Fifteen years ago, Lloyd’s established its Asian underwriting base in Singapore.
Since that time, Lloyd’s has continued to enjoy significant growth in Asia. “Singapore’s been successful as a regional platform for Asia-Pacific because it’s got a very pro-business environment, a regulatory environment which is very similar to what we have in the London market, English is the first language, it has an open-door policy for foreign expertise and labour, and it has a good legal framework which, of course, Lloyd’s underwriters prefer for certainty,” says Kent Chaplin, Lloyd’s general representative in Singapore.
Chaplin tells Insurance Business, “The non-life industry in Asia-Pacific has grown 10% annually over the past decade, and the regional business written from Singapore in the last 13 years has quadrupled. We started underwriting in 2000 with two syndicates, and we now have 19 managing agent service companies in Singapore writing about US$630m. We’ve done all that in 15 years, and with 380 people now here in Singapore it’s become, well and truly, our regional hub for Lloyd’s.”
But Chaplin adds that 90% of the business Lloyd’s writes from Singapore is offshore business. “Whilst there’s a very strong domestic market in Singapore, only 10% of our income is actually Singaporean business,” he says. “We are here, as are our competitors, to write international business.”
The global insurance industry’s interest in Asia continues to increase, evidenced by the recent announcement of IAG
and Berkshire Hathaway’s new strategic relationship. IAG
has said the deal significantly strengthens its capital position, enabling the group to pursue growth opportunities, including those in its six target Asian markets of India, Thailand, Malaysia, China, Vietnam and Indonesia.
Changing economies and growing populations
So precisely what’s going on in the region that’s increasing its appeal to Australian insurance businesses? Grant Peters, a partner at Ernst & Young Australia leading the Oceania insurance team, says low insurance penetration rates in the region represent a significant opportunity, noting that eight of the world’s 17 most underinsured countries are in Asia. Scott Guse, an audit partner for KPMG Australia in the insurance field, also speaks to the opportunities that present as a result of low insurance penetration. “If you take India, general insurance penetration is about 1% of their GDP [and] China 2%,” Guse says. “There is limited product at this point in time. Most general insurance products are motor vehicle-oriented only. There is very limited house, public liability, workers’ comp, health insurance …”
On top of low insurance penetration, population and economic growth in the region is very significant. It’s expected that, by 2030, 64% of the global middle class will reside in Asia, and the continent will account for over 40% of global middle-class consumption. By that time, it’s expected that China alone will have a middle-class population of around one billion.
“That population change is going to have pretty significant implications for the world overall,” Grant Peters says. “That goes to any product or service provider thinking about Asia … The middle class will demand a whole range of new services, including financial services and insurance. It’s going to be very hard for an Australian insurer to ignore those macro dynamics.”
According to Peters, Asia will have half of the world’s motor cars in 10 to 15 years’ time.
“The volume of people with more assets than they used to have before naturally means that more people want to protect those bigger assets,” he says. “Insurance just naturally comes into play.”
On the commercial lines side, he says GDP growth, larger and more complex businesses, and urbanisation will bring to Asian markets additional insurance exposures.
The regulatory landscape
And while growing economies demand more insurance, other significant changes are starting to make some Asian markets more conducive to a heightened Australian presence. Scott Guse mentions ownership structures. “When you look at Asia, there are different ownership structures that apply in different regions. Some are capped at 49%, such as Thailand, Indonesia is about 80%, whereas somewhere like Malaysia is 100% …
“But what we’re seeing is an aggressive opening up of those caps. [India] was 26%. They’ve now changed that to 49% foreign ownership allowed. That only changed late last year, and what we’ve seen in the Indian market is that about 25 new entrants have come in in the last six to nine months.
“As ownership structures free up a bit more, that does create opportunities, and I can only see local participants wanting more and more to partner with foreign players, including Australian institutions, because there’s a lot that we can offer them in terms of new technology, new distribution channels, experience [and] data analysis capability and technology.”
Peters says: “Government
s, historically, have found themselves an insurer of last resort effectively. But governments can’t afford to do that when population wealth increases, because the size of the potential losses from events get too big … Therefore, the government turns to the private sector to bridge that gap through insurance. And that’s what we’re starting to see. We’re starting to see different Asian governments relax the marketplace for domestic insurers, but also open up the market to overseas insurers too.”
Guse says inroads have been made with respect to strengthening regulations across the region. “It will be a long wait before they get anywhere near the regulation structures that we have in place in Australia, but the more regulation there is, I think the better it is for insurance companies to operate in, as there’s more stability and certainty over the way they can do business there.”
Similarly, Peters sees regulatory environments in Asia as more ready for overseas insurers now than was the case not long ago. “We’ve seen in the last five years quite a lot of change in regulations open up insurance markets. It would have been a little more difficult to enter Asian markets up until the last five years or so.”
Some of the changing regulations have been around the cost of insurance. “There’s been a lot of regulation around pricing in a lot of Asian markets, and, in some markets, the pricing is actually quoted by the government,” Guse says. “That is starting to ease up a bit, and we’ve recently seen Malaysia de-tariff their motor premiums. So instead of the government setting what you can charge for a motor policy, companies themselves are now being given that flexibility and freedom to price motor policies according to risk profiles.”
