November 14th, 2012

Growth Potential in Developing Markets

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President

Positive premium growth trends in developing markets are expected to be sustained over the next decade. During this time, emerging markets are expected to drive global economic growth, and foreign direct investment in these emerging regions is likely to increase. In Brazil alone, investment in infrastructure is expected to amount to USD550 billion over the next few years as the country prepares to host the soccer World Cup in 2014 and the summer Olympics in 2016. China and India too are expected to continue to see robust growth in the next ten years.

Such expansion creates demand for a wide range of insurance and protection products. Moreover, further opportunities remain as much of the growth potential remains untapped. Although growth in the insurance sector has been notable in emerging market regions over the last few years, premium per capita and the insurance penetration rate as a percentage of GDP is still relatively low. In 2010, non-life premium per capita and insurance penetration rate as a percentage of GDP in emerging markets was USD49 and 1.3 percent, respectively, according to Swiss Re. This is well below the USD1,458 and 3.6 percent in industrial markets, emphasizing the growth potential in developing markets.

Swiss Re estimates that non-life premium compound annual growth rate (CAGR) from 2011 to 2021 will be 6.4 percent in emerging markets, with developing Asian markets growing at a CAGR of 8.3 percent. This is an impressive growth rate when compared to an estimated CAGR of 2.6 percent for industrialized countries. The highest growth in premiums and insurance penetration is expected to be in China. Swiss Re predicts China will become the number two non-life market in the world by 2021 (see Table 1).

Table 1


As insurance demand continues to grow in these regions, the risks of operating outside established markets will also increase for (re)insurers. Insurance companies writing business that protects new construction in particular will need to be cautious with accepting risk because much of this new construction in emerging nations has moved into previously undeveloped high catastrophe risk zones.

Companies expanding their business in these regions therefore need to ensure they fully understand the impact of penetrating cold spots or traditional non-peak zones on their overall business. One way to identify and manage these risks is by implementing and adhering to stringent ERM frameworks. (Re)insurers also need to understand their exposures as they expand into new territories. Catastrophe models play an important part in this process, but, as discussed in the next series of posts, there are several challenges to overcome.

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