Insurance Coverage You Need

General Insurance Company In Malaysia - Emerging Foreign Multinationals

2012-01-04T10:00:00.000-08:00

General Insurance Company In Malaysia

Almost every international insurance company has looked at opportunities in Asia and by now, most have some sort of presence. By the beginning of 2008, of the top 30, listed, non-Asian insurers in the world, 25 had established some form of life insurance operation in one or more Asian countries. Allstate, Great-West, Power, Loews, and Lincoln National are the only five insurers out of the top 30 not to have any Asian presence.

However, up till now, there are only a handful of MNCs that have established a significant presence across multiple Asian countries. Most of the newer MNC players have only ramped up their presence in the region over the last five years and have achieved no more than small market shares in a very limited number of Asian markets. The operating environment for these MNCs is very different from that found by their more established peers who arrived in Asia 10-20 years earlier. Today, competition is far more intense and the opportunity to be a first mover no longer exists. Newcomers need to arrive in the region with considerable capital and patience because breaking even will take at least 6-8 years when the strategy is to build captive agent distribution. And they need to devote substantial management attention in fact, for many it seems disproportionate attention - to markets that show little immediate prospect of contributing in a meaningful way to profits at the group level.

This raises a number of difficult, and possibly unanswerable, questions. How should they think about Asia as a market, given their currently small position and the challenges in establishing a meaningful franchise? Which market should they place their bets on - the mature or the more developing - each with their very different risk-return profiles? How long will it take before the Asian business becomes a meaningful part of the total group value and returns some cash to start contributing significantly to the bottom line of the group? Should they "test the waters" or lay down a substantial investment? How will they set about building relationships in the region and should they attempt to go it alone or seek partners? Are there suitable acquisitions that can be viable shortcuts? How and where to build a regional headquarters to manage the Asian portfolio? Lastly, are the markets in China and India "too difficult to enter" or "too large to ignore?"

Is it too late to enter Asia? Have we already missed the boat? These questions are often asked by those foreign insurers who are not yet in the region or who have only a small presence in the market. The answer depends on the time frame. If one adopts a long-term horizon, the answer clearly is no.

There is no doubt that there are still going to be substantial changes in the market dynamics in virtually all of these Asian countries, and the market landscape in 10 years time will look very different from the one that can be seen today. Many Asian markets, in particular China and India, are still at an early stage of their development curve. Penetration is still low and the growth story of the last 5-10 years could easily continue for another couple of decades. With this perspective, entering Asia now is still plausible, despite the market being much more competitive than before.

Even in the most mature market in Asia, Japan, there are plenty of examples of new players entering the market at the right time, with the right product, and taking market share despite a highly competitive and dosed market. These examples include AFLAC'S cancer insurance in the 1980s and The Hartford's variable annuities in the early 2000s. These players entered in a specific niche, and had a high level of commitment to their entry efforts. These results are highly encouraging, and demonstrate the point that, even in Japan, there are plenty of success stories.

Choosing an appropriate partner is often a critical part of the strategy. The regulations in China and India dictate that foreign companies need to have a local joint venture partner. In other countries this is not a necessity but could be a powerful entry model. The key success factors for joint ventures are the same as elsewhere: there needs to be a good understanding of each partner's intentions; concrete areas of added value or contribution between the partners; and the development of a shared culture within the joint venture. In circumstances where the partnership is created out of regulatory necessity only, it is critical to have an understanding of what happens when regulatory limitations are lifted.

Not surprisingly, there are many examples of joint-venture failures. One American insurer's joint-venture foray in South Korea proves a good example. Due to differences and miscommunications between the MNC and the local partner, this joint venture led ultimately to financial problems as well as lawsuits for the parent companies. The company made a US$60 million loss in 2001 and in the same year sold its stake to a domestic competitor. A more recent example can be found in India. In 2005, Australia's AMP exited the Indian market by selling its stake to Reliance Capital, citing a strategic decision to focus on its wealth-management business in Australia and New Zealand. Its local joint-venture partner, Chennai-based " Sanmar Group, sold its stake to Reliance as well.

