A look at some rapidly growing general insurance markets in Asia

Transcription

1 A look at some rapidly growing general insurance markets in Asia Prepared by John Tucci and Verne Baker Presented to the Institute of Actuaries of Australia Biennial Convention September 2007 Christchurch, New Zealand This paper has been prepared for the Institute of Actuaries of Australia s (Institute) Biennial Convention The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council is not responsible for those opinions. John Tucci and Verne Baker The Institute will ensure that all reproductions of the paper acknowledge the Author/s as the author/s, and include the above copyright statement: The Institute of Actuaries of Australia Level 7 Challis House 4 Martin Place Sydney NSW Australia 2000 Telephone: Facsimile: [email protected] Website:

2 A look at some rapidly growing general insurance markets in Asia Section Page 1 Introduction 1 2 Overview of general insurance markets in Asia 2 3 China 9 4 India 28 5 Vietnam 46 6 Conclusions 60 7 Reliances and limitations 61

3 A look at some rapidly growing general insurance markets in Asia Abstract The purpose of this paper is to provide an update to a paper that we prepared two years ago for IAAust s XVth General Insurance Seminar looking at the rapid development of general insurance markets in Asia and the opportunities and risks presented for foreign companies looking to enter these markets. At that time we noted the significant consolidation that had occurred in the mature Australian general insurance market and the active pursuit of offshore insurance company acquisitions by some of the larger insurers looking to sustain future growth beyond the limited opportunities available in the Australian market. Since that time there has been further consolidation in the Australian market, most notably with the Promina acquisition by Suncorp, and the market leaders Insurance Australia Group and QBE in particular, appear to be continuing their aggressive expansion through offshore acquisitions. Given the current very low insurance penetration rates and rapidly developing economies in the region, Asia continues to present a very attractive prospect for Australian and other foreign general insurance companies looking to secure the next stage of their growth. In this paper, we provide a summary of the current state of general insurance markets in key Asian countries. As was the case with our original paper in 2005, we have continued to focus on the burgeoning new insurance markets of mainland China and India where activity and growth is most rapid and exciting. While we update the status of the general insurance markets in these two most populous countries of the world, we also explore the Vietnam general insurance market which has really come alive over the last two years and looks set to compete with China and India as a key target market for foreign investors. In this paper, we present our view of the opportunities and challenges presented to foreign insurers who may be considering entering the China, India and Vietnam general insurance markets, either through greenfield operations, company acquisition or joint ventures. All views or opinions expressed in this paper are those of the authors and do not necessarily represent those of our employer. Keywords: general insurance, general insurance markets, Asia, China, India, Vietnam.

4 A look at some rapidly growing general insurance markets in Asia 1 Introduction We have both worked as consulting actuaries in the general insurance sector throughout Asia since While we are aware of the significant changes that have occurred in the Australian general insurance market over the last six years, there have also been noteworthy developments in Asia, including: improved economic conditions which have contributed to strong premium growth in the region, particularly in the undeveloped but rapidly emerging insurance markets of China, India and Vietnam; increased regulatory supervision of insurance companies and progressive (albeit slow) movement towards best practice operating principles by insurers; the removal (or implemented programs for the removal) of premium rate tariffs in many countries; and easing of trade barriers in a number of countries, allowing foreign investors to more easily enter markets through either establishing new operations or by acquiring a stake in established domestic insurers. These changes have not gone unnoticed by foreign general insurance companies in the more mature markets (Australia included) to the extent that there has been, and continues to be, significant capital inflows into the region from foreign players aiming to get a piece of the action in Asia. The purpose of this paper is to provide a summary of the current state of general insurance markets in key Asian countries with a focus on what we consider to be the key countries of interest for foreign general insurance companies at present, namely mainland China, India and Vietnam. We also present our view of the opportunities and challenges presented to foreign insurers who may be considering these markets, either through greenfield operations, company acquisition or joint ventures. 1

5 Billion USD A look at some rapidly growing insurance markets in Asia 2 Overview of the general insurance markets in Asia 2.1 Market size and growth Gross written premium volumes of general insurance business in the major Asian countries (excluding the developed markets of Japan and South Korea) in calendar year 2006 are shown below in USD with Australian data provided for comparative purposes. General insurance gross written premium (2006) Australia China Hong Kong India Malaysia Singapore Taiwan Thailand Vietman Indonesia Philipinnes Source: Swiss Re Sigma No. 4/2007 While written premium volumes are still low in most Asian countries in comparison to Australia, China is the exception with written premium in mainland China surpassing that of Australia for the first time in Market penetration As indicated above, general insurance markets in most Asian countries are presently small compared to Australia. This is further emphasised in the following chart showing two different measures of insurance penetration: market penetration defined as Gross written premium (GWP) as a percentage of gross domestic product (GDP) for each country ( region in the case of Hong Kong and Taiwan) and market density defined as GWP per capita. 2

6 Gross premium growth rate Insurance penetration (GWP/GDP) % GWP per capita (USD) A look at some rapidly growing insurance markets in Asia General insurance market penetration and density in Asia ,300 1, ,100 1, Australia China Hong Kong India Malaysia Singapore Taiw an Thailand Vietman Indonesia Philipinnes Insurance penetration Insurance density Source: Swiss Re Sigma No. 4/2007 General insurance markets throughout Asia remain relatively undeveloped in comparison to Australia under both penetration measures, particularly insurance density (premium per capita). While the nominal premium volume in China is higher than Australia, insurance penetration remains very low reflecting the large population in that country, although it is increasing quite rapidly as discussed in the next section. Given the fast pace of economic development that is occurring throughout the region, it is not surprising that foreign insurers are taking a keen interest in these markets for their growth potential. 2.3 Market growth As shown in the following chart, premium growth rates have been very strong in the less developed Asian markets, particularly in comparison to Australia which has experienced low growth rates since General insurance gross written premium growth rate 30% 25% 20% 15% 10% 5% 0% Australia China Hong Kong India Malaysia Singapore Taiwan Thailand Vietman Indonesia Philipinnes -5% Source: Swiss Re Sigma World Series

7 2.4 Regulatory developments in the general insurance markets of Asia While the insurance regulators in a few Asian countries (notably Singapore and more recently Malaysia) are well advanced in implementing regulatory reform in the general insurance industry, regulators in many countries are still developing their supervisory roles in a number of areas as discussed below. Capital and solvency management In some countries, the capital and solvency requirements are based on simplistic premium and claim formulae without regard to the specific circumstances of each insurer. However, the recent trend has been that countries are starting to adopt (or are considering) more sophisticated capital and solvency management regimes. For example, as illustrated below, some countries have implemented or foreshadowed risk based capital (RBC) requirements. The Philippines China Vietnam India (under consideration) Thailand (under consideration) Hong Kong (under consideration) Taiwan Malaysia Australia Singapore Indonesia Traditional premium/ claim method Pending RBC system Risk - Based Capital Monitoring of policy liability reserve adequacy While some countries do not set specific reserving guidelines or require actuarial monitoring of liabilities, this is changing quite rapidly with a trend towards compulsory actuarial certification being required as shown below. This is leading to more employment opportunities for actuarial professionals in the general insurance sector. The Philippines Indonesia Thailand (under consideration) Vietnam Malaysia Taiwan China India Australia Singapore Hong Kong No reserving standards Pending introduction Mandatory actuarial sign - off Mandatory actuarial certification of policy liabilities is now a requirement in Australia, Singapore, Hong Kong, India, China, Malaysia and Taiwan. China and Taiwan introduced actuarial certification requirements in 2006 and Malaysia in In Hong Kong, actuarial certification remains limited only to the statutory lines of employees compensation and motor liability. Singapore and Australia were previously the only countries that required certification of policy liabilities at a 75% level of sufficiency but Malaysia has now also introduced a similar requirement. 4

8 For the countries that have actuarial certification requirements, the level of regulatory review and enforcement appears to vary by country. For example, regulatory review in Singapore is very stringent but this does not appear to be the case at present in India, most likely due to a lack of appropriately qualified resources at the Indian regulatory body. Promotion of best practice operating principles In the past, general insurance companies in Asia have tended not to embrace best practice operating principles to the same extent as those in more developed markets such as the USA, Europe and Australia. For example, the use of technical/statistical based premium rating processes such as predictive modelling tend to be quite rare in Asia and tend to be used mainly by foreign insurers who already have these skills through their head offices. This trend appears to be now slowly changing due to the influence of regulators in many countries who are encouraging insurers to embrace best practice principles, particularly in the areas of corporate governance and risk management. Apart from Australia, Singapore appears to be the most advanced in this regard although premium rating practices appear to still be rather rudimentary even in that country in many companies. Easing of foreign investment and participation restrictions While a number of Asian countries still restrict the participation of foreign companies in their general insurance industries, many have significantly eased foreign investment restrictions in recent years. As a result, the market share of general insurance business by foreign insurers has been steadily increasing in most markets. The following table summarises the current foreign investment restrictions that apply in each market. Country China Hong Kong India Indonesia Malaysia Philippines Singapore Taiwan Thailand Vietnam Investment restriction New companies can be established with 100% foreign ownership, however foreign shareholdings in domestic companies are restricted to no more than 51%. No foreign investment restrictions. Fully owned foreign companies are not allowed. Foreign participation is allowed through a joint venture with a local partner only and the foreign stake is currently limited to 26%. This has been foreshadowed to increase to 49% but no set timeframe has been set for the change. Wholly owned foreign companies are not allowed. Foreign companies can own up to 80% of an insurance company. Companies with currently more than 51% foreign ownership are required to sell down to no more than 51%. Companies with less than 49% foreign ownership can increase foreign shareholdings to 49%. New company licences are not currently being approved. No foreign investment restrictions. No foreign investment restrictions. No foreign investment restrictions. Full foreign ownership is not allowed. Foreign investors can hold up to a 25% share of an insurance company. New company licences are not currently being approved. Wholly owned foreign companies and joint ventures with domestic companies are allowed. Foreign companies may acquire a shareholding in a domestic State owned company subject to the government initiating this. 5

9 Removal of premium rate tariffs While premium rate tariffs on general insurance business are still common in Asia (especially for major lines of business such as motor and property/fire), there has been a trend in the region in recent years to removing tariffs and allowing free markets to operate. China and India are the most recent countries to remove tariffs. The following table summarises the current state of tariff markets in a number of Asian countries/regions. Country China Hong Kong India Indonesia Malaysia Philippines Singapore Taiwan Thailand Vietnam State of tariffs deregulation Tariffs have been removed on all lines except motor third party liability but motor premium rates remain subject to regulator approval. Fully deregulated no tariffs. Recently de-tariffed all lines of business on 1 January 2007 other than Motor third party liability which remains under tariff. Previously around 70% of general insurance business was subject to tariff. Fully deregulated no tariffs. Strict tariffs apply on motor and fire business. The Malaysian government has flagged the removal of tariffs but no planned timeframe for deregulation at this stage. Tariffs on motor and bond business. No planned deregulation at this stage. Fully deregulated no tariffs. Full tariffs on compulsory motor business. For other motor and fire business, a tariff applies to the operating expense component of premiums but this is to be removed in Tariffs apply on motor, fire, cargo and personal accident business but in practice, these are not strictly enforced. Mostly deregulated no tariffs except on obligatory insurance lines including motor third party liability, aviation passenger insurance, fire and explosion insurance and some others. 2.5 Market consolidation The general insurance markets in many of the countries in Asia have tended to operate with an excessive number of insurance companies (mostly local domestic companies). This has led to fragmented markets in a number of countries with insurers experiencing difficulty in achieving a sufficient scale of operations. For example, Hong Kong, Indonesia, the Philippines and Thailand currently have around 96, 100, 112 and 77 direct general insurance companies in operation respectively. The level of fragmentation of general insurance business by country is shown in the following chart. 6

10 General insurance market concentration among companies in Asia (2006) Malaysia Hong Kong Indonesia Thailand Singapore Phillipines* Taiwan 24% 24% 25% 30% 32% 36% 38% China India 67% 70% Vietnam 78% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% * Phillipines market concentration is based on premium in Market Share of Top 3 Companies Market Share of Other Companies While a fragmented market is an impediment to prospective foreign participants, there is some comfort that many of the region s insurance regulators are keen to see consolidation in the market. The introduction of enhanced capital and solvency requirements by many regulators, including risk based capital requirements in some countries, will speed up the consolidation process. This has been particularly evident in Malaysia in recent months following the introduction of risk based capital requirements and active encouragement of company mergers by the regulator in that country. 2.6 Dominance of motor business The relatively undeveloped nature of the general insurance markets in Asia has led to a significant dominance of motor insurance over other lines of business. This has been driven partly by a lack of demand for other lines of business but has also been due to the insurers general lack of expertise and distribution strategies beyond motor business. This has been somewhat of a problem for insurers in some countries as motor business has often been loss making, particularly after deregulation of premium tariffs has occurred. However, it is clear from experience with more developed countries such as Singapore and Hong Kong that demand for other lines of insurance tends to increase markedly as economic conditions improve and the wealth of individuals grows, and this is now also evident in less developed markets such as China and India. 2.7 Distribution of general insurance business in Asia The predominant means of distribution of general insurance products in most Asian countries remains through agents although distribution through brokers is also important, particularly for commercial lines of business. Agents are often not tied to a particular insurer but can have authority to sell insurance on behalf of a number of companies and are generally remunerated by commission. However in some markets, insurance companies employ in-house agents (i.e. salespeople) who are employees of the company but otherwise operate in a similar manner to agents except that they sell products only on behalf of their employer. In-house agents tend to be remunerated under a combination of fixed salary and commissions. 7

