incontrovertible that the growth of economies in Asia and the Asia Pacific has been prolific, arguably shifting the global economic balance in favour of those regions.
Global economic power has moved away from the established, advanced economies of North America, Western Europe and Japan, a trend that will continue over the next 35 years.
China overtook the USA in 2014 to become the largest economy in purchasing power.
It is projected that India could have the potential to overtake the US as the world's second largest economy by 2050.
In 2014, India, the third biggest economy in the world, was 50% larger than the fourth biggest, Japan.
Indonesia, Australia's closest foreign neighbour, a country with a population of 250 million, is predicted to rise from the ninth largest economy to fourth.
In 2014, Australia was the 19th largest economy, but is predicted to drop out of the top 32 largest economies by 2050.
As a consequence of this change, rising incomes and living standards across many less-developed economies, particularly in emerging Asia, will multiply the potential market for every commodity, manufacture, service and technology. Currently, about 78% of Australian exports go to Asia, where most economies are closely integrated with China; 36% go directly to China. The Australian and Chinese economies are intertwined and will become more so in the immediate future.
The rate of economic trade and activity between Australia and the region will significantly increase in volume and as a percentage of GDP.
These changes will affect the insurance industry. So the question is: what does this all mean for insurers now and in the future?
As Asian populations become older and richer, that means plenty of business for insurers.
The region's middle class is expected to balloon from 525 million in 2009 to 3.2 billion in 2030. Household wealth will double by 2025.
In terms of insurance, in 2013, premiums in Asia grew by 7.3% compared to 1.4% in Europe and a decline in North America. Despite that, Asia remains woefully underinsured.
Western countries typically spend 7%-8% of GDP on insurance. In 2013, Asian countries, excluding Japan, spent only 3% on average. That is all the more inadequate given that governments have no plans to develop a material, much less robust, public safety net. Alternatively, governments are opening their insurance markets.
China wants 5% of GDP to be spent on insurance by 2020, up from 3% today.
A list of the 34 largest insurers in Asia is filled with organisations with which I have no familiarity, including the largest, Ping An Insurance. But for Japanese insurers, like Sompo and Tokio Marine, the only other familiar brands with significant market penetration were Suncorp and QBE which were respectively ranked 24th and 29th.
Despite challenges, the global insurance market has its sights firmly focused on significant expansion in the Asia Pacific market. The potential gains from entering the relatively grass-roots market are enormous, if not historic.
In entering the market, insurers are grappling with significant cultural, regulatory and practical differences and inconsistencies. It seems plain that industries are not keeping up with the apocalyptic change.
Mike McGavick, XL Catlin Group CEO, has said the industry has struggled with globalisation and dealing with different regulatory systems around the world, which act as a significant impediment to the industry's ability to profit from global growth. Its hesitance to deal with the volume of data and engage with evolving economies is a tremendous challenge.
Globally, we have seen tremendous consolidation in the insurance market, particularly with mega-mergers of Chubb/Ace and XL Catlin.
Ace and Chubb have participated in a $29.7 billion merger. Perhaps coincidentally, the Asia Pacific head of the merged entity sits in Singapore.
In Australia, we have seen the arrival of Berkshire Hathaway, both directly and through its significant investment in IAG, purportedly with a view to tapping into existing IAG distribution networks in the Asia Pacific region.
In some sections of the market, there is a bias towards control of operations investing in Sydney. In other cases, regional head offices are being based in Singapore.
The Australian middle and upper market has been significantly infiltrated by market arrivals and that has diminished the presence of traditional Australian general insurers that have only a slight presence in Asia Pacific markets.
This has resulted in tension and transfer of corporate knowledge and capacity, in some instances away from Australia and into the regional centres of Singapore, Hong Kong, Shanghai and Macau.
Globalisation has increased the frequency and prevalence of international service providers – brokers, adjusters and legal service providers – and brands have endeavoured to respond by being more global and servicing clients in a boundary-free way.