Apart from joint ventures, acquisitions could be part of the entry strategy. Generally, there are not that many available targets in Asia, but there have been success cases. In its early years in Asia, AIG acquired Nanshan in Taiwan while Prudential (UK) bought Chinfon as it entered the same market. More recently MassMutual bought Protective Life in Hong Kong, while Aviva partnered with Woori, a South Korean financial group, to buy LIG Life in South Korea. Manulife, AIG, and AXA all acquired existing firms when entering the Japan market. A few of these acquisitions worked especially well - in most of these cases the MNC buyers actively changed the operating model of the acquired business.

For example, Manulife's premium income grew sixfold within four years after its acquisition by using its variable annuity expertise from the US market and building a strong channel relationship with the Tokyo-Mitsubishi bank. At the same time, as with all acquisitions, there are many more cases where the acquisition failed as culture clashes took time to digest. For example, AXA's premiums declined by 25 percent within the first four years of buying Nippon Dantai in Japan.

Going forward, acquisitions are not likely to play a big role in MNC entry into the region, since there are not that many acquisition targets. There are many reasons for this.

First. all the pan-Asian franchises are owned by large MNCs who have voiced no intention of scaling back their Asia operations (with the exception of AIG who will likely sell a part or all of its Asian operations after its bailout from the US government).

Second, many local Asian insurers are family-owned (especially in Taiwan and South Korea), and they often see the insurance company as a family jewel in a larger, diversified group of businesses.

Third, even if acquisition targets are available, they are usually not in the fastestgrowing markets since no one wants to trade away their growth story. Furthermore, prices for these scarce opportunities have been high and are likely to remain so. Therefore, while acquisitions will happen, this will remain an opportunistic strategy for MNCs seeking expansion in Asia. Nonetheless, events such as the 2008 financial crisis may create unique opportunities for aggressive acquirers to buy assets that would not normally be available during normal market conditions.

Asia will continue to be a highly attractive marketplace in the next decade. Notwithstanding the certain volatility that comes with these markets, growth prospects are very strong - in particular, compared to the Western markets in Europe and North America. Forty percent of global premium growth in the next five years will be generated in Asia. Also, margins continue to be very attractive and generally much higher than in more mature international markets. This offers plenty of opportunities for local companies and foreign players alike.

At the same time, the life insurance industry in Asia is at an inflection point. Competition is getting much tougher, many new players have entered the arena, and the recipes for success are changing dramatically. We have outlined what it takes for life insurers to become, or remain, a winner in Asia in the next decade. We are convinced that in 10 years the competitive landscape will look quite different from now. We will see some familiar names in the list of top performers, but also some unknown or new ones. For sure, the prize of winning in Asia will only go to those who have a clear strategy of how to outperform competitors in the region, and the execution ability to implement that plan. For those who are prepared, the next decade in Asia will bring another enormous opportunity for growth and value creation. To learn more, you can check out General Insurance Company In Malaysia.

Large Insurance Companies In US - Well Established Foreign Multinationals

2012-01-03T22:00:00.000-08:00

Large Insurance Companies In US

A handful of foreign multinationals such as AIG, Prudential (UK), ING, and Manulife, already have a sizeable share in a number of Asian markets and generate a significant proportion of their global profit from this region. However large their current market positions, these players still only occupy a small share of the overall Asian market, but their future growth potential remains very significant. Total market share of all foreign players across Asia is 25 percent in 2008, and we see this increasing to 30-35 percent within the next 10 years.

The leading multinational players share a number of characteristics. They all have big positions in the "first generation" of Asian markets that have been open to foreign companies (for example, Hong Kong, Singapore, and Taiwan), while some have been first movers in emerging markets such as Indonesia, the Philippines, and Thailand. They have built most of their operations organically, with only a handful of acquisitions over the years. All of them have built sizeable Asian management teams which are headquartered in Hong Kong.