11 While the sales volume of general insurance products through partnerships with banks (i.e. bancassurance) is still relatively small in most markets, this channel is growing in importance, mainly for personal lines of insurance. The insurance products sold are often linked to personal loans or mortgages obtained by the bank customer. The most popular products sold include property insurance, personal accident, travel and medical. In recent times, there has been a marked trend in many countries towards direct forms of distribution of general insurance business, mainly as a result of reducing profit margins due to high operating expenses, particularly arising from upward pressure on commission rates in order to retain quality agents. This has included establishment of separate direct channel insurance companies by larger companies in order to avoid damaging relationships with existing agents (i.e. channel conflict) with a focus on call centres, telemarketing operations and internet. 2.8 Focus on China, India and Vietnam In the next sections, we explore more closely, the developing general insurance markets of mainland China, India and Vietnam. These markets are currently viewed with most interest from foreign companies looking to expand into Asia. 8

12 3 China 3.1 Overview Mainland China has experienced an economic boom in recent years with real gross domestic product (GDP) growth since 1999 exceeding 9% per annum. Following its ascendancy to the World Trade Organisation (WTO) in 2001, strong economic growth is expected to continue well into the future. With a current population of 1.3 billion people, this has given rise to a burgeoning (although still relatively undeveloped) insurance industry with enormous potential for future growth, albeit with some degree of risk. As a result, mainland China currently ranks very highly on the lists of foreign insurers looking to expand into Asia. 3.2 A brief history of the China general insurance market China has a unique history of insurance reflecting the political history of the country. The first insurance company in China, Guangzhou Insurance Company, was set up by a British trading house in Other British firms soon established insurance companies in Hong Kong, Shanghai and other major Chinese cities, setting the stage for foreign domination of the industry lasting almost one and a half centuries. The first Chinese-owned insurance company was established in By the end of the Second World War, the domestic general insurance market was well established in China. However, shortly after establishing the People s Republic of China on 1 October 1949, the Communist Party introduced two far-reaching policies with regard to the insurance industry, namely: nationalising of all Chinese-owned insurance companies and compelling foreign-owned insurance companies to leave China. On 20 October 1949, the Communist Party established the People s Insurance Company of China ( PICC ), a wholly state-owned insurance company and by 1952, all foreign insurers had left China. At around the same time, the Government implemented a course of action to effectively shut down the insurance industry. Following a series of economic reforms commencing in 1978, PICC re-entered the domestic insurance business and remained the only general insurance company in the market until Although growing from a small base, its sales achieved an average growth rate of around 40% per annum throughout the 1980 s. Ping An was established in Shenzhen in 1988 and China Pacific Insurance Company (CPIC) was formed in Shanghai in 1991, effectively ending the monopoly of PICC. At almost the same time, American International Group ( AIG ) became the first foreign insurer to enter the China insurance market with a licence to write both life and general insurance business in Shanghai. At the start of 2000, the Chinese government made a series of commitments to introduce insurance industry reform prior to their formal entry to the WTO on 10 December The package of reforms included removing the geographical, services and ownership restrictions that existed for foreign-invested insurers over a five year time frame. 9

13 As a result, the insurance regulator, the China Insurance Regulatory Commission (CIRC) granted approval for a number of new insurance companies. Moreover, additional branch licences were granted to regional domestic companies that were previously limited geographically, in key insurance areas such as Shanghai, Guangzhou and Beijing. Increased foreign participation has since continued with 13 direct foreign general insurance insurers operating in China by the end of Regulatory environment in China The following is a brief summary of some of the key areas of regulation impacting on general insurance companies in China including: the insurance regulatory body, requirements for foreign insurance companies or foreign investors, licensing of new insurance companies, capital and solvency requirements, policy liability reserving requirements and pricing regulations and tariffs. Insurance regulator China s insurance regulator, the China Insurance Regulatory Commission (CIRC), was established in 1995 with responsibility for: formulating and enforcing insurance related laws and regulations, overseeing insurance business operations, protecting the interests of policy holders, developing the insurance market, maintaining order and ensuring fair competition, promoting insurance industry reforms and restructuring and setting up a risk evaluation and advance warning system to minimise insurance risk. There are ten functional divisions under CIRC, namely the executive office division, policy and planning, finance and accounts, general insurance department supervisory enforcement, life assurance supervisory enforcement, intermediary regulations, personnel, communist party propaganda, international and internal discipline supervisory division. There are 31 branches of CIRC operating throughout the mainland. The role of CIRC is constantly evolving as the fledgling insurance industry develops and in recent times there has been a suggestion that there will be increased emphasis on the regulation of solvency in future in addition to supervision of market conduct. Participation by foreign insurers and other foreign investors Foreign companies may participate in the China insurance industry in one of two ways; either: by investing in a domestic insurance company or 10

14 by applying for a foreign invested insurance company licence. In China, foreign investment regulations apply to investment in domestic companies across all industries including insurance. Foreign investment in the insurance industry is subject to additional requirements of CIRC. Foreign insurance companies are subject to separate establishment and operational regulations in addition to the legislation that governs domestic companies. Domestic companies with foreign investment are subject to the same operational guidelines as domestic companies without foreign investment. Foreign investors (including foreign insurance companies) seeking to take an investment stake in a local domestic insurance company are subject to a number of requirements as follows: the total investment from wholly foreign owned companies cannot exceed 25% of the total share value, the total investment from a single wholly foreign owned entity must not exceed 10% of total share value, the total investment from affiliated entities must not exceed 10% of total share value without CIRC approval, foreign investments must be in the form of currency and cannot be arranged through a bank loan or stock swap and shareholders may not transfer their stock or be replaced within three years. Investment in local domestic insurance companies by banks, securities institutions, military, social groups and government-funded institutions is not permitted although recent legislation now allows banks to establish their own insurance companies. Foreign insurance companies wishing to operate in China other than by way of an equity stake with a domestic insurer can operate in one of three ways, namely: an equity joint venture with a (non-insurance) Chinese corporation, a wholly owned insurance subsidiary or a foreign company operating as a branch in China. The form of establishment is subject to approval by CIRC. All foreign general insurance insurers to date are operating as branches. Licensing of new insurers Licensing can be regarded as a two stage process with application to CIRC to establish a company followed by a formal licence application. Under the relevant regulations, the initial application includes a number of specific requirements including: details of the intended senior managerial staff of the company and confirmation that they all meet the qualification requirements set down by CIRC, 11

15 detailed business plans setting out the company s infrastructure, intended size and scale, staff numbers, office and working equipment etc., details of the shareholders of the company and starting capital and various other items as specified by CIRC. Following submission of the initial application, a six month time frame applies for CIRC to process the application and make its decision on whether or not to allow the applicant to move to the formal licence application stage. If approval is confirmed, the company then has one year to complete preparations to establish the company and make a formal application to commence operations. This preparatory period may be extended for another three months subject to CIRC approval. In practice it appears that both the first stage approval process and the length of preparation time have exceeded the times set out in the regulations. A foreign insurance company must meet additional requirements including: having over thirty years of establishment experience in a WTO member country, having a representative office in China for two consecutive years prior to licence application, having total global assets of at least US$5 billion at the end of the year prior to application, having met all regulatory requirements in the company s country of origin including capital and solvency requirements and other criteria specified by CIRC. In practice, licences are generally provided on a per branch basis. Both domestic and foreign insurance companies must apply to open additional branches and insurance services cannot be provided in areas where the company has no branch. Hence, branch licences are critical to expansion strategies. Over the last two years, CIRC has been allowing foreign companies to change their branch structures to subsidiary status. The main advantage of operating as a subsidiary in the country rather than the branch of the foreign parent company is that the subsidiary can more readily establish branches throughout the country and do this at significantly lower capital costs. Capital and solvency requirements The minimum paid-up capital for an insurance joint venture, wholly owned foreign insurance company, or branch of a foreign company is RMB200 million (approximately USD25 million). General insurance companies seeking to apply for additional branch licences will require an additional RMB20 million (approximately USD2.5 million) in paid-up capital for each additional branch licence. However, a company with at least RMB500 million in paid-up capital is exempt from this requirement. The following additional requirements apply regarding the amount of capital: an injection of additional equity capital is required if the balance of assets less liabilities falls below the specified minimum solvency level, net written premiums are not allowed to exceed 4 times paid-up capital plus retained earnings and 12

16 the maximum exposure per risk must not exceed 10 times paid-up capital plus retained earnings. The current minimum solvency level (allowable assets less liabilities) for general insurance companies in China is defined as the greater of: 18% of net (of reinsurance and taxes) written premium less than RMB100 million plus 16% of net (of reinsurance and taxes) written premium above than RMB100 million, and 26% of the average net (of reinsurance) incurred claims in the previous 3 years less than RMB70 million plus 23% of the average net (of reinsurance) incurred claim in the past 3 years greater than RMB70 million. An insurance company that has been in operation for less than three years is required to apply the premium basis. Policy liability reserving requirements General insurance companies are required to set minimum policy liability provisions for both outstanding claims and unexpired premiums based on the advice of an approved actuary. The requirements are in many aspects consistent with international best practice. For outstanding claims, reserves are set up for reported and incurred but not reported (IBNR) claims. Allowance for direct and indirect claim handling expenses is also required. For each component, the requirements stipulate that a number of methods can be adopted, but also appear to offer flexibility allowing the actuary to use a superior method provided the actuary can justify this. Premium liabilities represent a prospective estimate of the cost of claims in the unexpired period. No discounting is permitted to any of the reserves. The guidelines however remain silent regarding additional provisions acting as risk margins. The guidelines require companies to appoint an actuary to carry out the calculations and provide a reporting framework for submission to CIRC. Reporting requirements appear similar to those specified in other actuarial institutes' professional guidelines and include comments on data quality, methodologies, assumptions, analysis of experience, the adequacy of reserves, performance of the portfolios, changes in underwriting and claim handling procedures, etc. Pricing regulations and tariffs Prior to 2003, general insurance business in China effectively operated under a strict tariff market with both premium rates and policy wordings being formulated by CIRC for most lines of business. With effect from 1 January 2003, significant deregulation occurred with removal of fixed premium rate tariffs on all lines of business other than motor third party liability. In addition, only motor insurance is now subject to regulatory pricing approval. Policy wordings and premium rates for other insurance lines must be filed with CIRC but there is no special requirement for approval under the revised insurance law. 3.4 Market size and growth The following chart shows the gross written premium (GWP) volumes of general insurance business in mainland China in recent years in USD. 13

17 insurance penetration (GWP/GDP) % insurance density (GWP per-capita) USD Billion USD A look at some rapidly growing insurance markets in Asia General insurance gross written premium - China Year Source: Swiss Re Sigma World Insurance Series General insurance premium volumes in China have grown at a compound average rate of around 22% per annum since 1999 in local currency. By comparison, the growth rate for the Australian general insurance market has been around 9% per annum for the same period. 3.5 Market penetration The following chart shows the market penetration indicators over the eight year period to 2006, namely market penetration rate (GWP as a percentage of real GDP) and the market density (GWP per capita). General insurance penetration and market density in China 1.2% % % % 0.4% % 5 0.0% Year - penetration density Source: Swiss Re Sigma World Insurance Series 14

18 While the China general insurance market has exhibited very strong growth in premium volumes in recent years, the overall insurance market penetration remains very low compared to developed countries with annual gross written premium representing only around 1% of GDP or less than USD20 per-capita (c.f. for Australia, the comparative figures are 3.2% of GDP and USD1,200 respectively). It is worth noting that market penetration varies significantly between different regions of China reflecting the different pace and direction of economic development. The major general insurance markets are situated on the eastern coastal regions where the major cities (e.g. Beijing, Shanghai, Guangzhou and Shenzhen) are located. 3.6 Market share By the end of 2006, there were a total of 36 general insurance companies writing business in China, comprising 23 domestic and 13 foreign companies. The following table shows the number of general insurance companies in operation over recent years, highlighting the rapid increase in the number of companies (particularly new domestic companies) since Number of general insurance market participants Local Foreign branch Total The China general insurance market is dominated by local companies, particularly PICC, CPIC and Ping An who together, write around 73% of business in the country. This dominance is expected to continue for some years as a result of: their strong brand names in the market (particularly PICC which controls over 50% of the market), their very well established distribution channels, the efforts now being made by these companies to move their operating procedures towards best practice and their recent success in raising significant capital for expansion through overseas stock market listings (e.g. both PICC and Ping An have listed in Hong Kong and CPIC is expecting to list in Hong Kong in the near future). While the top three players continue to dominate the market, their market shares (particularly the leader PICC) have decreased in recent years due primarily to increased competition from the smaller domestic companies and to a lesser extent, the increasing presence of foreign companies. This has already been evident with the market share of the top three companies reducing from 97% in 1998 to 73% in In particular, PICC has been most affected in this regard with its market share reducing from over 79% in 1998 to 51% in A high level breakdown of market share based on gross written premium in 2006 is shown in the following chart. 15

