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Chapter 1
Emerging Themes in Asia
Joining an insurance company in the 1960s in Hong Kong was not an obvious choice. In fact, the industry was poorly understood, and only a few multinationals were active in the market at the time. Insurance agents had a difficult time explaining to customers what the product was about, and many viewed such agents with suspicion. It was in such an environment that Dominic Leung joined the American International Assurance Company (AIA) in Hong Kong as an IT analyst. He remembered that “AIA was essentially run by locals—besides a few expats from the U.S., most of the management team consisted of Hong Kong executives.” Over the years, the industry blossomed, as life insurance became one of the first financial products that most middle-class people purchased. As AIA expanded its presence across Asia, Dominic moved to Taiwan in 1989 to become the country head. There, AIA was known by its Chinese name, Nan Shan, (a company AIA acquired some years before). Over the years, many multinational insurers followed the lead of AIA in entering Asia, including Allianz, AXA, Manulife, Prudential UK, and ING. By the mid-1990s, as more multinational companies aggressively entered the Asian markets, Dominic was headhunted away to be the CEO of Prudential UK’s Greater China operations, overseeing the three markets of China, Hong Kong, and Taiwan.
In January 2004, Dominic made his latest career move. He moved to Ping An, the fast-growing, second-largest life insurer in China, and became the chairman of its life insurance subsidiary (which contributed the vast majority of the value of the group). In 2006, he took over responsibility for all of Ping An’s insurance activities, including life, property and casualty, pensions, and health insurance. Then in June 2010, Dominic retired from his formal role and became the company’s principal advisor. During his tenure, Ping An grew from $7.1 billion in life insurance premiums in 2003 to $17.6 billion by 2011. The company went public in 2004 and boasted a market capitalization of $47 billion at the end of 2011, making it the second-largest life insurer in the world. As he reflected on his career move in Ping An’s internal newsletter in 2004, “I wanted to use my 30-plus years in the insurance industry to contribute to the development of the mainland China market. This is an once-in-a-lifetime opportunity.”
From the international finance center of Hong Kong to the fast-growing Taiwan market, and then to the huge domestic economy of China, in many ways Dominic’s career reflects the development of the Asian life insurance industry. From a global life insurance perspective, opportunities in Asia developed first in the more accessible markets like Hong Kong and Singapore, before growing rapidly in the next wave of developing markets such as Taiwan and South Korea, and finally reaching the massive markets of China and India.
The global financial services industry has gone through extraordinarily rough times in the last few years, and the life insurance industry is no exception. Insurers globally have been hit hard by sluggish growth, low interest rates, falling equity prices, high volatility in capital markets, product blowups (most notably, variable annuities), and increasingly tough regulation. It is no surprise that the mood in the boardrooms of life insurance companies globally is not very cheerful these days. Against this global backdrop, life insurers in Asia have fared fairly well. For the 12 Asian markets studied, total gross premium continued to grow even in 2008, the first year of the global financial crisis, when they increased 11 percent from 2007 levels, in contrast to Western Europe1, where premiums declined by 4 percent. Growth rates in Asia have continued to outperform Western markets throughout the financial crisis over the last years. Asian insurers’ resilience through the crisis can be attributed to their largely domestic businesses, smaller write-downs on their asset books (given limited exposure to U.S. mortgage-backed securities or government bonds from peripheral EU states), and a set of strong macroeconomic fundamentals underlying the insurance market. These fundamentals include robust economic growth, a high savings rate, and the continued emergence of a strong middle class.
Consequently, the role of Asia in the global life industry is becoming ever more prominent. Asia is expected to contribute more than half of global premium growth over the next 10 years and profitability should remain higher than that in the West. (See Figure 1.1.) A combination of higher growth expectations and better margins has led to higher market valuations for Asian insurers, and in particular, Chinese insurers. At the end of 2011, four out of the top ten life insurers of the world by market valuation were from Asia. This is in stark contrast to the picture 10 years ago, when all top 10 companies were from Europe and the United States.
A NEW PARADIGM
Despite the history of strong growth, the Asia life insurance industry certainly has its own challenges. The industry is entering into a new paradigm, during which insurers will be faced with a set of issues very different from those seen in the last decade. Growth rates, even if still high relative to the West, will come down, and shareholders and regulators will place more pressure on insurers to generate value rather than just top-line growth. The competitive landscape will change too. Multinational insurers will find themselves faced with stronger local competitors and will be forced to up their game when it comes to where and how to compete. The mass-recruiting model of tied agency, which has been the primary growth engine across Asia, is fast coming to an end (except for truly developing markets such as Indonesia and Vietnam). The rapidly growing bancassurance channel is ending up with banks capturing most of the value. New alternative channels are emerging, but remain small, and will require radically different skills to manage. Meanwhile, the pace of technological development is producing a new generation of digital users across Asia who are shifting from traditional to online channels for gathering information and making purchases. Lastly, rising wealth levels and growing sophistication of Asian consumers are creating many distinct segments with increasingly diverging and specific needs in products and services.
The following five pan-Asian themes will characterize the Asian life insurance market over the next several years:
- Asia as the emerging powerhouse in life insurance.
- A heated battle between multinationals and locals.
- The changing face of distribution.
- Driving innovation in insurance.
- Changing product mix to meet the new needs of the Asian consumers.
