As (re)insurers are challenged to deliver healthy, accretive returns in maturing and increasingly competitive markets, emerging markets present growth opportunities that may not be found in the United States or Europe. Regulatory challenges, tightening reserve levels and capital requirements, coupled with volatile global economies and a low interest rate environment, are forcing companies to seek non-traditional or emerging growth strategies.
As economic and sociopolitical conditions generally continue to stabilize and as investments in infrastructure increase, emerging markets have increasingly been viewed as a viable investment for companies seeking long-term growth. Latin America, the Middle East, Asia, Africa and Eastern Europe all offer opportunities with varying degrees of maturity, stability, industrialization, regulatory freedom and a growing middle class.
View of the Regions
An exploration of various emerging markets around the world reveals the trends that enhance certain regions’ potential and those that present challenges. A scan of the overarching factors in the regions that have appeared on (re)insurers’ radar screens needs to be combined with a close-up view of specific countries’ status and prospects for the future.
The building and investment program that drives growth in the Middle East has received much attention. The growth is expected to reawaken in 2013, following the events of the “Arab Spring” and the global recession’s impact. (Re)insurance demand is growing as compulsory lines are being introduced, regulation is increasing and energy cover premiums, previously exported to foreign reinsurers, are insured domestically. Local insurers are beginning to retain more on energy risks.
Discussion of the Asia market tends to be dominated by China and India. The region as a whole, however, is quite diverse. Each country has its own opportunities and challenges and is at a different stage of development. With insurance penetration rates often lagging behind gross domestic product growth, strong insurance revenue growth is likely in China, India, Indonesia, Malaysia, the Philippines, Singapore and Vietnam.
Africa continues to grow at a fast pace, has been widely unaffected by the global economic downturn and its consumption of life and non-life insurance products is increasing steadily. The potential for future growth within is dramatic - though there remain significant challenges to be overcome before Africa can realize its full potential. The giants of the African continent such as South Africa and Nigeria are home to sophisticated and highly competitive insurance and reinsurance markets. Today, many South African insurers are, with varying degrees of success, seeking growth across the region given the commoditized and over-traded domestic environment. However, barriers to entry remain high in many African countries due to inconsistent and continually evolving legislative environments. High levels of poverty are contributing to low insurance penetration, which has led to significant growth in micro-financing, and in turn, micro-insurance products for low income consumers in poorer African countries. Life and agricultural insurance products have led the penetration of these markets to date.
Generally, insurance penetration per capita in Central and Eastern Europe (especially those countries to the south and east) is still comparatively low compared to Western Europe, so it continues to be attractive to investors. However, the current Eurozone crisis has led to stagnation and contraction of premiums in many of the countries. As in the Middle East, there is a trend towards increasing requirements for compulsory insurance, especially in those countries that sit within the European Union. A growing demand for certain casualty specialty classes of insurance is driving greater demand for reinsurance for these classes.
In comparing the various emerging market regions, a region that stands out today is Latin America because of its large size, increasingly stable economic and social environments, diverse trading partners and rich supply of natural resources.
Despite the slowing effect of the recent global recession, foreign investment into the Latin America region and investment from within are both mitigating the recession’s impact. However, there are pockets of exceptions within Latin America, as some countries continue to experience volatile economic conditions and uncertainty resulting from sociopolitical unrest. And compared to the other emerging market regions, Latin America’s insurance market is larger than those of Central and Eastern Europe, Africa, the Middle East and Central Asia. Only the Southeast Asia market is larger, at approximately two and half times the size.
In 2010, it is estimated that 583.7 million people, or 8.4 percent of the world’s population, lived in Latin America. Further enhancing the region’s attractiveness, the region produced 7.5 percent of the world’s gross domestic product in 2010, but its share of the insurance industry is much lower, at only 2.95 percent of the world’s premium volume. Brazil and Mexico generate the largest premium volume based on their sizes relative to other countries in the region.
Another advantage offered by the Latin American market is its relatively deregulated and open business environment compared with other emerging markets around the world.
Additionally, Latin America is being drawn into the spotlight as Brazil “takes the world stage” and attracts considerable attention. Brazil is set to host the 2014 World Cup and the 2016 Olympic Games. The presence of both these events in Brazil is a statement on the stability of the local economy and major investments in new and improved infrastructure. These developments have spurred strong internal demand for insurance products.
Latin American countries are mobilizing their natural resources. Brazil’s growth in oil revenues is enabling reinvestment in infrastructure, education and telecommunications. This investment, along with an environment of political and social stability, is creating a socio-economic shift in demographics in the coming decade.
The opening of the Brazilian insurance market, however, has not been without growing pains. Implementation of Resolutions 224 and 225 reflect an effort to fine-tune the market by regulating premium flow to remain largely inside the country. The goal is to help build the insurance industry. The loose monetary policies of more affluent countries have recently been met by Brazilian capital control measures and monetary policy in an effort to prevent the overvaluation of the real (Brazilian currency).
However, a challenge exists in the entire region to maintain a balance between a healthy development of domestic demand/consumption versus export of produced goods, as well as the balance of government investment versus business investment.
These developments reflect the delicate challenges in an interconnected global economy, as well as the growing confidence of Brazil to emerge as a strong, sovereign player.
As large as Brazil is, however, it is not the only growth opportunity in Latin America. The whole region, as discussed earlier, offers potential as well. There is a host of factors driving growth in the region that warrant the attention of (re)insurers seeking to pursue emerging markets.