19 China general insurance market share by gross written premium in 2006 Foreign companies 1% Other local companies 32% PICC 51% Ping An 11% CPIC 11% Source: China Insurance Regulatory Commission (CIRC) website The market dominance of PICC can be largely attributed to its previous monopolistic status that has left it with a far more extensive network of branches than its competitors. However, its dominant market share continues to fall away as new domestic companies penetrate the market. The domestic insurers market shares, excluding the top three players, increased from 4% in 2001 to around 32% by the end of Foreign insurance companies, which are still operating under some service and geographical restrictions, only accounted for 1.2% of the total market in General comments on domestic insurers In general, the domestic companies currently have a number of key advantages over the foreign companies, including: cultural assimilation, which is not an issue for domestic companies, stronger brand names, better relationships with the regulators and banks and established national distribution networks and stronger distribution capabilities. Conversely, they also operate under a number of disadvantages, including: generally weaker management teams lacking in general insurance experience, lack of established histories and reputation, over-reliance on motor insurance which has exhibited marginal (if not negative) profitability in recent years, lack of experience in product development, risk management, underwriting (including actuarial skills), claims management and IT and 16

20 overall difficulty managing the operational (including cultural) changes required to operate in a best practice environment. In addition, most of the smaller domestic companies do not have established financial management or corporate governance processes and systems in place. In the long term, we expect the domestic players will be forced to make significant management and operational changes as the foreign companies exert more influence. General comments on foreign insurers The foreign companies are striving to gain market share in a profitable manner, and are generally finding it difficult to address serious challenges in developing an effective sales distribution system in China. Gross written premium in 2006 for foreign companies only accounted for 1.2% of the total market. To put this in context however, the overall market continues to grow rapidly so this effectively means that the foreign companies are participating in that growth even if their overall market shares are not increasing as rapidly. Furthermore, there are still geographic and other business restrictions that severely constrain the growth of foreign companies. Other factors that prevent foreign insurers from increasing market share include irrational price competition by domestic competitors, low economies of scale and lack of business connections in the local market. We believe that the gap between domestic and foreign companies in terms of market share will eventually narrow but this is likely to be a gradual process until the restrictions imposed on foreign companies (particularly on geographic expansion) are completely lifted. 3.7 Business mix The following chart shows the breakdown of gross written premium in China by line of business as at 31 December China general insurance business mix 2005 Others 13% Cargo 4% Liability 4% Property 12% Motor 67% Source: Yearbook of China s Insurance 2006 China Insurance Regulatory Commission 17

21 The general insurance market in China continues to be dominated by motor insurance business which is effectively only written by local domestic companies. While foreign companies have been allowed to write motor property damage business since 2003, they are not allowed to write compulsory third party motor liability business. As a result, and due to recent poor underwriting performance of motor business, foreign insurers (other than through joint ventures with domestic companies) have not written motor business. Most local domestic companies focus attention on the sale of motor business due to: the well established motor market and the significant growth occurring in motor vehicle numbers in China (e.g. 7.2 million new cars were sold in 2006, up 25% from the previous year) and a general lack of expertise in other lines of business. Property business, the second largest line of business, is predominantly commercial in nature with very little domestic property insurance being written. Business grouped under Others in the above chart comprises mainly agriculture, credit and guarantee, short term health and accident. Market leaders PICC, Ping An and CPIC all have similar business mixes whereas the smaller domestic companies tend to write proportionally more motor business and less property business than the market leaders. This is due to either limitations in capacity or general lack of expertise in property business. The broad similarity of business mix between most of the domestic companies suggests that the market has yet to develop any major niche players or any commercial/personal lines specialists. Foreign insurers tend to focus on the more profitable cargo, commercial property and liability lines, usually targeting sales to foreign corporations (often of similar nationality) operating in China. Premium volumes in specialised lines of business such as liability (other than motor liability) and health business are relatively small at present but are expected to increase significantly as the Chinese economy continues to develop and foreign insurers bring technical expertise into the country. Health and medical insurance in particular is rapidly gaining importance in China in response to various government initiatives aimed at improving access to cost efficient medical products and services in the country. In the last two years, this has seen a number of the larger insurance companies establishing separate health insurance companies in order to expand into this market. Foreign insurers are particularly interested in entering the immature health insurance sector as many see themselves as having a competitive advantage over domestic companies due to their experience in this difficult line of business. 3.8 Profitability of the China general insurance market Due to the lack of detailed historical performance statistics for the China general insurance market, it is difficult to gain an accurate picture of the true industry profitability in recent years. Based on annual financial statements of the market participants published by the regulator, the general insurance industry appears to have achieved a reasonable level of profitability in recent years with pre-tax profits averaging around 5% of net earned premium since 1999 and returns on equity (after tax) of around 13%. 18

22 gross claims paid as % of gross written premium A look at some rapidly growing insurance markets in Asia However, we believe the published results for most companies would have been overstated as a result of inconsistent, and most likely insufficient, provisioning for outstanding losses. Prior to 2005, actuarial certification of loss reserves was not required and incurred but not reported (IBNR) provisions were based on a simple multiple of 4% of net paid claims. Based on our experience, we believe this reserving basis has been inadequate. The potential overstatement in profitability is compounded by the rapid growth of the companies in recent years. Keeping the above in mind, we set out below some broad profitability indicators revealed from the published statistics. Claim payment ratios The published statistics allow analysis of claims experience through the gross claim payment (GCP) ratio: Gross claim payment ratio = (Gross claim payments) (Gross written premium) The following chart shows the gross claim payment ratio over the 6 years to 2006 for the general insurance industry in China. General insurance gross claim payment ratios in China 60% 50% 54% 46% 49% 51% 56% 52% 55% 53% 40% 30% 20% 10% 0% Year Source: Yearbook of China s Insurance 2006 and website China Insurance Regulatory Commission The gross claim payment ratio has averaged around 54% since It should be noted that this simple ratio based on financial year statistics does not compare claims and premium from the same exposure period. In view of the delay between receipt of premium and payment of claims, this ratio will likely provide a distorted view of prevailing true loss ratios. In particular, when portfolios are growing strongly (which is the case presently for most companies in China) this payment ratio tends to understate the true loss ratio. We also suspect that annual claim payments may be distorted by delays and speeding up in settlement, arising from the rapid development of claim handling processes in the industry. 19

23 gross claim payments + expenses as % of gross written premium A look at some rapidly growing insurance markets in Asia Taking the above into account, we estimate that claim payment ratios shown above could understate the true loss ratios (i.e. fully incurred claims including IBNR as a percentage of earned premium) for the industry by up to 30%. Combined ratios The following chart shows the gross claim payment ratios shown above adjusted to include an estimate for acquisition and operating expenses (i.e. gross combined ratios). General insurance gross combined ratios in China 120% 100% 80% 60% 34% 40% 38% 37% 41% 41% 30% 40% 20% 54% 46% 49% 51% 56% 52% 55% 0% Year gross claims as % GWP Acquisition and operating expnses as % GWP Source: Yearbook of China s Insurance 2006 and website China Insurance Regulatory Commission Acquisition and operating expenses based on major domestic insurers Operating expenses include business tax ranging from 5% to 8% of GWP over the period shown Based on the estimated combined ratios shown in the above table, it would appear that the overall underwriting performance of the general insurance industry has been quite profitable in recent years. However, the combined ratios shown suffer from the same deficiencies as described earlier with the claim payment ratios. If this deficiency were corrected, we would estimate the true combined ratios to be significantly higher than shown. For more recent years in particular (e.g and 2004), this would translate to underwriting losses rather than profit. General comments on market profitability The overall profitability of the China general insurance industry is currently driven by the profitability of motor business due to the dominance of this line in the market (see Business Mix above). The removal of tariff premium rates in 2003 subsequently gave rise to significant competition in the motor market with evidence of significant premium rate cutting by market participants in order to either retain (in the case of established companies) or increase market shares (in the case of newer companies). In addition, this has also been followed by increased sales commissions to agents selling motor business. Combined with significant growth in the motor market, these factors appear to have had a significant adverse impact on overall profitability of the market although there are some early indications that performance may have improved since

24 Profit margin (underwriting profit before tax as % of GWP) A look at some rapidly growing insurance markets in Asia Other major lines of business such as commercial property and cargo appear to have been consistently very profitable for a number of years. This remains a very encouraging factor for foreign insurance companies who tend to focus on these lines of business. Performance of foreign insurance companies As many foreign companies in China are relatively new to the market, a number of them are still recording financial losses due to start-up costs and new business strain. However, based on the most recently available public information from the regulator, it appears that at least two of the more established foreign companies (namely American International Assurance which was established in 1992 and Tokio Marine & Fire which was established in 1994) have both consistently achieved underwriting profitability in recent years although American International s results were poor in 2003 and Underwriting profit margins of select foreign general insurers in China 25% 20% 15% 10% 5% 0% % -10% -15% Year American International Assurance Tokio Marine & Fire Source: Yearbook of China s Insurance 2006 and website China Insurance Regulatory Commission Profit margin equals underwriting profit before tax, divided by gross written premium 3.9 Distribution of general insurance business in China The main distribution channels utilised by the general insurance sector in China include: direct (in-house) sales force, authorised representatives/ sideline agencies, individual agents, brokers, professional agencies, and bancassurance. 21

25 Direct sales force The traditional distribution method for general insurance in China, particularly among domestic companies, is the direct sales channel based on the use of salaried in-house sales teams. This approach is different to the concept of direct selling which is common for the distribution of personal lines business by the major Australian insurers. Salaried sales representatives sell products to a range of customers from large enterprises through small to medium enterprises and individual consumers. In the early years of insurance market development, all business was sold through direct sales. The more established companies such as PICC, CPIC and Ping An are thought to sell more than 50% of their business through direct sales channels although we believe that the proportion has been decreasing in recent years. Smaller domestic companies with less experienced sales staff and possibly less valuable corporate connections need to place more reliance on other distribution methods. The proportion of business distributed through the direct channel varies by line and a considerably higher proportion of commercial products will be sold directly than other lines. This method also includes the traditional direct concept including: telephone call centres, telemarketing and internet portals (although these are not significant at present). In recent times, a number of the larger domestic companies have placed greater focus on direct (nonintermediated) distribution as a result of reducing profit margins due to high operating expenses, particularly from pressure on commission rates in order to retain quality agents. This has seen a number of companies establish separate direct channel insurance companies with a focus on call centres, telemarketing operations and internet. Authorised representative and sideline agencies Authorised representatives and sideline agents comprise non-insurance companies distributing products for commission. They include: banks (bancassurance), car dealers (a very important channel for motor business), postal savings offices, securities firms and railway agencies. This channel is usually limited to the sale of simple, standardised (often fixed price) personal lines policies related to their core business with minimal/simplified underwriting or negotiation with the insured. It is a dominant source of business for motor insurance sales with some companies distributing as much as 90% of their motor portfolio through this channel. Bancassurance is another form of sideline agent distribution that is becoming an increasingly important source of business to general insurers. The majority of products distributed through the banks comprise personal lines sold to loan and mortgage clients of the bank. 22

26 Individual agents Individual agents represent the insurance company to sell their products, typically targeting individuals or small to medium sized businesses. Commission driven agents were first introduced to the China insurance market by American International Group following its entry into the Shanghai life insurance market in This strategy was copied by domestic life insurance companies and also adopted by new joint-venture operations. The commissioned agent is now an important feature of the life insurance market but not as common in the general insurance market. Brokers The use of brokers remains relatively undeveloped for direct general insurance business in China, first being introduced to the market in As a result of WTO reform, a number of foreign brokers recently entered the market through jointventure arrangements and this is a distribution channel that is expected to develop strongly in the future, particularly for commercial business lines. The broker channel is very important for foreign insurance companies, especially for those who do not have the scale or capacity to set up direct sales channels. Professional agencies Professional agencies distribute a wide range of products for different insurance companies through their links with both small and large corporations. Professional agencies (currently numbering over 180) are quite often developed by entrepreneurial ex-insurance company sales staff with additional financing from individual backers who have strong relationships with key state-owned enterprises Prospects for new entrants Our work in the region has included a number of financial modelling and business plan assignments to assist foreign companies in their plans for entry into the market. Based on our findings, we believe that through a well planned and robust business strategy, foreign companies could realistically aim to achieve the following targets for a start-up operation in China: profitability after five years from business commencement, break-even (i.e. positive cumulative profits) after 8 years and a long term return on equity target of 12% to 15% per annum or higher. However, such targets do not come without significant risks as discussed below Common challenges for foreign insurers entering the China general insurance market While the China general insurance market offers great potential for foreign companies, there are a number of challenges that companies will face in establishing and building their businesses. Some of these are described below. 23

