Considerations for Market Entry
For (re)insurers considering entry into an emerging market, several developments should be monitored in the regions under consideration. Is there a growing need for infrastructure and commercial/industrial insurance for transportation, utilities and agribusiness industries? Is there a prospect for deepening insurance penetration, especially in personal lines, as the population’s disposable income grows? Are income levels growing, allowing the purchase of “middle class” lifestyle products that require insurance? How is longevity increasing and creating new/additional insurance needs?
As outlined above, there are many reasons why (re)insurers might pursue a growth strategy by expanding into a particular overseas market. Successful expansion into the region, however, will require a thoughtful approach to understanding local customs, markets, legal issues and regulations. Ensuring overall strategic fit and the ability to mobilize local resources and talent that understands how to tread in the local environment are key success factors. An integrated approach should consider strategic, capital, risk, operational and talent implications of the value proposition.
Before a (re)insurer enters a new market, there are several key considerations that need to be evaluated to understand potential growth opportunities. Potential market entrants need to understand the reputational risk issues, ensuring that the country has a sound economic environment and lower inflation levels. This assurance is achieved through an understanding of the factors for measuring economic conditions and having a commitment to maintain the measurement process. The (re)insurer needs to ensure that the regulatory environment permits foreign investment mobility and that the company’s governance/compliance approach is adaptable to the emerging regulatory environment. Importantly, the company needs to have an understanding of the overall risk exposure in the market to help achieve the right strategic fit.
Potential market entrants need to have an achievable operational model. They should be able to leverage multiple distribution channels and related costs and technologies. (Bancassurance and other alternative distribution networks, such as “affiliations,” are growing in these markets.) The ability to innovate product offerings should be considered. Though traditional products continue to be a focus, the ability to create new products that specifically appeal to local needs is important. Companies that are the first-movers into a market may be able to achieve fast-paced growth in areas such as microinsurance or index-based weather insurance, for example. These types of products may tie in with local dynamics by contributing to a transformation of the culture, perhaps by promoting financial literacy where it is needed. Companies need to be able to tap into the right talent and resources. Having an understanding of and ability to navigate local market dynamics, not only from an underwriting but also an operational/regulatory point of view, is essential.
Once the market is understood and the company has assessed its strategic fit, decisions must be made on the optimal methodologies for how to enter the market. The form of entity that the (re)insurer assumes is a key success factor. Local market knowledge and leverage of an existing distribution network may provide a competitive advantage to those companies that acquire domestic/established players. There may be higher start-up costs and a longer break-even period for newly established companies. The final choice of method will be determined by best strategic fit for the (re)insurer and on available opportunities:
- Acquisition of a local company
- A joint venture with a local company
- Establishment of microinsurance facilities
Fresh start company (branch/subsidiary)
- Local reinsurance may provide an initial entry point in order to gain market knowledge prior to expansion of a full insurance footprint.
Ultimately, delivering on a more meaningful strategy and generating solid results will require evaluation within an overall enterprise risk management and economic capital framework. Assessing risk exposure enterprise-wide and understanding capital efficiency implications within a firm’s capital architecture will be an important consideration if the emerging market strategy is to drive measurable, value-accretive growth/shareholder value.
Guy Carpenter, a leading global broker, is uniquely positioned to help its clients analyze and consider potential entry into attractive growth markets. As a member of the Marsh & McLennan Companies, we are part of a global network of professional services firms that provide analysis, advice and transactional capabilities to clients in more than 100 countries. We combine a mastery of fundamentals in global risk and capital strategies with local market knowledge and relationships to position our clients for success.