The ASEAN nations
Then there’s the ASEAN (Association of Southeast Asian Nations) initiative. “Indonesia, Malaysia, the Philippines, Singapore, Cambodia, Myanmar, Vietnam, Brunei, Laos and Thailand make up the ASEAN,” Kent Chaplin says. “These 10 countries are looking to agree on a multilateral free trade agreement and set up an ASEAN economic community not dissimilar in principle to the European common market. End of 2015 is the target date to establish the principles to ensure the free flow of goods and services, and significant progress has already been made, particularly in trade and manufacturing.”
Chaplin says, on the financial services side, it appears there will be a slightly longer gestation period. “It’s looking more to 2020. But we will certainly see changes, and there’s been talk of a relaxing of trade barriers to allow the cross-border movement of insurance and reinsurance in the natural catastrophe space.
“The ASEAN is forecast to be the fourth largest market in the world, and you’ve got countries such as Indonesia, which has 250 million people – half of which are under 30 – with a vastly growing middle class [and] an increasingly well-educated workforce. In the ASEAN countries, there is an abundance of natural resources, such as oil and gas, minerals, commodities; and, of course, all 10 countries are within striking distance of Singapore. It makes it a fantastic opportunity.”
In Singapore itself, a major change has recently occurred, which Chaplin says has further cemented Singapore as the Lloyd’s hub in the region. “The regulator has approved Lloyd’s to be able to subdelegate its underwriting authority, which means the 19 service companies based in Singapore, which are wholly owned by their London managing agents, are able to delegate underwriting authority to intermediaries (Lloyd’s cover holders) in Singapore and overseas, which we expect to be a significant contributor of revenue to the market.”
Chaplin says the change means Australian insurance intermediaries, who can already access Lloyd’s capacity in Singapore, can now have that capacity delegated to them to underwrite on behalf of the Lloyd’s members. He also says it means there’s an opportunity for Australian intermediaries to base themselves in Singapore as Lloyd’s cover holders. “For those Australian intermediaries, particularly in the specialist insurance market and who want to access Asia, they can do so through Lloyd’s in Singapore because the Lloyd’s service companies can also delegate authority to cover holders inside Singapore. That’s quite a big shift for businesses looking to grow outside Australia.”
Taking the opportunities
Katherine Simmonds, managing director of Ironshore in Australia, says Ironshore’s partnership with Fosun International Ltd will help it continue building its brand in Asia. In May, it was announced that Fosun would acquire the remaining 80% interest in Ironshore that it didn’t already own. “We see this as a partnership opportunity with enormous potential,” Simmonds says. “With over $30bn in assets across its investments, Fosun opens up a whole range of new markets for Ironshore.”
Ironshore already has offices in Singapore, Hong Kong and Tokyo, but Simmonds says it sees great further growth potential in both its existing and new Asian markets. “At the moment, we’re looking at Malaysia as one additional country in Southeast Asia. We’re also looking to expand our Hong Kong operation quite significantly, alongside Fosun,” she says.
Speaking about some of Ironshore’s specialty products, Simmonds says the company is seeing substantial growth in Asia in mergers and acquisition insurance. She adds: “Another product that we’re seeking to grow across the Asian region, country by country, is political risk and trade credit. We already have a strong presence in that product in Australia and also in Asia, and we’re seeking to leverage that across the Fosun network, and also to partner with local marketplace participants, such as the brokers, to really expand our offering in that product.”
Peters expects more Australian insurance companies to move into Asia within the next few years. “Economic growth, the middle-class growth, and the underinsurance gap, I think … will naturally lead Australian insurers to think more about Asia … Our local market is quite mature, so insurers will look for new areas for growth … Those kind of dynamics, I think, all add up to point to Asia.”
Know the markets
Both Peters and Guse single out China and India as future big insurance markets. “The sleeper is probably Indonesia, as far as the size of the opportunities,” Peters says. “But you then need to very much be aware … each Asian country is very different and you need a specific market-entry strategy for each individual country. You can’t really treat Asia as a collective, from that perspective. There’s always uniqueness around regulation, the level of existing competition, and culture. Culture’s very important, particularly around how insurance is positioned and sold.”
Chaplin agrees that it’s critical for Australian intermediaries to take the time to understand each individual local market into which they intend to move. “The risks here are so price-driven, you need to be close to the risk to really select the business you want to write, and to be able to price effectively,” he explains. “You also need to exercise underwriting discipline, so you’ll need to be able to walk away from risks that aren’t priced adequately or that don’t meet your risk appetite.
“To be able to find the business that you want to write, and write it profitably, you need to be on the ground, you need to understand the local markets, you need to invest in those markets in terms of time and resources and data.”
Additionally, Guse highlights the sovereign risk of which Australian businesses venturing into Asia need to be aware. “I know a number of companies that have had tax laws changed on them because countries needed to meet their budgetary requirements … One country changed its tax laws on 30 November so that it could achieve its budgeted position by the end of December.
“What goes with sovereign risk is the ability to get money out of countries once you’ve invested in those countries … In some of the smaller countries, it’s hard.”
Guse and Peters also say it’s important that businesses are prepared to stick it out for the long term if a move into Asia is planned. “I would say, if you’re going to invest in Asia, it’s a long-term investment strategy,” Guse says. “You can’t do it for the short term and expect to make a profit … You need to go into it with that frame of mind – that it’s an investment for the future [but] not the short-term future.
“Whilst there are a whole lot of opportunities, there are an enormous amount of risks that exist in [Asian] countries. You need to weigh up the cost benefits of doing business there.”