27 Insurance market penetration The China general insurance market is immature and the lack of market penetration of general insurance products is a constant challenge. The low consumption of personal lines relates to historically low levels of private ownership of insurable assets and the reluctance of the population to insure those assets. Motor insurance is compulsory in many provinces, yet consumers typically select the minimum coverage. In order to improve the quality of the portfolio and increase insurance penetration, insurance companies need to move away from previous practices based simply on following the market leaders and consider investing more resources in product and service innovation. The market participants have remarkably similar business profiles and there may be potential rewards for those companies that can develop and maintain an alternative business strategy. Inadequate risk management culture A large share of commercial insurable risks are in the hands of State Owned Enterprises that do not fully understand the role of insurance in managing risks that were previously absorbed by the state economy. The problem of building or enhancing commercial lines portfolios can be compounded by overly aggressive sales staff and intermediaries who pay little attention to the underlying needs of the insured or the potential for the insured to default on premium payment in their search for business. Competitive strength of dominant players Companies have found it difficult to build market share by winning business from the three major local companies, particularly PICC. It appears that most local domestic insurers have, to a certain extent, responded to the market dominance of their more established competitors by attempting to win business on the basis of price rather than differentiate themselves or develop new markets. The foreign insurers operating in China currently write only around 1.2% of gross premium. While the scope for future growth is clearly present, their ability to make inroads will depend on how they can overcome the dominance and market power of the larger local companies. The companies that will succeed faster will be those that can take advantage of their superior business skills compared to the local companies (e.g. in technical underwriting) and concentrate on more profitable lines (e.g. cargo, property and possibly personal accident and short term health), perhaps within niche markets such as foreign corporations. Underwriting control versus growth Performance targets in China have typically focused on top line growth and market share, commonly at the expense of underwriting profits. A key management challenge is to understand the true underwriting results of the business and be prepared to move out of business lines that are unsustainable at prevailing premium rates or to impose stricter underwriting controls that correctly price or exclude inferior risks. In order to achieve this discipline, it is critical to separate the underwriting and sales functions but in practice many companies appear to have given the sales function too much authority. On the other hand, companies need to balance the need for short term profits against long term objectives of developing the distribution network and building a client base. 24

28 Managing a profitable motor portfolio The motor market is fiercely competitive and based on our understanding of claims and expense ratios, the market as a whole appears to have been unprofitable for at least a couple of years proceeding the removal of tariffs in 2003, although we understand that profitability may have improved since Furthermore, much of the distribution control is held by increasingly powerful distribution channels of car dealerships and banks that are driving up distribution costs. It is critical that companies develop the necessary premium rating and market segmentation techniques to underwrite selectively in a market that is so competitive. Companies that target more profitable segments may be able to make underwriting profits and sustain market share, even if the motor market is unprofitable as a whole. The management challenge is to develop underwriting expertise and then adhere to the chosen underwriting strategy while resisting pressure to price to match the competition. Lack of industry data and changing insurance experience The use of best practice technical approaches to claims reserving and product pricing in China has been significantly hampered as a result of poor data collection practices by insurance companies in the past. While this is slowly improving in the industry, it will be some years before a reasonable volume of historical data is available for such approaches to be used to best effect. Even if data collection techniques are improved, the relevance of historical experience will be questionable (at least in the short term) due to the rapidly changing insurance experience within China as the market grows. A good example of this is in motor insurance where the number of new motor vehicles and new, inexperienced drivers is increasing rapidly throughout the country. This rapidly increasing exposure and the likely change in risk profile of insured drivers may mean that future experience will differ significantly from that of the past. Developing a direct sales force There are many challenges in the recruiting, training and retaining of key sales personnel. It can be difficult to motivate and reward a successful individual, especially in an environment where companies continually poach staff to support their expansionary goals. The developing intermediary market with potential for commission based remuneration is appearing increasingly attractive to successful salaried sales staff. Personal relationships and connections are very important and so loss of key personnel usually means a loss of existing business as well as the future contribution the individual may have made. For larger established companies, the direct sales force is typically managed through branch management, other than those dealing with specialist risks and large national clients. In many aspects, branches are managed as subsidiaries with a high level of autonomy, but this approach is becoming a concern to management as it is becoming increasingly important to ensure that underwriting and other operational procedures are followed at the branch level. However, this control of sales activity in the branches must be achieved without stifling the entrepreneurial drive that is required to develop new markets. Human resources The importance of an effective sales force is vital, but there is an equally urgent need to develop the quality of management and technical personnel. A common theme in many of our projects is the lack of insurance experience and other technical expertise, particularly in the areas of actuarial, underwriting and claims management. It is these areas that are critical to maintaining greater control over financial performance. 25

29 In view of the relative immaturity of the market, there are very few experienced insurance professionals and demand for quality staff, particularly at a managerial level is very high. The universities in China do offer insurance related courses and are certainly producing bright young professionals. However the vital element of experience is missing. Recruiting from the existing companies is common but the danger is always that such people are too set in their ways and unwilling to adapt to new business practices. Regulatory environment The regulatory environment in China has developed in line with the growth of the market and as a consequence, many regulations were first implemented in draft form and in fact many unwritten rules are still not part of formal legislation. This has created an additional challenge for management who must plan medium-term strategies against a changing environment. Many of the insurance companies also complain about the amount of management time expended in dealing with the regulators. The regulator, CIRC, does not appear to interfere directly in operations, but it wishes to be informed of any major company decisions, and may indicate that certain strategies are unacceptable. There can also be significant lags in response time that have reportedly varied between 2 weeks to 4 months. The regulator also has many unwritten rules and has often used them to move the market in certain directions. The more established companies do not appear to be affected to the same extent as they have typically already built up their relationships and understand these unwritten rules better. Capitalisation Capital is becoming increasingly important to finance regional expansion and provide underwriting capacity to compete with larger established players. Industry sources also report a growing degree of regulatory focus on solvency, also increasing the need for capital. Several domestic general insurance companies are looking for additional capital to bolster their balance sheets and improve future access to capital. This is evidenced by the level of planned IPO and restructured shareholding activity currently underway or being foreshadowed through the press. Once a company has increased its capital base, it must meet certain performance targets to support that new capital. We believe that few of the local domestic insurers are actually prepared for what this may mean in practice going forward. Reinsurance The reinsurance market in China is immature and undeveloped by international standards. Historically, China had very little dealing with international reinsurance markets and even since market liberalisation, domestic insurers have only gradually introduced the use of reinsurance. The largest reinsurance company in China is the State Owned China Reinsurance Corporation. Prior to 2006, this company was the only reinsurer licensed to operate in China although since then a number of foreign reinsurers such as Swiss Re and Lloyd s have obtained licences. China Re has recently announced that it intends to raise capital through a public listing. Difficult investment environment Due to the restrictions on investments and the general limited number of investment instruments available, it will be difficult for insurers to achieve higher than bank or cash rate returns. 26

30 The Government is however contemplating allowing insurers to invest in a greater variety of investment vehicles subject to maintaining an overall low level of investment risk. Actuarial management of pricing and reserving The use of actuarial expertise in pricing products is very low in China although the regulator is keen for the industry to embrace such practices. One problem that the industry faces in this regard is in establishing a reliable data base of relevant historical claims and policy information to enable sound actuarial pricing techniques to be employed. To date, the level and quality of data collection remains low both at the company and industry level although this is now changing with the introduction of mandatory actuarial certification of policy liabilities and solvency. Foreign companies are likely to have an advantage over domestic companies (particularly in pricing), as the use of actuarial and technical analysis is likely to be a standard feature of their businesses. Fraud and corruption It is extremely difficult to assess the level of fraud and corruption in the China general insurance industry. However, from our discussions with a number of market participants, we believe this is likely to be a problem, particularly at the distribution level in relation to the manipulation and overpayment of commissions to agents. The threat of capital punishment which applies in China for high level corruption is a deterrent, particularly at senior management levels within companies. Exposure to natural hazards China has a relatively high exposure to natural hazards such as earthquakes, typhoons, and floods compared to other countries. This is an important consideration in product development, policy wording (including exclusions) and reinsurance planning. In practice, policies in China tend to exclude earthquake cover but include flood cover. This is the reverse situation compared to a number of other countries (e.g. Australia) where earthquake cover is provided but flood cover is excluded. 27

31 4 India 4.1 Overview India has enjoyed a period of consistent economic growth with real GDP growth in excess of 6% per annum in each of the last 9 years. Most economic forecasts indicate that strong growth is expected to continue well into the future. With a population of 1.1 billion people, including a rapidly expanding middle class, the insurance industry in India has enormous growth potential. As a result, India is now competing with China as the preferred option for foreign general insurers looking to expand into Asia. 4.2 A brief history of the India general insurance market The origins of the general insurance industry in India can be traced back to the Triton Insurance Company which was established by the British in Calcutta in Over the next 120 years, more than 100 additional general insurance companies were established in the country. All general insurance business was nationalised in 1972 when 107 insurers were amalgamated and grouped into four national companies. The four companies, New India, National, Oriental and United became the subsidiaries of the General Insurance Corporation of India (GIC) with each company operating under strict premium tariff rules for all business sold. In December 1999, legislation was passed to allow entry of foreign insurance companies into the market through a maximum holding of 26% in a joint venture with a local Indian company. At the same time, the insurance regulator, the Insurance Regulatory and Development Agency (IRDA) was established and plans were developed to restructure the government monopoly GIC and its four subsidiaries. In October 2000, the first private companies were established with Reliance, a local company with no foreign equity and Royal Sundaram, a joint venture between Royal & Sun Alliance (RSA) and the Indian company Sundaram, entering the market. In December 2000, New India, National, Oriental and United India were de-linked from their holding company GIC and GIC subsequently became the national reinsurer. Currently there are 15 general insurance companies operating in India including the 4 public sector units ( PSUs ) and one standalone health insurer. Half of these companies are joint ventures with foreign insurers and the remainder are fully domestic entities. Star Health & Allied commenced operations as the first standalone health insurer in In January 2007, an important regulatory milestone was achieved with the removal of fixed premium rate tariffs from all lines of business other than motor third party liability (TPL). From this date all insurance companies are free to set their own premium rates for general insurance business other than TPL. 4.3 Regulatory environment in India The following is a brief summary of some of the key areas of regulation impacting on general insurance companies in India including: the insurance regulatory body, requirements for foreign insurance companies or foreign investors, 28

32 licensing of new insurance companies, capital and solvency requirements, reinsurance requirements, policy liability reserving requirements, pricing regulations and removal of premium rate tariffs, and management of an insurance policy data repository. Insurance regulator The Insurance Regulatory and Development Authority (IRDA) was established in It has the duty to "regulate, promote and ensure orderly growth of the insurance business and re-insurance business". Its functions include: registration and continuing regulations of insurers, policyholder protection, setting standards for professionals working in the insurance industry, promoting the efficiency of insurance business and setting requirements on investment, solvency, levies, tariffs and reporting. Participation by foreign insurers or foreign investors According to the IRDA Act passed in December 1999, life and general insurance companies in India are not permitted to have foreign equity in excess of 26%. The amount of 26% is defined to include holdings by any foreign entity either through the foreign joint venture partner or via foreign shareholdings in the Indian company. The IRDA is strictly enforcing this regulation. It is notable however that in some insurance joint ventures, the foreign partner exercises management control. In 2004, the Indian government announced that the 26% cap on foreign direct investment would be increased to 49% for the insurance sector. At the time of writing, the Congress Party Government does not hold a clear majority and its coalition partner, the Communist Party, has delayed this amendment. The government is subsequently trying to find a way allowing an increase in foreign investments in insurance without amending the Insurance Act. The government is considering raising the cap on Foreign Institutional Investments ( FIIs ) over and above the foreign direct investment ceiling in insurance. The IRDA, in conjunction with the Reserve Bank of India has recently also decided that the stake of foreign insurers in Indian banks will also be counted towards the foreign equity cap. When the Indian promoter is a banking company, the proportion of FIIs in the banking company is not taken into account towards the 26% FDI cap in the Indian insurance company. However, if the foreign insurance partner has FDI in the local promoter then that will be counted towards the 26% FDI cap in insurance. 29

33 Licensing of new insurers There are no geographical or business line restrictions on new insurance companies (i.e. a general insurance licence allows a new insurer to operate on a nation wide basis). However, licensing as a composite insurer (i.e. life and general insurance business) is not available. Companies seeking to write both life and general insurance business are therefore required to set up separate joint venture companies for this purpose. An example of this in the market is Tata AIG which is present in both sectors through separate joint ventures. The licensing process is in three stages and the IRDA typically takes two to three months from the date of application to award a licence. However, prior to the application, the joint venture company needs to be formally established. In practice, this is quite a time consuming process. To date no application has been rejected. During the first stage, the applicant must submit to the IRDA, form IRDA/R1 Requisition for registration application which sets out the details of the capital structure as well as details of any shareholders holding more than a 1% stake in the proposed company. Financial projections including sensitivity analysis must also be supplied. The second stage involves submitting to IRDA, detailed information on the business plan via the submission of form IRDA/R2 Application for registration. The third stage (i.e. the granting of the licence), happens automatically after funding. Capital and solvency requirements The current minimum capital requirement in India is Rs1 billion (approximately USD22.7 million). The IRDA is planning to relax the minimum capital requirement for standalone health insurers to Rs500 million. In addition, there is a formula based solvency requirement calculated by line of business based on the amount of premiums and incurred claims in the previous year of operation. It is defined as the greater of: 20% of net premium, 20% of gross premium multiplied by factor A as specified below, 30% of net incurred claims, 30% of gross incurred claims multiplied by factor B as specified below. Line of Business A B Fire Marine cargo Marine hull Motor Engineering Aviation Liability Rural insurance Others Health According to IRDA (Protection of Policyholders' Interests) Regulations 2002, all insurers must maintain a minimum 150% solvency margin at all times. 30