Landgrabbing in China and India

The top priority for these multinational leaders is rapid expansion in the large, emerging, landgrab markets, meaning China and India, which promise the strongest potential for growth over the next decades. As matters stand, their current presence in these markets is very small compared to their overall Asia business, mainly because they have been constrained by regulations. However, significant deregulation has started, and, as such, the potential for growth is now mainly constrained by their execution capacity. Large Insurance Companies In US

For example, in India the market is currently open for joint ventures to operate freely, and in China licenses for previously restricted cities are being granted at an accelerated pace. Given the large scale of these countries, the multinationals need to place their bets in a few key geographies as well as move into the vastly underpenetrated hinterland. For instance, ICICI-Prudential, through a bancassurance tie-up with 10 regional rural banks, has access to about 10,000 rural and semi-rural bank branches in five Indian states.

The challenge cannot be overstated. A few decades ago, when the first multinationals entered Asia, they were often the only ones blazing the trail and played a large role in developing the industry. They were seen as the most desired employers by agents and staff, and their brand names carried significant premium to the local companies. Today, the competitive landscape is quite different. Due to the enormous growth prospects in Asia, many more multinationals are frantically entering these markets, even if they have had very little presence in Asia before.

In China, there were 23 multinational life joint ventures as of December 2007, and many more are applying for their joint venture license today. In India, there were 18 joint ventures in operation in mid-2008, all competing ferociously across the country. For the few large multinational players who have been providing the main foreign presence in other parts of Asia for decades, the challenge they face in developing their presence in these countries is unprecedented in their history in Asia.

While the challenge is large, these large multinationals do have a significant advantage over their fellow foreign entrants: a strong Asia management bench and long experience of operating in the Asian market environment. Over the past decades, these MNCs have built up a management team that has been successfully operating across many Asian countries. Given their tested operating models and their experience in penetrating high-growth markets, they do have an advantage over less experienced peers, who are mostly betting on a few key hires, or sometimes, counting on their local joint-venture partners to develop their presence.

Capturing Share from Local Incumbents in Mature Markets Such as Japan and South Korea

Apart from landgrabbing in China and India, another growth opportunity for these MNCs is capturing share from the local incumbents in mature markets, especially in Japan and South Korea. In the past, MNCs have not been able to capture a large share of the domestic market in the life insurance business. However, these markets are now at an inflection point for the MNCs - while the local incumbents are fixing their large, legacy sales forces, new channels and products have opened up potential for other players to build market positions in these segments.

The strategy to capture share from the local incumbents is straightforward. Either these MNCs can outexecute the locals, or they need to develop niche segments. Both of these strategies can work. For example, in many markets the MNCs have an edge in recruiting, training, and infrastructure support since they are leveraging across Asia many of the best practices and tools they have developed. Furthermore, MNCs have been successful in building niche segments, such as The Hartford in variable annuities and AFLAC in medical insurance.

Protecting the Franchise in Established Geographies

The challenge in the more established geographies for the leading MNCs such as Hong Kong, Singapore, and some Southeast Asian markets, such as Thailand, is quite different. In these geographies, the large, foreign MNCs have to defend what they have already built up. In fact, because they were often first movers they have now reached the stage where they need to revitalize their organizations in the face of renewed competition. It is a role reversal - some of these MNC insurers, once seen as attackers and first movers in Asia, are now local incumbents targeted by local upstarts. Large Insurance Companies In US

In recent years, some of these MNC leaders have lost share across some of their strongest markets in Asia to local attackers and other MNC entrants. The MNCs need to ensure that the sales forces in these established countries do not get complacent and live off their accumulated book of business - that they continue to upgrade and attack the market. Product innovation is also important to keep up with developments in the market - these leading MNCs must not lose the competitive edge that made them successful in the first place.