These are the important themes that are present in most, if not all, of the Asian markets, and are essential to understand the industry. It is important to note that the Asian life insurance market is not homogenous. In a region that sweeps down from the borders of Europe and Africa to the Indian and Pacific Oceans, each market differs in terms of economic development, levels of market penetration, and regulations that govern the various players, not to mention the more obvious differences in culture and social values. Winners in the Asian life insurance industry have, and will always be, those who are able to understand these intricate differences and to tailor their strategies accordingly.
ASIA AS THE EMERGING POWERHOUSE IN INSURANCE
“Without growth, there is no point in being in Asia,” a senior insurance executive once explained when analysts asked about his company’s top priority in Asia. Growth is undeniably a hallmark of the Asian life insurance markets. Asia, excluding Japan, accounted for 17 percent of global life premiums in 2010, but perhaps more significantly, it accounted for 45 percent of the growth in the global market from 2002 to 2010. Looking ahead to the next decade, Asia will further establish its role as the global growth engine—the region is expected to grow on average at 6 percent per annum, compared to the 2–3 percent expected from North America and Western Europe, and to also contribute more than half of the global growth in premiums. The growth will not be uniform across Asia. The two lighthouse growth markets, China and India, are expected to deliver 75 percent of the growth in Asia; but Indonesia and Vietnam will also grow quickly from a lower basis, with forecast growth rates in the low to mid teens. The mature markets of South Korea, Taiwan, Hong Kong, and Singapore will likely grow at a slower but healthy pace, in line with their markets’ GDP growth. The exception is Japan, where there has been no growth for the last two decades, and that is unlikely to change in the future.
Moreover, the profitability of most Asian markets, with the exception of India, is superior to that of many mature Western markets. For example, return on life reserves2 was on average 0.6 percent in Asia versus 0.4 percent in Western Europe in 2010. The margin of difference between the two regions is expected to remain the same for the next decade, and by 2020 return of reserves are predicted to stand at 0.7 percent in Asia versus 0.5 percent in Western Europe. It is this combination of growth and profitability that has made Asia the premier destination for so many global life insurers over the last decade. See Figure 1.2.
Solid Fundamentals Supporting Growth
Asia’s strong continued growth is underpinned by the region’s robust macro-economic fundamentals, which include a growing but aging population, steadily increasing wealth levels, high savings rates, and the rise of the middle class.
The United Nations’ population database shows that projected demographics are staggeringly in favor of Asia. The combined population of the countries under review in this book is expected to grow from 3.3 billion in 2010 to 3.6 billion in 2020, adding another 300 million potential customers. In the same time frame, the U.S. population will grow by a mere 30 million, and that of Western Europe will increase by 12 million. That means that Asia will have more than seven times the total population growth of the United States and Western Europe combined, or in absolute terms, Asian growth will match the population of the entire United States. This growth will be unevenly distributed. Populations in India, Malaysia, and the Philippines will increase by 13–18 percent; North Asian countries such as China, Taiwan, and South Korea will grow by 3–6 percent, while Japan will continue its gradual population decline.
At the same time, some of these countries, such as South Korea, Japan, and China, will see the emergence of a large aging population, like those in the Western world. Aging is no longer a Western phenomenon. The proportion of the population over the age of 65 is expected to increase significantly from 2010 to 2020. As a result, the number of working adults supporting each retiree will decrease, thus dramatically altering the shape of the age pyramid. Take South Korea for example, where this figure will decline from 4.5 in 2010 to 3.9 in 2015 and 3.4 by 2020. This phenomenon will drive demand in health insurance, annuity and endowment policies, and retirement-related products.
It is a well-known fact that economic growth in Asia is much higher than elsewhere in the world. However, it is still worthwhile noting just how significant this trend is. The projected real GDP growth rate for the Asian countries excluding Japan ranges from 4–9 percent per annum between 2010 and 2020. In contrast, the U.S. economy is expected to grow by less than 3 percent during the same period. In total, the 12 Asian countries studies accounted for 43 percent of the world’s real GDP growth from 2002 to 2010 and 42 percent of projected growth from 2010 to 2020. As Figure 1.3 shows, even countries projecting rather modest levels of growth by Asian standards are still expected to almost double the estimated pace of growth in the U.S. economy.
With fast-growing GDP levels, the personal financial assets of the population will also grow proportionally. For example, personal financial assets in China and India grew at annual rates of 22 percent from 2002 and 2010, whereas the volume grew just 5 percent in the United States and 7 percent in the United Kingdom over the same period. The increase in the personal financial assets (PFA) will naturally drive growth for life insurance products. Furthermore, a changing attitude on investments and personal finances is accelerating this opportunity even beyond these absolute growth numbers. Traditionally, Asians are more prone to leaving their personal financial assets in deposits or cash. In 2002, Chinese consumers put 84 percent of their PFA in cash or bank deposits, while Indian consumers did so with 74 percent, and Thai consumers with 72 percent. There has already been a considerable shift away from savings in bank deposits into investments. Between 2002 and 2010, without exception, consumers from these Asian nations shifted their cash into investment products. By the end of 2010, the Chinese put only 67 percent of their PFA in cash, while Indians did so with 54 percent, and Thais with 52 percent. There is much more room for growth, when considering that in mature markets such as the United States, cash holdings as a percentage of PFA are at only 14 percent.
As Asians move from saving to investing, a great deal more money will become available for investment in mutual funds and equities, as well as life insurance. Will the Asian consumer choose to invest this cash in life insurance rather than other investment products? In markets where life insurance ownership is very low, the answer is a resounding yes. In markets such as China, India, Indonesia, and the rest of Southeast Asia, market penetration of life insurance is still less...