34 The IRDA's solvency margin regulations do not represent a risk based capital approach that is sensitive to factors such as line of business, type of asset, reinsurance program or concentration of risk. We understand that the IRDA is looking at this issue but has not made any announcements at the time of writing this paper. The IRDA is reportedly planning to initially introduce a risk based capital regime for standalone health insurers. Reinsurance requirements Following the removal of premium rate tariffs from 2007, compulsory reinsurance cessions to the national reinsurer (GIC) were reduced from a level of 20% to 15%. This will be further reduced to 10% from 1 March Each insurer must have its annual reinsurance programme approved by the IRDA. Each insurer must offer other Indian insurers and the GIC, participation in its facultative and treaty surplus programmes before overseas placements can be made. There are also restrictions on the quality of such overseas reinsurers. Limits are also set on the amount of reinsurance placed with individual reinsurers. Policy liability reserving requirements General insurers are required to set minimum policy liability provisions for both outstanding claims and unexpired premiums. For outstanding claims, reserves are required for reported and incurred but not reported (IBNR) claims based on the advice of an appointed actuary. The liability for premiums (reserve for unexpired risks) is determined as 100 % of premium received or receivable net of reinsurances during the last 12 months for marine hull business and 50% for all the other lines of business. Reserves for IBNR claims are required to be determined based on actuarial principles following guidance notes issued by the Actuarial Society of India, with the concurrence of and any directions issued by the IRDA. The latest Actuarial Society of India Guidance Note (Draft) GN 21 recognises that the appointed actuary s responsibilities are critical to the financial soundness of the company. His or her responsibilities are onerous and include: a statutory responsibility to IRDA as well as a responsibility to the client, a requirement to monitor the ongoing solvency of the company, consideration of all aspects likely to affect the financial condition of the company including premium deficiency, business volume, future underwriting policy, etc., a requirement to certify reserves annually, responsibility for premium setting and monitoring of capital requirements. Although these responsibilities are onerous, there are in practice, very few experienced general insurance actuaries performing these roles in India. In addition, the IRDA does not currently employ any specialist general insurance actuarial staff to review the estimates produced. The quality of the reserving is therefore not likely to be of a consistent standard to that which would be expected in a country such as Australia. 31

35 Pricing regulations and removal of tariffs Prior to 1 January 2007, approximately 70% of general insurance business was subject to fixed premium rate tariffs. From 1 January 2007, motor third party liability business is the only segment which continues to be under tariff. The IRDA referred to this as the first phase of de-tariffication and insurers were not allowed to change existing covers or policy wordings during the first phase. The second phase of de-tariffication (originally scheduled in 2008) that would allow customisation of products by insurers, has subsequently been brought forward to 1 October Insurers had proposed a 150% increase in commercial motor third party liability premium rate tariffs owing to heavy losses in the past. However, political lobbying and opposition from the transport sector has forced the IRDA to restrict any increases in premium rates for commercial third party liability by no more than an additional 70% above the original tariff rates. The IRDA has also set up a motor third party pool for this purpose. The pool is being managed by the GIC and insurers receive 10% of gross premiums for referring business to the pool. The loss sharing in the pool at the end of the financial year will be on the basis of market share of individual insurers. Private motor third party liability also remains tariffed and the IRDA has introduced revised tariff rates from 1 January However, private car third party premium rates continue to be extremely unprofitable for insurers. Management of data repository There has been increasing concern over the lack of quality insurance data in the industry. The quality and extent of insurance data collected by many private sector companies has been mediocre. This has been mainly driven by the tariff market stipulating that only rudimentary data is required for rating. As well as having adverse implications for pricing and reserving we would also expect companies to keep poor information in their exposures to natural catastrophes. The IRDA together with the Tariff Advisory Committee ( TAC ) has formed a data warehouse to compile data from all insurers and publish key statistics from time to time. The IRDA is also in discussions with the GI Council and existing insurers to allow access to the data to new entrants. Insurers have been asked to submit data on a monthly basis to the TAC in a specified format. The TAC has compiled health and motor insurance data from TPAs and PSUs respectively. 4.4 Market size and growth The following chart shows the gross written premium volumes of general insurance business in India in recent years in USD. 32

36 insurance penetration (GWP/GDP) % insurance density (GWP per-capita) USD Billion USD A look at some rapidly growing insurance markets in Asia General insurance gross written premium - India Year Source: Swiss Re Sigma World Insurance Series General insurance premium volumes in India have grown steadily since A significant contributor to this growth has been insurance penetration to the middle class population which is currently estimated to be of the order 250 million to 300 million people, and growing rapidly. The rapid GDP growth along with a booming economy has resulted in higher wealth creation amongst this segment. 4.5 Market penetration The following chart shows the market penetration indicators over the 8 year period to 2006, namely market penetration rate (GWP as a percentage of real GDP) and the market density (GWP per capita). General insurance penetration and market density in India 0.8% 6 0.7% 0.6% 0.5% % 3 0.3% 0.2% 0.1% % Year - Source: Swiss Re Sigma World Insurance Series penetration density The market penetration of general insurance continues to be very low in India, despite the strong growth in premium volumes in recent years. Annual gross written premium in 2006 represents only around 0.7% of GDP which has remained relatively stable over a number of years, or around USD5.2 per capita. Both market penetration indicators are among the lowest of developing countries in Asia. 33

37 4.6 Market share As at 31 March 2007, there were a total of 16 general insurers in India. The following table shows the number of general insurance companies in operation since the opening of the market in Number of general insurance companies in India Local Foreign JV Total The 16 general insurance companies consist of: the 4 national public sector companies - New India, National, Oriental and United India, delinked from the GIC, 2 specialist public sector insurers - the Agriculture Insurance Company of India Limited (AIC) which was formed in 2002 and operates the National Agricultural Insurance Scheme (NAIS), the Export Credit Guarantee Corporation Limited (ECGC) for facilitating international trade, and 10 companies in the private sector, 8 of which are joint ventures with foreign companies. Apollo DKV is the most recent company to start operations in August 2007 as the second standalone health insurer. Star Health & Allied which started operations in March 2006, was the first standalone health insurer. In addition to these 16 companies, Future Generali has recently received licence approval for its general insurance joint venture. Sompo of Japan has signed a general insurance joint venture agreement with three Indian Banks, whereas QBE, the Australian insurer, has entered into a general insurance join venture agreement with the Rajan Raheja Group, a Chennai-based diversified business house. There has been a steady decline in market shares of PSUs from over 85% of business in terms of premium income in 2004 to around 65% as at 31 March ICICI Lombard which is the largest private insurer is tipped to overtake New India in gross written premium in the current financial year. The following chart shows the breakdown of public and private market share by financial year according to statistics published by the IRDA 34

38 Market share % A look at some rapidly growing insurance markets in Asia General insurance market share - India - public vs private sector insurers % 4.0% 9.5% 14.2% 19.4% 25.9% 34.1% % 96.0% 90.5% 85.8% 80.6% 74.1% 65.9% Financial year Public insurers Private insurers Source: Insurance Regulatory and Development Authority (IRDA) website A high level breakdown of the current market share based on premium income is shown in the following chart. India general insurance market share by company 2007 Oriental 16% United India 14% ICICI Lombard 12% Private 35% IFFCO Tokio 5% Bajaj Allianz 7% National 15% New India 20% Reliance 4% TATA-AIG 3% Royal Sundaram 2% HDFC Chubb 1% Cholamandalam 1% Source: Insurance Regulatory and Development Authority (IRDA) website General comments on established insurers The four state owned companies remain the dominant companies in the market but their market shares have been rapidly declining as a result of aggressive expansion strategies adopted by the newer private companies. The state owned organisations are currently not run on economic grounds, and are not subject to the same performance requirements imposed by shareholders on the private sector companies. They have traditionally been required to write all lines of business, and have not carried out risk selection in their underwriting. 35

39 Owing to the rising competition, PSU workers are lobbying to combine the four PSUs under the GIC. The government has to date however, ruled out such a move. Prior to the removal of tariffs, all PSUs offered similar products. However, since the removal of tariffs, some of the PSUs have identified the need for product innovation and have commenced filing new products for regulatory approval. State owned insurers have traditionally enjoyed wider market penetration through a country wide presence and reliability for being a state owned entity. However, severe drawbacks in claims servicing, including delays and litigation, have dented some of the brand image of these companies. Almost all the PSUs are in the process of discontinuing their tie-ups with third party administrators (TPAs) which have traditionally played a major role in servicing health insurance claims. Lack of underwriting culture as well as poor IT infrastructure has resulted in these companies being selected against by the private sector companies that have stronger underwriting procedures. There has been a noticeable change in the outlook of PSUs following the recent removal of premium rate tariffs. PSUs have waged a price war to regain lost market share and have been very aggressive in the commercial segment. All of the four PSUs have invited applications for management, actuarial and HR consultants to revamp their image and regain market share in the new environment General comments on the new private sector insurers Most private insurers have increased their market shares by focussing on profitable lines of business such as Fire, Marine Cargo, Engineering, Liability and Personal Accident lines. Motor third party liability and health insurance, which have been unprofitable, were primarily written by the PSUs whereas the private companies wrote these lines very selectively. Since the removal of premium rate tariffs, private companies have experienced severe price competition in the commercial segment from PSUs. The focus of the private companies has shifted to the retail segments such as individual health business with most insurers now targeting a retail oriented business mix. Health business has been identified as the segment for expansion with all top private companies strategising to strengthen their health portfolios. Examples of this include teaming up with nongovernment organisations and self-help groups to increase penetration in rural areas. This trend is likely to continue and as a result, a number of multinational insurance groups have expressed interest in entering the Indian market and setting up standalone health insurance joint ventures. This trend in increasing market share for the private companies and is expected to continue for the following reasons: there is an increasing interest in leveraging the captive customer base of domestic partners and to tap low cost rural markets through existing distribution channels, experienced staff moving from PSUs to private companies due to higher remuneration, product innovation and customisation of services, low marketing costs by exploiting direct marketing channels and bancassurance relationships, good IT infrastructure and setting up of in-house claims servicing models, and the ability to better utilise global capacity to write large corporate risks. 36

40 4.7 Business mix As in China, the general insurance market in India is dominated by motor insurance, although property and health lines are also significant as illustrated in the following chart showing the breakdown of gross written premium in 2006 by private insurers in India by line of business. India general insurance business mix 2006 Personal Accident 3% Liability 2% Aviation 2% Engineering 5% Others 10% Health 11% Marine 6% Motor 43% Fire/Property 18% Source: Insurance Regulatory and Development Authority (IRDA) website The large growth in premium volumes in recent years has been driven by growth in the motor, health and personal accident lines. We would expect that other lines (particularly property, cargo and liability) will become more significant as economic conditions develop further. Engineering has emerged as a profitable line since the removal of tariffs with all infrastructure projects requiring mandatory engineering cover. It is evident that although premium rates have decreased since the removal of tariffs, premium volumes have not, indicating an increase in business volumes across the industry. Private insurers are increasing their focus on the health insurance segment and it is likely to grow very rapidly. It is worth noting that the four main public sector companies have been writing proportionately higher shares of motor and health business which have tended to be relatively unprofitable in recent years. It appears that the newer companies are targeting more profitable lines of business. Regulations make it mandatory for every insurer to write a fixed proportion of their business in rural and social sectors. However, private insurers have identified rural insurance as a profitable segment and insurers are increasing their focus on rural and semi-urban markets. The focus has clearly shifted from larger cities and metropolitan areas with the bulk of the middle class population being located in smaller cities and towns. 4.8 Profitability of the India general insurance market Unfortunately in the past, very little historical data has been retained by the PSU insurance companies. This prevents us making an accurate assessment of the true industry profitability. 37