Maximizing Synergies Across Asia

While it is not easy to capture synergies across Asia due to the differing landscapes, languages, and regulations, leading MNCs should use the advantage of their regional network by maximizing synergies across their operations. Historically, many of these companies have taken a very entrepreneurial approach and expanded quickly in each market, often as distinctive business units led by entrepreneurial managers. This business model worked well when the foreign entrant first established itself because it allowed a large degree of flexibility for country managers. But as the Asia headquarters of the leading MNCs built up, these MNCs have now developed into more complex-matrix organizations with myriad functional and geographic lines. In such organizations, some form of standardization and best practice sharing can yield important benefits.

Front-office synergies such as cross-regional training, proprietary selling tools and techniques, and common product development tools can give leading Asian MNCs an advantage over their less regional peers. Synergies across the back office are much harder to achieve, but when done properly, can yield substantial benefits. While not all processes can be operated centrally in the regional headquarters or back-office processing units, in critical areas such as underwriting, investment management, and risk management, building a strong central function can both lower cost and increase the quality of risk control in the various operating units. It is important to note though, that due to the huge differences between the various countries in Asia, capturing back-office synergies for the leading MNCs is only at an early stage. During this process, it is also common to hear lots of complaints from country managements on the inflexibility and bureaucracy from such an approach. At this stage, it is unproven to what extent these back-office synergies will give these MNCs a true cost and operational efficiency advantage over the local players.

Lastly, one of the most important advantages of these leading MNCs is their strong management team and their understanding of the opportunities in Asia. For example, leading MNCs in the region are much quicker to decide on mergers and acquisitions (M&A) opportunities, as well as capturing growing niches in certain markets compared to their less experienced peers. This strength in management is difficult to quantify - in fact, for some it may appear as a bloated regional management structure. However, when compared with other MNCs who have little local management presence in Asia, it is clear that the leading MNCs have built a much better starting position to capture the growth opportunities in these markets. To find out more, you can check out Large Insurance Companies In US.

Life Insurance Companies In Asia - Smaller Foreign And Local Players

2012-01-03T10:00:00.000-08:00

Life Insurance Companies In Asia

Chasing the large incumbents are the smaller foreign and local players. Most of these players have a much shorter history than the incumbents, and they have accumulated only single-digit market shares over several years. The strategic imperatives for these players depend on whether they are in more mature or nascent markets.

In many of the Asian markets the landgrab phase is over, and, consequendy, smaller foreign and local players are likely to find it much more difficult to expand significantly beyond their current market position in a short period of time. Therefore, they need to choose whether to remain as fringe players with a similar model to the larger players or to find a niche they can dominate and potentially become much more profitable within that niche.

Across Asia, life insurance players are not very well differentiated. While the brands may differ in terms of history and recognition, the operating model and the target market are remarkably similar across all players. Most players today focus on the mass-market segment, and sell very similar products.

Smaller players can certainly survive in their current form for some time. Market growth is strong and there is still little pressure for consolidation. In fact, there seems to be relatively few scale benefits for the large players, and most of the smaller players have been able to enjoy healthy margins without experiencing the disadvantages arising their from their smaller size. With the largest players typically saddled with historical legacies and aging sales forces, there is little urgency for smaller players to change their business model radically. For these reasons, consolidation has not yet happened in these markets.

In fact, given their more nimble starting point, smaller players are better situated to capture the growth potential from these markets. The opportunity to create a differentiated branding and business model is large. Life Insurance Companies In Asia

In mature markets, such as Japan, South Korea, and Taiwan, where customers are becoming more sophisticated and the competitors are well established, the niche for smaller companies is likely to be in distribution for example, targeting high-touch, high-margin customers or innovating the operating model to deliver low-premium, low-margin products to the mass segment.

This is already evident in the more mature markets of South Korea and Japan where there is a growing proliferation of smaller, but highly successful, niche players. This includes ALICO's direct-channel strategy in Japan that mobilizes corporate agents to sell medical insurance, and ORIX Life's low-premium strategy, which uses the mail-order channel for low-margin policies. ALICO's market share jumped from 1 percent in 2000 to 4.8 percent in 2007.

