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February 12, 2014

Waves of Change in Rapid-Growth Markets

Summary:

While investment in rapid-growth markets will continue to be vital for global insurance firms, outsized returns will not come easily. Strategies must be tailored to particular economies and their cultures.

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Global expansion into new markets represents a powerful opportunity — especially as economic performance languishes in much of the developed world. As a result, insurance executives must regularly evaluate and refresh their strategies to identify which international markets are most likely to offer the best prospects.

As regional markets around the world become more connected and complex, however, understanding how best to optimize the balance between opportunities and risks in individual countries remains a significant challenge. Even in a world linked closer together by macroeconomic trends, mobile phones and the Internet, regulatory and cultural differences persist, and even nations that share a common border may diverge markedly when it comes to future risk.

To help executives better understand the rebalancing now taking place across the insurance landscape in rapid-growth markets, we will highlight growth opportunities in specific countries around the globe.

While once-flourishing BRIC economies Brazil and India are now expanding at a slower pace, the U.S. is rebounding, and the U.K. and the Eurozone are at last rising from their doldrums. At the same time, a cluster of emerging markets, such as Malaysia, Indonesia, Mexico and Turkey, are making regulatory changes that could produce significant opportunities.

These shifts are causing insurance executives to reassess their strategies to determine which rapid-growth markets (RGMs) represent the most attractive investment options. To help navigate this rapidly evolving landscape, EY has created a matrix that analyzes the risks and opportunities for insurance firms across 21 RGMs. Our study identifies the following RGMs as particularly attractive for insurance investment:

Turkey offers a greater level of opportunity than any other RGM in the study but also poses substantial risks. An economic downturn cannot be ruled out. While political turmoil has cooled in recent months, tensions could return. In addition, markets for some lines of coverage are relatively mature.

Indonesia also offers an extremely strong economic growth picture — second only to China and Vietnam in our forecasts. However, it is challenging to obtain licenses, so acquisition is the main entry route.

China, despite a recent slowdown in growth rate, continues to boast extraordinary income growth that spurs auto and home ownership. In addition, an aging population will drive the development of the life and health markets. However, market entry remains difficult for foreign firms.

Malaysia offers an attractive mix of demographics and strong economic growth and has become a base for the development of takaful, sharia-compliant insurance.

Hong Kong (a special administrative region of China) ranks low for opportunity but presents less risk than any other market in our study. Hong Kong can also serve as a trade route into the rest of Asia.

The United Arab Emirates (UAE) has become the fastest-growing insurance market among the Gulf States, with a compound annual growth rate (CAGR) of 17% over the past six years. Regulatory changes may create greater opportunity for expansion of takaful products.

Our analysis does not merely focus on markets with the highest opportunity and lowest risk but provides a more nuanced picture of the shifting landscape. Depending on a firm’s appetite for risk, a second tier of RGMs also shows considerable promise:

Brazil remains an important opportunity, though slowing growth rates have revealed festering economic risks. Following a program of liberalization, Brazil is the most accessible of the BRICs for foreign insurance companies. Brazil’s key advantage is scale: Of the markets in our study, it has the third-largest forecast growth in insurance premiums in US dollar terms, following China and India. Moreover, record new car sales are propelling robust growth for automobile lines.

South Africa follows Brazil with the fourth-largest absolute growth in insurance premiums. In addition to scale, South Africa may be a good trade route into sub-Saharan Africa, as South African companies have been among the most successful in penetrating other African markets.

Vietnam has become one of the most exciting RGM opportunities. Its income growth and premium growth rates (when considered in percentage terms) place it among the top two markets we assessed. But investors face significant corruption and sovereign risks when entering Vietnam.

Mexico has undergone a program of extensive liberalization, opening its market to foreign insurers. On some measures, Mexico is the most open insurance market in our study. Yet the pace and unpredictability of regulatory change can be risky for investors.

India’s opportunity is impossible to ignore, given that it is second only to China in terms of absolute forecast growth in insurance premiums. Yet, the regulatory environment has proved extremely challenging for investors. In addition, a large current-account deficit and reliance on portfolio capital inflows elevate liquidity risks.

Our analysis suggests that while investment in RGMs will continue to be vital for global insurance firms, outsized returns will not come easily. Companies that carefully tailor products and develop market-entry strategies suited to particular economies and their cultures will see the greatest rewards.

Key factors influencing market selection

When investing in RGMs, insurance executives will want to carefully consider four important waves of change:

1. The speed of regulatory change.

Some RGMs, such as South Africa and Mexico, are moving quickly to adopt new insurance regulations and may surpass advanced economies in the stringency of their risk-based regulation or consumer-protection requirements.

2. Customer adoption of insurance products.

The rise of social media and the growing popularity of overseas educational experiences are among the forces breaking down traditional barriers to insurance penetration. Many markets where traditional cultures tended to limit adoption of insurance products, such as Vietnam and Saudi Arabia, are now experiencing rapid premium growth.

3. Government fiscal policy.

Offering tax incentives for insurance products can significantly affect how customers choose savings and pension services. At the same time, a lack of confidence in public pension and welfare schemes can encourage adoption of private insurance alternatives.

4. Government attitude.

In most RGMs, the government considers the insurance sector strategic. This is in part because of the crucial role insurance plays in facilitating savings, investment and entrepreneurship. Understanding the government’s goals for the sector’s long-term development is therefore crucial. Some governments will focus on the potential growth benefits of insurance development and seek as much foreign expertise as possible in developing the insurance sector. Others will wish to have the insurance market dominated by domestic companies over the long term.

Download the full report here: Waves of change: the shifting insurance landscape in rapid-growth markets

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