41 We make the following general observations on the India general insurance market profitability based on non-confidential work we have undertaken in the country. The first phase of de-tariffication resulted in an intense price war between private and public sector insurers, especially in the commercial segments. There is anecdotal information to suggest that profitability across different lines of business has changed significantly as a result. Premium rates for health insurance and motor business appear to have increased significantly with most insurers starting to adopt experience rating methodologies for these portfolios. Premium rates for property/fire business which was highly profitable under the tariff and helped in cross-subsidising losses from group health and motor third party liability insurance, have reduced significantly since de-tariffication. Following the recent de-tariffication, PSUs led the reduction in fire rates by as much as 30% to 40% of original tariff rates. Motor business Motor business, which accounted for more than 40% of the industry s gross written premium in 2006, is likely to grow further in the current financial year with the de-tariffication of the own-damage segment of this business. Premiums were previously set by tariff based on four rating factors including broad geographic location, engine capacity rating, age of vehicle and no claim discount. Most private insurers are moving to risk based premium rating. The IRDA has disallowed insurers from changing Motor own damage rates by more than 20%. Any such change requires justification at the time of re-filing of premium rates with the IRDA. Based on various market commentaries and our experience in India, we believe that overall motor loss ratios are in the range of 110% to 130% for PSUs. This is because unlike private companies, public companies cannot deny third party coverage, resulting in extremely poor overall experience. Motor third party loss ratios are in the range of 150% to 200% while loss ratios for motor own damage are in the range of 75% to 100%. In view of this extreme performance, the private sector companies have mainly targeted private cars and motor cycles by offering comprehensive coverage, and have tended to minimise coverage of commercial vehicles where loss experience is considerably worse than private. In addition, they have tended to avoid offering third party liability only policies as the private sector s share of the third party liability market was only around 14% in Private companies have been able to achieve significantly lower loss ratios in the range of 60% to 100%. This is primarily due to selective underwriting and more technically based underwriting. The loss ratios are however likely to worsen significantly in the current financial year with a number of the private companies targeting top line growth following de-tariffication. Property/fire business Fire business which represented approximately 23% of the total industry s gross premium in 2004 reduced to around 18% in The contraction of the fire line has been mainly due to private sector companies which are increasingly striving for a retail oriented business mix. However, with the recent de-tariffication, the fire line is witnessing renewed vigour with PSUs actively targeting the Fire sector through aggressive pricing tactics. Although there has been a decrease in premium rates in the market, premium volumes as a whole have reportedly remained stable. 38

42 This line appears to have been consistently profitable over recent years with estimated loss ratios averaging around 50% to 55% for the public sector companies since For private companies, the fire loss ratios have been in the range of 40% to 60%. Following the removal of tariff premium rates, significant premium rate discounts in property/fire business occurred with PSUs leading the way with reductions in fire rates of as much as 60% in some cases. Following complaints from private insurers, the IRDA has restricted fire premium rate discounts to a maximum of 51.25% of original tariff rates. Health business Health business represented approximately 11% of the industry s gross written premium in In the past, a universal scheme known as Mediclaim dominated the non-government health insurance market and this product is still is a major contributor in the health sector. Mediclaim policies were predominantly written by public sector companies and were characterised by extremely low premium rates. However, since the removal of tariffs, PSUs have increased Mediclaim premium rates significantly. Health insurance is currently a significant loss making line of business in India with industry loss ratios estimated at around 120%. The main contributing factor is the Mediclaim policy which provides hospitalisation benefits for most conditions with very few exclusions. This situation has prevented global specialist health insurance companies from entering the market, as it is difficult to write an appropriate risk based policy which can compete against Mediclaim. Private insurers now offer a wider suite of health insurance products ranging from hospital cash to critical illness covers. Private insurers have found it increasingly difficult to penetrate the market as Mediclaim policies remain very popular and are still actively sold by the public sector insurers. However, the recent increase in Mediclaim premium rates is likely to help private insurers to market more innovative health products. Group health business has been the most significant loss making segment with most insurers incurring heavy losses due to poor performing corporate accounts. A number of private and public insurers have already discontinued loss making group health accounts in the current financial year. Marine business The proportion of marine business has decreased steadily in recent years. Marine business which represented approximately 10% of the total industry s gross premium in 2004 decreased to around 6% in Marine Cargo premium rate tariffs were removed in 1994 while marine hull tariffs were removed in Shortly following the removal of tariffs, a price war occurred and premium rates fell substantially in the market with a subsequent deterioration in profitability. Since 2001, Marine business appears to have been reasonably profitable for the public sector companies with loss ratios averaging around 60% to 65%. 39

43 Expense levels and commissions Expenses represent around 30% of net premiums for the public sector companies. Regulations require management expense ratios to be less than 19.5%. However, private companies have reported significantly higher management expense ratios as most companies are still in the expansion phase. Agency training costs comprise a large proportion of expenses and lately private players are exploring alternative, lower cost distribution channels. This is supported by an evident downward trend in expense ratios since Commission rates paid to intermediaries are subject to approval by the IRDA and maximum rates are generally fixed. Maximum rates of commission vary at around 5% to 10% of gross premium for individual agents and around 6.25% to 17.5% for brokers, depending on the line of business. No commission is payable on motor third party liability insurance. General comments on market profitability The profitability of the whole general insurance market in India is currently adversely affected by the unprofitable motor line, although this is offset somewhat by profitable fire business. While there is scope for improved profitability following the removal of tariffs, it appears that the experience in India is similar to that in other markets where tariffs were removed in that there has been a deterioration in the short term as a result of competitive forces in the market. We would expect this situation to be corrected within the next three years as the market stabilises from the effect of the removal of tariffs. 4.9 Distribution of general insurance business in India The distribution channels utilised by the general insurance sector in India include: agents and corporate agents, bancassurance, brokers, and direct sales. Agents The dominant distribution channel has historically been the agency force. While the public sector companies are able to attract agents, they suffer from high attrition rates due to indiscriminate agent appointment. The most successful tied agents tend to be local people known in the community who distribute products on a part-time basis. Educating and training these agents is a serious challenge for the insurance companies. Both the public and private sector use branch networks to manage these agent forces. For the private companies, most branches are located in the major metropolitan areas and larger cities. The relatively small premium size of most general insurance products compared to life insurance products results in lower commissions and this affects the performance of agents to a large extent. Corporate agents These consist of a wide range of entities including motor vehicle dealers, credit card companies, finance companies travel agents, hospital networks for health insurance etc. 40

44 Motor dealerships are a very important distribution channel for motor business. Bancassurance and other distribution agreements There is a gradual shift in general insurance distribution strategy with most insurers opting for lower cost distribution channels such as bancassurance over traditional channels such as agency and brokers. Bancassurance relationships have become all the more popular after de-tariffication as insurers are trying to cut back on agency training costs. While bancassurance has to date been mainly aimed at the life insurance industry, increasing attention to the distribution of general insurance products has been made with numerous bank and other corporate relationships being confirmed in recent years for both public and private sector insurers. Brokers Insurance brokerage in India is still in its infancy in comparison to other developed insurance markets and hence, brokers currently account for only a very small percentage of premium income generated in the country. At present, there are over 250 licensed brokerage companies in India. These organisations include large global firms such as Aon, Boda, Howdens and Willis, as well as smaller firms and individuals. The broking business in India has been heavily dependent on reinsurance which has never been subject to tariff. As a result of low capital requirements, a number of participants have entered the broking market but the surrender and cancellation of broking licences has been fairly common as many of the brokers are finding it very difficult to grow and attract new business. In July 2006, the IRDA constituted a committee to look at existing broking regulations as well as suggest new codes of conduct to be adopted by brokers in the de-tariffed environment. Direct Direct marketing has in recent times become much more popular, especially internet sales and telemarketing. This trend is likely to continue with most insurers opting to reduce the business written through traditional channels in the pursuit of lower distribution costs. Other less common (although increasingly popular) distribution techniques in India include: direct mailing, either using the customer base of the insurer s joint venture partner or in some cases, with a bancassurance partner. Bancassurance has not been exploited to the same extent as in the case of life insurance (this is expected to change following the recent removal of tariffs), telesales and telemarketing volumes for personal lines products have increased significantly over the last two years with a tremendous increase in cellular phone penetration in India (for example ICICI Lombard increased its telesales force from 800 in 2005 to around 1300 in 2006 and the company is reportedly planning to increase its direct marketing capacity further), and the use of the internet in the sale of motor, personal accident and home insurance, although business volumes remain quite small. 41

45 4.10 Prospects for new entrants to the general insurance market Unlike China, the track record to date of the foreign insurance companies (through joint venture) has been a huge success. Private companies have successfully differentiated themselves from their public counterparts through the provision of quality of service and product innovation. In just six years since the first phase of liberalisation in , private sector insurers have captured nearly 35% market share. Most companies have posted maiden profits in their third years of operation. However, there are initial indications that the recent removal of tariffs is likely to reduce the profitability of private sector companies in the short term. This is possibly the ideal time for potential entrants to enter India as the removal of tariffs has placed all existing insurers on a level playing field. However, it is unlikely that new entrants will achieve the same level of success as existing players in as short a timeframe as most of the existing companies are now benefiting from economies of scale with countrywide networks. Nevertheless, we do have somewhat more optimistic views on the potential achievements from a start-up operation in India than in China. For example, based on our findings, we believe that through a well planned and robust business strategy, new joint venture general insurance companies could realistically aim to achieve the following targets for a start-up operation in India: profitability after three to four years of operation, break even (i.e. positive cumulative profits) after five to six years and long term returns on capital of 12% to 15% after tax or higher. The biggest challenge faced by potential foreign new entrants is the availability of suitable domestic partners for the insurance joint venture. Most of the large corporations with widespread distribution networks have already entered the general insurance industry during the first phase of privatisation in Following the removal of tariffs, a number of multinational insurers and investors have shown interest in entering the Indian general insurance market but they are reportedly finding it very difficult to secure credible joint venture partners. Interestingly, we understand that there is a developing practice of foreign partners paying an up-front premium to the local partner in order to secure the joint venture agreement. The shortage of credible joint venture partners has reportedly increased the up-front premium quoted by some of the domestic corporations (including banks) which are planning to enter the general insurance sector. The distribution network, size of captive customer base and brand name of the local partner are some of the main contributing factors in deciding the entry premium. With a number of banks showing interest in entering into insurance joint ventures, the banking regulator is believed to strongly object to banks holding more than a 49% stake in insurance. The implementation of BASAL II reforms from financial year 2008 will result in higher capital requirements for banks. This means that insurance joint ventures with banks will require a second domestic promoter that would hold the remaining 15% stake (due to the 26% cap on foreign investors). This poses an additional problem of devising a joint venture agreement with more than one domestic promoter that would allow subsequent dilution of stakes by the domestic partners when the foreign equity cap in insurance is raised to 49%. 42

46 4.11 Prospects for acquisition To date there have not been any acquisitions of the established private sector joint venture companies although the American company Chubb has recently withdrawn from its joint venture with HDFC by HDFC acquiring Chubb s shareholding in the joint venture. However, we see some prospects for acquisitions to occur for the following reasons: required capital injections arising from the strong premium growth (this could encourage investors to reassess their positions), recent deregulation will make it difficult for smaller companies to compete with larger private and public companies, frustration from some foreign investors over delays to increasing the maximum foreign investment in joint venture companies from the current 26% to a proposed 49%), and changing focus from current foreign investors. However, with Indian promoters starting to understand the long term profitability prospects of general insurance business, acquisitions in the short term seem unlikely Common challenges for foreign insurers entering the India general insurance market Similar to China, the India general insurance market offers great potential for foreign companies, but there are a number of challenges that companies will face in establishing and building their businesses. Some of the challenges are described below. Removal of premium tariffs The recent removal of premium rate tariffs has sparked intense competition in the market which has resulted in price cutting among various lines of business and an overall reduction in profit margins for the general insurance sector. While we expect this situation to correct itself over the next three years, it does make market conditions very difficult in the short term. An area of concern for most insurers is the fact that motor third party is still tariffed, particularly the private motor car segment. It is likely that the IRDA will issue guidelines in the near future making it mandatory for private insurers to write third party liability cover without denial. This may become a huge area of concern particularly because third party claims are not capped. Also, new insurers will find it increasingly difficult to break into commercial segments of fire/property because of severe price competition in these lines of business. Foreign ownership constraints and exercising management control Due to the current 26% ownership cap on foreign investors, management control is usually effectively in the hands of the local joint venture partners. The government has foreshadowed the cap being increased to 49%, however it has had difficulty in passing this change through legislation. The government is also investigating ways of increasing foreign investments in insurance through other channels such foreign institutional investments ( FIIs ). A challenge therefore is for the foreign investors to be able to effectively add the value of its expertise in the insurance operation of the joint venture. In addition to this, there is a market practice of payment of an up-front premium by the foreign partner to the local partner as a token payment for the joint venture. This amount is likely to increase significantly in the future as the number of credible local partners becomes scarce. 43