Most of these strategies involve pursuing niche distribution channels and developing different business models. This means acquiring different types of staff for specialized sales channels or focusing on niche products. As explained previously, Mirae Asset Life in South Korea was the first insurer to combine an insurance sales force with a deep focus on premium, asset-management products. Part of the strategy was to develop mini-retail investment centers in convenient locations alongside a roaming sales force that would bring potential clients to these centers for sal meetings. By the end of 2006, Mirae had established 47 so called "Financial Plazas" in convenient, middle-class locations throughout South Korea. Already, around 11 percent of Mirae Asset Group's mutual fund sales are through Mirae Asset Life, as compared to the industry average of less than 3 percent.

Meanwhile, ING in South Korea provides an example of a player attacking the incumbents' housewife-dominated sales forces with agents who mostly male, younger, and better educated and thus able to target a different customer base. And in Japan, Sompo Life successfully markets basic life insurance products using non-face-to-face methods. Its core product is a one year, term-life insurance, which allows customers to review their insurance needs according to their life stage by adding riders for various types of cover, such as hospitalization, cancer, and income replacement insurance.

There are also the product specialists. For example, The Hartford, in Japan, concentrates solely on variable annuities and manages 22 percent of the total in-force sum assured, as of financial year 2006. Indeed it can be said that The Hartford created this market. Life Insurance Companies In Asia

In less mature markets, the strategy for the smaller players can be quite different. In these markets, such as India and China, but also some of the Southeast Asian markets such as Vietnam or Indonesia, there is much more room for smaller players to participate in the natural growth of the market. These markets are still in landgrab mode, where the penetration of insurance to gross domestic product (GDP) is still low (2 percent in China and 4.3 percent in India). For smaller players in these markets, the business model need not necessarily be different from the large incumbents; instead, the focus should be on execution excellence and the development of a stronger management bench. Choosing the right channel mix and geographic focus is also important, as it is not feasible to expand nationwide without the proper management resources and for some foreign players, the proper licenses.

Execution excellence is key for the smaller players to succeed in these markets. But this is no small thing to achieve. Many of the smaller players in markets such as China and India have grown at breathtaking rates.

They often struggle with a lack of management talent, poor operations, and a lack of control over highly entrepreneurial branch operations. For most of these smaller players, their ambitions should be outgrowing and outexecuting the large incumbents by a significant percentage. This is particularly true when they compete away from the more developed cities and drive deep into the hundreds of emerging second- and third-tier cities, where brand leadership is still wide open. But we believe few of the smaller companies will be able to achieve this - the operational challenges are enormous, even though they are at a smaller scale, and management talent is even harder to attract for these companies. Therefore, focus is a key success factor for these smaller attackers. Too often we have seen companies fail because they tried to do everything - every channel and every geography - at the same time, without the proper management bench, operations, and IT support in place.

Looking at the development of the past decade, there is no reason not to expect a handful of these smaller players to become large, dominant players over the next 10 years, especially in the rapidly growing markets. Leading players in China and India have built their current strong market position within the last 5-10 years. For example, ICICI-Prudential in India has grown its position only in the past few years. For some of today's smaller life insurers, dominance may come from a niche segment, either in terms of customers, distribution models, or products. But we also anticipate that many of the smaller players will struggle with their existing small and undifferentiated operating models.

These players might be able to defend their current market share, and will even enjoy the natural growth of these markets for some years. They will probably still be quite profitable, and many will not see the urgency to change the way they operate and experiment with new initiatives. However, in the dynamic world of Asian life insurance, we see a lost opportunity for them to develop a stronger, more defensible niche and they will eventually come under a lot of pressure from larger and stronger players - they will be the first victims of a consolidation wave. To learn more, you can check out Life Insurance Companies In Asia.