47 Lack of product innovation Customisation of products was stifled under the former tariff regime. This is frustrating to companies wishing to produce tailored solutions that meet their clients needs. However, the IRDA will allow companies to sell customised products from 1 October 2007 as part of the second phase of deregulation. Absence of risk management culture The lack of underwriting culture due to the prolonged tariff regime has severely affected the industry. There is a shortage of skilled underwriters and risk management personnel. Adoption of risk management principles is therefore going to take time and will involve a cultural change, particularly among the dominant public sector companies. Fierce competition Private companies offer enhanced customer service offerings such as in-house, timely and hassle free claims settlement. These are adding significant costs to the operations that currently cannot be adequately factored into premiums. Since the removal of tariffs, almost all insurers have been forced to reduce margins across all products. Shortage of experienced staff The private sector companies have staffed many positions from the public sector companies. Acquiring and retaining senior and experienced staff is a significant problem in the insurance market. Poaching of staff is a common practice. Lack of industry data and changing insurance experience While not to the same extent as has been the case in China, the use of best practice technical approaches to claims reserving and product pricing in India has been significantly hampered as a result of poor data collection practices by insurance companies in the past. While this is slowly improving in the industry, it will be some years before a reasonable volume of historical data is available for such approaches to be used to best effect. Effective distribution Developing an effective distribution strategy is critical for foreign insurers entering the Indian insurance market. For this reason, finding a local joint venture partner with a large potential insurance customer base and effective distribution channel is a critical factor to success for foreign insurers looking to enter the market. Most of the reputed and large domestic banks have already entered or are in the process of entering the general insurance sector. Fraud Fraud is a major concern in India. For example, motor repair shops are often cited as contributing to excessive claim leakage by over-inflation of repair costs. In addition, from a corporate governance perspective, there have been instances of unethical competition and breaching of tariff limits under the previous tariff regime. Also, agents, brokers and third party administrators have been repeatedly reprimanded for colluding with fraudulent claimants. Exposure to natural hazards India is subject to severe natural hazards including earthquakes, cyclones and floods. 44

48 While India has experienced some of the world s worst natural catastrophes in recent years, the events have mostly not produced high insurance losses due to the low level of insurance penetration. Recent floods in cities such as Mumbai have changed this situation as insured losses have been significant. 45

49 5 Vietnam 5.1 Overview With a population of 83 million, Vietnam is a markedly smaller country than China or India. However, it ranks alongside both of these countries in the current level of interest being expressed by foreign general insurance companies looking to enter the market. Vietnam s economy has been growing rapidly with annual GDP growth averaging between 7% per annum to 8% per annum since In January 2007, the country was admitted as a member of the World Trade Organisation (WTO) and together with the fast pace of economic reform in the country, this is expected to further stimulate the significant amount of foreign direct investments (FDI) being made in the country. For example, in 2006, almost 800 new projects were approved generating in excess of USD10 billion in foreign direct investments. This is in addition to USD6 billion being invested in Vietnam by Vietnamese living abroad. Combined with the current very low level of insurance penetration in the country, these factors are all very encouraging signs for the general insurance industry in future. 5.2 A brief history of the Vietnam insurance market Vietnam started on the road to economic reform in 1986 with the introduction of Doi Moi. The official plan was for a market-based economy with a socialist orientation. This is generally interpreted to mean that market economics are allowed but with a leading role for the State and the maintenance of one-party rule. Prior to 1993, the Vietnam Insurance Corporation (Bao Viet), which was established by the State in 1963, operated under a monopoly in the insurance market. The company wrote only general insurance business, including cargo, marine hull, protection & indemnity, aviation, personal accident, and automobile third party insurance. In 1993, the government enacted a decree (No. 100/CP) allowing foreign insurers to operate in the country. Joint-stock insurers were formed in 1995 through the collaboration of several large corporations in Vietnam. In 1996, life insurance was first introduced when Bao Viet was converted into Vietnam Insurance Corporation by the Ministry of Finance and granted a composite licence to offer life products. A key event in late 2000 was the passing of the country s first Insurance Law. Most of the contentious issues, such as discrimination between local and foreign insurers, asset localisation restrictions and the licensing of new insurance agents were passed as drafted, despite aggressive lobbying by some sections of the insurance community. The Bilateral Trade Agreement signed between Vietnam and the USA in July 2001 took effect in Vietnam in December Under this agreement, for insurance and other non-mandatory sectors, USA companies became entitled to form joint ventures with local companies with a maximum equity of 50% after three years from the effective date of the treaty, and 100% equity after five years. In line with the financial reforms of the country following the Asian financial crisis in the late 1990s, the government expended considerable effort to develop the insurance sector. A development plan, titled the Strategy for Development of Vietnam s Insurance Market for was formulated. 46

50 The government has a buoyant view of the future of the insurance industry, with plans to enhance insurance revenue such that it will account for 4.2% of GDP by To achieve this goal, the government has announced the following strategy: assistance for local companies to increase capital, encouragement for improvements in IT, management and use of external consultants, no new State-owned insurance companies or captives, foreign companies allowed to expand their operations in the country, encouraging new entrants particularly from countries with good trading relations with Vietnam and from companies that have proven insurance experience, encouragement for domestic insurers to expand their current lines of business and for them to operate outside Vietnam, the insurance regulator to move to best practice compared to other insurance supervisors in the region, and self-regulation amongst the Association of Vietnamese Insurers. The American company AIG received the first licence to operate a 100% foreign-owned general insurance company in Vietnam in December In 2006, ACE and Liberty Mutual Group received their licences as did 3 local domestic companies, Global Insurance (Toan Chu), Agricultural Bank and Bao Tin. As of March 2007, there were 22 licensed general insurance companies operating in Vietnam. However, the general insurance market today is still very small and undeveloped. The insurance penetration rate (premium as a percentage of GDP) of general insurance business was only 0.7% in 2006, among the lowest in the Asia region. 5.3 Regulatory environment in Vietnam The following is a brief summary of some of the key areas of regulation impacting on general insurance companies in Vietnam including: the insurance regulatory body, requirements for foreign insurance companies or foreign investors, licensing of new insurance companies, capital and solvency requirements, policy liability reserving requirements and pricing regulations and tariffs. Insurance regulator The insurance regulator is the Insurance Department of the Ministry of Finance ( MOF ). It supervises market conduct such as policy terms, conditions and tariffs, commissions and agent management. It also supervises companies financials including capital requirements, minimum solvency ratio and liability provisions etc. 47

51 We understand that the regulator cooperates closely with the Monetary Authority of Singapore ( MAS ) and Asian Development Bank ( ADB ) who have provided them with technical support. The Insurance Law provides a basis framework and the legislative detail is contained in various regulations (decree) and guidelines. Important regulations and guidelines include the following: Decree No 42/2001/ND-CP (1 August 2001) detailing the implementation of a number of articles of the Insurance law. Decree No 43/2001/ND-CP (1 August 2001) sets out the financial regulations to insurance companies and insurance brokerage companies. Circulars No. 98 and TT-BTC (19 October 2004) set out the implementation guidelines on Decree No 42 and 43 respectively. Decree No 118/2003/ND-CP (13 October 2003) sets out the penalties for administrative violations of individuals or companies. Decree No 115/1997/ND-CP (17 December 1997) sets the regulations on the Motor compulsory third party liability insurance. Decree No. 46 released on 27 March 2007 implemented new rules on foreign insurers wishing to operate in Vietnam, and included a new solvency standard which will change the solvency standard for general insurers. Up to March 2007, both local and foreign insurers were regulated by the same legal framework, with the same minimum capital requirements, solvency requirements, guaranteed deposits, reserving requirements and pricing requirements. However, many wholly-owned foreign insurers were subject to further restrictions such as in setting up of branches, selling compulsory insurance business etc. These restrictions will be phased out after five years from the country s WTO accession. Participation by foreign insurers and other foreign investors including licensing requirements Foreign companies may participate in the Vietnamese insurance industry in one of three ways: by purchasing shares of a domestic company, by establishing a joint-venture ( JV ) insurance company, or by establishing a fully foreign owned insurance company. Insurers are not permitted to conduct both life and general insurance business simultaneously. One exception is that life insurers are allowed to sell personal accident and health care insurance as a supplement to life insurance. Article 63 of the Insurance Law sets out the conditions to establish a company and the main prerequisites include: meeting the minimum paid-up capital requirement, lodging a formal application, the form of the company and its charter must comply with the law and other regulations, and the management personnel must have appropriate skills, expertise and professional qualifications in insurance. 48

52 With the advent of Decree No. 46 released on 27 March 2007, foreign applicants are further subject to the following requirements: minimum assets of at least US$2 billion, at least 10 years of experience as an insurer, and must be licensed to operate in their country of origin. An new licence application should include the following: a written application requesting to establish an operation, a draft charter of the company, a 5 year business plan, specifying the methods of establishing insurance reserves, the company s reinsurance program, the investment plan, business efficiency, solvency, and the economic benefits of the operation, curricula vitae of the management personnel including certificates evidencing their skill, expertise and professional qualifications, details of the capital contribution plans, including a list of organisations/individuals contributing more than 10% of the paid-up capital, the financial status and/or other information regarding the shareholders, and insurance rules, terms, premiums and commissions for each type of product planned to be sold. The Ministry of Finance has advised that it will decide whether or not to grant a licence within 60 days from the date of receiving a complete application. Written notice with reasons will be given if an application is rejected. Although foreign ownership is permitted in Vietnam, it has been carefully controlled to date. Restrictions are often placed on operating licences to prevent writing certain lines of business. Typically, foreign insurers were restricted to writing only business from foreign invested companies, but excluding motor and personal accident. These restrictions have been eliminated as a result of the country s accession to the WTO. Although the current law still prevents foreign insurers from writing the business of state-owned enterprises and projects, the regulator has indicated that these restrictions will also soon be eliminated. For foreign-invested companies (except for wholly owned foreign insurers), such companies may open one branch apart from their head office to conduct insurance business in the first year of operation. After three years of operation, up to two new branches are allowed. After five years of operation, the number of additional branches shall be based on the market demand as well as any international agreements the Vietnamese government has adopted. There is no additional minimum capital requirement for each new branch. Wholly owned foreign insurers are restricted from establishing new branches within the first 5 years following Vietnam s accession to the WTO unless a Bilateral Trade Agreement is in place between Vietnam and the country of origin of the foreign insurer. Capital and solvency requirements The minimum capital requirement under recently revised regulations for foreign general insurers is VND300 billion (approximately USD18.8 million). This is a substantial increase from VND70 billion (approximately USD4.4 million) under the previous regulations. 49

53 Furthermore, foreign applicants must deposit 5% of their paid-up capital with a commercial bank in Vietnam within 60 days after receiving their licence, and insurers are required to set up a hedge fund protecting clients against risks. New restrictions have been placed on general insurers, limiting their investments in government bonds, corporate bonds and joint-ventures to 35% of their hedge funds. We understand the reasons for recently increasing the minimum capital requirements are: The regulation is aiming to increase the strength of the market. The regulator intends to keep control of the market and avoid an overly fragmented market such as that currently in the Philippines and Thailand. There is no additional minimum capital requirement for establishing additional branches once a licence is obtained. However, there is a restriction on the number of branches that can be set up in each year. In terms of solvency, a company must operate with a solvency margin exceeding the maximum of 25% of retained premium and 12.5% of gross written premium written in the previous year. The solvency margin is defined as the difference between the value of assets and liabilities, however the following assets are excluded in the solvency calculation: capital investment in other insurance companies, bad debts, and rewards and welfare fund. In the case of a joint-venture insurance company, the capital contribution by the Vietnamese parties must not be lower than 30% of the paid-up capital. Policy liability reserving requirements General insurance companies are required to set minimum policy liability provisions for both outstanding claims and unearned premiums although there is currently no requirement for certification of the reserves by an approved actuary. The rules are set out in regulatory Circular 99. Outstanding claims Outstanding claim reserves are required to be established by line of business using a statistical or actuarial methodology and must include appropriate allowance for incurred but not reported (IBNR) claims using a chain-ladder approach. This is a relatively new requirement of insurers, and it appears that very few of the existing insurance companies are likely to be able to meet these requirements at the present time due to not having retained sufficient historical policy and claims data in the past. Unearned premium reserves The required methodology for determining unearned premium reserves is consistent with international accounting requirements, based on 1/365, 1/24 or 1/8 methods. 50

54 Contingency reserves Prior to 1 January 2006, insurance companies were required to maintain contingency reserves in order to compensate for future large claims or events in case the total net written premium in the financial year was potentially not sufficient to meet claims payments. We understand that from January 2006, contingency reserves are no longer required and most insurers are now removing these reserves from their accounts. Other reserves Insurance companies are also required to set up a compulsory reserve fund. The purpose of this reserve is to supplement their paid-up capital and ensure the company s solvency. The fund is set up by 5% of the annual after-tax profit each year, until the level of the compulsory reserve fund is equal to 10% of the company s paid-up capital. Pricing regulations and tariffs In Vietnam, premium rate tariffs apply for obligatory forms of insurance only, including motor compulsory third party liability, aviation passenger liability, professional indemnity insurance for various professions, fire and explosion insurance, insurance of construction works, passenger and inflammable goods transportation, employer s liability in respect of foreign invested companies and insurance cover for Vietnamese citizens travelling abroad. A file and approval process applies for health and personal accident insurance. required to file: The insurers are a request to the regulator to approve the product prior to the commencement of underwriting, rules, terms and conditions, premium rates and commission rates, formula and methods in calculating premiums and reserves, with explanations, and relevant data including sample proposal forms, the sales tools and sample forms of information which the client must disclose and sign when purchasing the insurance. For other products, the insurance companies are only required to file the rules, terms and conditions and premium rates (in Vietnamese, except for products subject to international practice such as aviation and marine which can be filed in English) with the regulator. 5.4 Market size and growth The following chart shows the gross written premium (GWP) volumes of general insurance business in Vietnam in recent years in USD. 51

55 insurance penetration (GWP/GDP) % insurance density (GWP per-capita) USD million USD A look at some rapidly growing insurance markets in Asia General insurance gross written premium - Vietnam Year Source: Swiss Re Sigma World Insurance Series General insurance premium volumes in Vietnam have grown at a compound average rate of around 23% per annum since 1999 in local currency. 5.5 Market penetration The following chart shows the market penetration indicators over the seven year period to 2006, namely market penetration rate (GWP as a percentage of real GDP) and the market density (GWP per capita). General insurance penetration and market density in Vietnam 0.8% 6 0.7% 0.6% 0.5% % 3 0.3% 0.2% 0.1% % Year - penetration density Source: Swiss Re Sigma World Insurance Series Although the Vietnam general insurance market has recorded very strong growth in premium volumes in recent years, penetration remains very low with annual gross written premium representing only 0.7% of GDP, among the lowest penetration rates in Asia (c.f. for Australia, the comparative figures are 3.1% of GDP). 52

56 5.6 Market share As of March 2007, there were 22 licensed general insurance companies operating in Vietnam, comprising 13 domestic and 9 foreign companies. Among the domestic insurers, 10 were joint stock companies and 3 were state-owned. Five of the foreign insurers were 100% foreign-owned and 4 were joint ventures with local companies. American International Group (AIG) was the first foreign insurer granted a licence in Vietnam. The Vietnam general insurance market is currently highly concentrated due to the immaturity of the market and predominance of the original state-owned insurance companies. At the end of 2006, the top 4 insurers had a combined market share of nearly 90%. The top 3 insurers in Vietnam s general insurance market are Bao Viet, Bao Minh and PetroVietnam with a combined market share of 75% by the end of Bao Viet was a previously state-owned insurer with the Ministry of Finance as its principal shareholder. The company operates in more than 60 provinces and dominates in most lines of business. It writes all lines of business including life insurance. The market share of the company declined from 52% in 2000 to 35% in The company structure was changed in August 2007 to a joint stock company, with shares to be sold to local private investors, foreign investors and its own employees. The multinational financial services group HSBC has recently been announced as having been approved to buy 10% of shares in the company. Bao Minh was another state-owned company which was partly privatised in The company writes only general insurance and had a market share of around 21% in PetroVietnam Insurance is a wholly-owned subsidiary of an energy company, PetroVietnam. The insurance company writes all lines of business, and specialises in marine, engineering and energy insurance. A high level breakdown of market share based on gross written premium in 2006 is shown in the following chart. Vietnam general insurance market share by gross written premium in 2006 Foreign companies 7% Other local domestic companies 18% Bao Viet 35% Petro Viet Insurance 18% Bao Minh 22% Source: Association of Vietnamese Insurers 53

57 General comments on domestic insurers There are currently a number of key advantages for the domestic companies over foreign companies, including: fewer restrictions in the type of business that can be written, stronger relationships with the government, regulator and other local financial institutions (e.g. banks), a more well established distribution network with a more extensive reach, and stronger brand recognition. However, the local insurers also have some disadvantages, including: a lack of insurance expertise and relatively weak management compared to foreign companies, limited experience in product development, risk management, underwriting, claims management, actuarial, IT etc., limited focus on corporate governance, and pressures on management in a changing environment through increased foreign competition and for state-owned companies, having to deal with privatisation. General comments on foreign insurers The main challenge for foreign companies is to establish appropriate distribution expertise in order to gain market share in a profitable manner, particularly compared to the larger domestic competitors that have much stronger distribution networks. While gross written premium from foreign companies currently makes up only around 7% of the total general insurance market, we expect that the government s plans for international integration will increase competitiveness in the market, thus reducing the dominance of domestic companies. In addition, a number of opportunities are expected to emerge for foreign companies to take equity positions in previous state-owned companies as per the recent example with HSBC and Bao Viet mentioned earlier. 5.7 Business mix The following chart shows the breakdown of 2006 gross written premium in Vietnam by line of business. 54

58 Vietnam general insurance business mix in 2006 Miscellaneous 3% Liability 2% Motor 27% MAT 30% Engineering 13% PA & Health 15% Property 10% Source: Association of Vietnamese Insurers In comparison to many other developing countries in Asia, general insurance business is relatively well diversified by line of business and is not dominated by motor business. This is mainly due to the present situation where there are significantly more motorcycles than cars on Vietnam roads. Although motor business is an important line of business, other dominant lines of business include Marine, Aviation and Transit as well as property and engineering. These lines of business are predominantly from the commercial sector and are usually written with significant support from reinsurers due to the larger and more sophisticated nature of the risks. The volume of personal lines of insurance other than motor business is very small due to the low levels of private home ownership and a general lack of community awareness of insurance. While the volume of personal accident and health insurance business written is significant at 15%, this business is predominantly sold on a group basis to corporations on behalf of employees. 5.8 Profitability of the Vietnam general insurance market Unfortunately, there is currently no publicly available information on the profitability of the general insurance market in Vietnam. From general discussions held with various market participants, we understand that most insurers have recorded reasonable levels of profitability over a number of years. However, it is difficult to place too much credibility on these observations as we have some concerns about the quality of the loss reserve provisioning in the country and we feel that due to potential under-reserving, the profit levels of many companies may be somewhat exaggerated. Based on our observations, it appears that overall performance by line of business does not differ significantly from what we have seen in other Asian markets where Fire/Property and Marine Cargo tend to be very profitable, Marine Hull business tends to show volatile experience and Motor business is marginally profitable. 55

59 5.9 Distribution of general insurance business in Vietnam The main distribution channels in the general insurance sector in Vietnam include: internal sales staff throughout branches, general agents, insurance agents, brokers, affinity groups, direct marketing, and bancassurance. Internal sales force The internal sales force is a major distribution method for most of the local general insurance companies in Vietnam. The internal sales force is generally run in a similar manner to a standard tied agency arrangement and compensation is predominantly on a fixed salary component plus bonus linked to the insurance sales volumes achieved. For foreign companies, the fixed salary component often makes up the larger share of the total compensation amount. General agents General agents include retail shops, petrol stations and other organisations that that enter into agreements with insurance companies to sell insurance products. This channel is usually limited to the sale of simple, standardised personal lines policies related to their core business with minimal/simplified underwriting or negotiation with the insured. Examples include petrol stations and small retail shops that sell motor insurance and even schools that sell personal accident insurance covering students. There are reportedly around 1,000 outlets in the country that sell insurance in this manner. Insurance agents Insurance agents play a significant role in the distribution system in Vietnam, both in personal and small commercial lines of general insurance business. In 2006, there were over 45,000 general insurance agents in Vietnam and the number continues to grow rapidly. Remuneration of agents is primarily commission based (as a percentage of premium income sold), similar to other agency arrangements throughout Asia. Insurance agents, who tend to work with the major local domestic insurers, are required to be registered with the Ministry of Finance and to meet a number of industry standards. 56

60 Brokers There are currently 8 broking firms in Vietnam including the multination brokers such as Willis, AON and Marsh as well as 5 local firms. Brokers tend to cater for larger industrial and commercial accounts, particularly handling the insurance requirements of large multinational companies operating in Vietnam. Foreign brokers are currently permitted to service foreign invested organisations but not government businesses or business of state-owned enterprises. These restrictions are likely to be eliminated in the near future. While the overall proportion of general insurance sold through brokers is currently around 12%, foreign brokers have been more successful than their local counterparts and have captured the majority market share of 86% according to news sources. Aon tops the list of brokers with a 46% share of the broking market. Affinity groups Affinity groups include mainly car dealers and tour operators who focus on motor insurance and travel and accident insurance respectively. Direct marketing While a significant amount of government business is transacted directly with insurance companies, there are currently very few examples of the use of direct distribution such as direct marketing, telemarketing and internet sales in Vietnam and this is expected to be the case for the foreseeable future. Bancassurance While bancassurance distribution is becoming an important distribution channel for life insurance companies in Vietnam, the sale of general insurance products through banks is rare and generally limited to credit related insurance tied to customer loans. Some commentators point to the stage of evolution of the banking industry in Vietnam as the main reason why bancassurance is not developing as a significant distribution channel for insurance sales. Currently, the banking sector in Vietnam is booming and consequently, banks appear to be more focussed on expanding core banking services rather than on insurance sales. We understand the bancassurance relationships that currently exist are very rudimentary (e.g. insurance company sales staff located in bank branches rather than bank staff trained and selling insurance products). We are not aware of any advanced operations such as trading of bank databases with insurers Prospects for new entrants Following Vietnam s bilateral trade agreement with the USA and the country s accession to the World Trade Organisation, most of the country s protective practices have been abolished and the insurance market has opened up to allow foreign companies to operate in the country. At present, some barriers still exist which make it difficult for foreign companies to compete against the local domestic companies but these will be gradually removed to ensure a level playing field. 57

61 Vietnam is considered to be an attractive country for investment given its strong economic growth, significant reduction in poverty and increasing living standards in recent years, and stable political environment. It is expected that the above factors will continue driving significant increased demand for insurance products in the country and we therefore we have a very optimistic view of the potential for new entrants into the Vietnam general insurance market Common challenges for insurers entering the Vietnam general insurance market While the Vietnam general insurance market offers good growth prospect for foreign companies, there are a number of challenges that companies will face in establishing and building their businesses. Some of these are described below. Underdeveloped infrastructure Although Vietnam is enjoying sustained economic growth and is a market perceived with good potential, there are concerns on the largely under-developed economic infrastructure. This, together with an undeveloped regulatory and legal structure means that doing business in the country is of relatively high risk compared to other more established countries in Asia. Increasing competition Increasing competition in the market appears to be resulting in significant downward pressure on premium rates, particularly from local companies reacting to the influx of foreign insurance companies. However, we believe this irrational behaviour in the market is likely to be a short term consequence of the opening up of the market and that the market will stabilise in the medium to longer term. The government appears to be playing a role in this regard through its endeavours to ensure that local companies improve financial and management standards, as well as overall market behaviour in the face of foreign competition. Shortage of skilled insurance personnel As a consequence of the short history of the insurance industry, there is a significant lack of skilled personnel and this is causing a major problem for insurance companies looking to expand in the country. This means that it is difficult to recruit and retain experienced staff and a lot of poaching of staff between insurance companies is becoming evident in the market, thereby driving up salary and sales intermediary costs. Lack of industry data The industry data currently available in Vietnam is not recorded in sufficient detail to be useful for pricing purposes. This is compounded by the rapidly changing and expanding profile of insurance risks driven by the rapidly growing economy. This therefore represents a significant challenge for new insurers to appropriately design and price new insurance products in the market. Limited distribution channels For foreign insurers participating in the Vietnam general insurance market, establishing an effective distribution channel is crucial. While the major local companies have developed expanded branch networks and state-owned insurers currently secure business directly from the government, foreign insurers will be required to develop distribution channels from scratch. This will be difficult for new start-up companies without the support of an established local company as a joint venture partner. 58

62 Fraud As is the case with both the China and India general insurance markets, we fraud is a material issue in Vietnam, particularly in the motor line of business where fraudulent and overstated claims and repair costs are quite common. Exposure to natural hazards Vietnam is exposed to typhoons, tropical storms and flooding in many areas. Although there have not been many major insurance losses from these hazards to date, this is an important consideration in related product development, policy wording (including exclusions) and reinsurance planning. 59

63 6 Conclusions The general insurance markets in many developed countries (e.g. the United States, Japan, Australia and others throughout the European Union) are now very mature and insurers will face significant challenges in achieving sustained growth within their home markets. As a result, many of the large insurers in these countries continue to actively seek further growth opportunities in the relatively undeveloped Asian insurance markets. Asian insurance markets are seen as particularly attractive for foreign general insurers due to strong long term economic growth prospects and the flow on effect that this will have in increasing the current very low level of insurance penetration that exists in the region. While a number of Asian countries are viewed favourably by potential foreign investors, mainland China, India and more recently, Vietnam are generating a particularly high level of interest as a result of strong economies and a rapidly increasing demand for insurance products and services. The China, India and Vietnam general insurance markets offer significant growth and long term profitability prospects for foreign insurers wishing to enter these markets. However, there are also significant risks. We hope that this paper has adequately presented both perspectives to interested readers. 60

64 7 Reliances and limitations In putting together this paper, the writers have relied upon a variety of publicly available information, documentation, interviews and experience gained a number of years of working in the insurance markets of Asia. Although independent verification of the information gathered was not undertaken, we have reviewed some of the information for reasonableness and consistency with our knowledge of the insurance industry. Reliance is placed on, but not limited to, the general accuracy of all information and data provided and publicly available to us. The paper is intended to provide information on the general insurance markets of specific Asian countries and is not designed to provide formal recommendations. 61