Life Insurance Growth In India - Creating New Growth Horizons

2012-01-02T19:00:00.000-08:00

Life Insurance Growth In India

Beyond improving the core, which inevitably takes years to complete (and is very much an ongoing effort), incumbent insurers in Asia need to rebuild momentum and develop new growth options. They can look at new channels or business models, other businesses in financial services, and other markets to expand into. The challenges involved in making this work are enormous and cannot be undertaken where there is risk of undermining the core business or removing the focus away from the required improvements stated above.

The Asian life insurance incumbents are still relying largely on their massive sales forces - which are simultaneously a strength and a weakness. Of course, the enormous selling power of these agent forces is a huge advantage that incumbents need to build on. At the same time, other channels, notably bancassurance, have grown much faster than the agent channel in general. The often lower qualifications of incumbents' agents, compared to some attackers in the market, tends to hinder them when they try to sell the faster growing products such as investment-linked or health insurance. Across the region, local incumbents have a much lower share in bancassurance and alternative channels than in the agent channel. This might be surprising at first glance, but can be explained by the difficulty in managing channel conflicts. The agent sales forces usually have substantial internal power in these organizations that allows them to push back at the development of competing channels.

Furthermore, incumbents have been much slower to react to emerging trends than the smaller attackers in the market. Nonetheless, incumbents should be able to turn this around. They should leverage their strong relationships in the financial services market and their strong brand power to become marker leaders in alternative distribution channels and bancassurance. By developing these channels parallel to their traditional sales forces, they also reduce the number of legacy issues they have to deal with and can set the aspiration of building best practice channel management capabilities. This might require them to hire the best talent and maybe even set up these new channels separate from the rest of the organization, to prevent channel conflicts. Life Insurance Growth In India

Local incumbents should also look at new growth opportunities in related financial services. This might seem like a stretch given the enormous challenges in the core life business, but there are some obvious synergies within the financial sector that are worthy of consideration by large incumbent insurers. These have already been recognized by a number of local insurance companies who have expanded domestically into banking, for example, Cathay Life in Taiwan acquired the United World Chinese Commercial Bank (now Cathay United Bank) in 2001 and Ping An in China bought 89 percent of Shenzhen Commercial Bank (later renamed Ping An Bank) in 2006.

On the surface, expansion into banking may look obvious. Analysts tout obvious synergies such as securing control over a captive bancassurance market, cross-selling and sharing information on the customer base, and creating back-office synergies. In practice though, synergies arising from insurance-bank combinations are very difficult to achieve. For example, the Allianz-Dresdner merger in Germany took many years to realize the expected distribution benefits, and the insurer eventually chose to break off the bank.

Other mergers such as Travelers-Citigroup and Winterthur-Credit Suisse also demerged a few years later after it was found that the costs and complexity of integration outweighed the benefits. Another area of natural expansion into other financial services is asset management. Again, there are some obvious benefits with 80 percent of life insurance in Asia flowing into savings products. We have described the challenges and opportunities already, but again this is an area where incumbents can leverage their size and brand to create new growth horizons. Life Insurance Growth In India

Meanwhile, some larger Asian life insurers are running out of expansion space in their domestic markets. This has led a number of companies to think about extending their reach into other Asian, and even global, markets. Many Taiwanese insurers, for example, have expanded into China, including Cathay Life, which formed a life insurance joint venture with China Eastern Airlines and Shin Kong, who has a joint venture with Hainan Airlines. Ping An dipped its toes into overseas markets by opening a branch office in Vietnam. The large Japanese insurers have also begun their journey towards a more international portfolio.

Players like Nippon Life and Dai-ichi have already set up businesses in some Asian markers and have expressed their objective to raise revenues outside of Japan. For example, Dai-ichi, in July 2008, bought 24 percent of Ocean Life Insurance in Thailand, and in October 2008 completed its acquisition of its one-third stake in Tower Australia. So far, these have been relatively timid steps by the leading Asian incumbents, but they are likely to give rise to some much larger overseas steps as they become more comfortable with forays into these markets. Of course, not all of these will be successful moves - in fact the financial crisis in 2008 has made many acquisitions look very untimely - but from the vantage point of these incumbents, this could be a step that they can ill-afford not to take in the long term. To find out more, you can check out Life Insurance Growth In India.

Health Insurance Deductible Self Employed - Sustaining Margin Pressure

2012-01-02T10:00:00.000-08:00

Health Insurance Deductible Self Employed

We believe it is unlikely that the current high levels of profitability in Asia's life insurance business, relative to the more developed Western markets, will be sustainable in the long run. Competition is already eating away at profit margins and will continue to do so. This has been most visible in bancassurance, where the banks have squeezed the margins of the Life insurers. On the other hand, in the agent channel and in more traditional life insurance, many of the features of life insurance products continue to be opaque to customers, so the compression of margins will most likely be a much slower process. While the margins of Asian life insurers will gradually decrease in the long term, in the context of global Life insurance, this region will still be significantly superior in terms of profitability in the years to come.

What we do not anticipate in the next several years is major consolidation in the industry. Asia is still very much a growth market, and for many of the players, throwing in the towel and selling to competitors is not an option. In fact, the slowdown in their home markets has prompted many international players to double down on their Asian efforts. In the longer term - and it may be quite a long term - consolidation in the industry may happen, but no one should be waiting for consolidation to play their cards.

In this market context, life insurers across Asia in particular, many of the local players need to shift from a growth to a value paradigm. Many life companies are still mainly focused on growing the top line. This is only natural, since the current market valuations of these companies assume that 70-80 percent of their value will be from future growth expectations. But even in markets such as China and India it is becoming increasingly clear that high growth alone is not sustainable in the long term, and is no guarantee for success. What investors are looking for are sustainable business models and long-term, value creation opportunities. To take a value perspective, life companies will need to adopt some of the initiatives described above, which include maximizing the product and channel economics, introducing a cost perspective into operations management, and rationalizing investment decisions from a risk perspective.

Challenges and Opportunities for Life Insurers in Asia
Above we have looked at the five key success factors for winning in Asia. The following section will describe the specific challenges and opportunities for life insurers in Asia. The strategy for every company will of course be different and each one's success will depend on its ability to leverage its natural strengths and adapt its competitive positioning to capture value creation opportunities. The nature of the response will very much depend on the starting point of the many players in the market. At the risk of over-generalizing, the starting point of life insurers in Asia can be roughly divided into four groups:

Large local incumbents - Characterized by major market positions, first-mover advantage, close regulatory relationships and seen as national champions, these organizations usually have a large agency force with numbers in the tens or hundreds of thousands.
Smaller foreign and local players - These are usually companies which are much smaller and nimbler than the large local incumbents, burdened with far fewer historical legacies, and have strengths in particular localities or product areas.
Well-established foreign multinational companies - These are companies with long experience in Asia, usually the first overseas movers in local markets, well-positioned across several Asian markets, and operate a well-staffed Asia headquarters.
Emerging foreign multinational companies - These are small latecomers to individual markets and typically have a limited footprint, focusing only on a few markets.

The following details the top strategic priorities for each of these types of players.

Large Local Incumbents
Most Asian markets are dominated by a handful of large local incumbents. These companies are very well established and often had a near, or actual, monopoly in the past. Their corporate culture and practices were nurtured in a time when they faced little competition. Among the many advantages they retain are: strong relations with a range of partners and official bodies, strong brand awareness, and large sales forces. Companies that fall into this category are China Life in China, Samsung Life and Kyobo in South Korea, Cathay Life and Shin Kong in Taiwan, LIC in India, and Nippon Life and Dai-ichi in Japan.

These local incumbents are increasingly being squeezed by more nimble foreign players and local competitors. As deregulation accelerates and competition intensifies, this pressure on the incumbents will continue to build up and a proactive response is needed. In general, we believe that these incumbent players have two broad priorities: transforming the core, and creating new growth horizons.

Transforming the Core
Many of Asia's local incumbent life insurers have enjoyed a quasi-monopoly, or at least a dominant market position, in the past. This has led to very large sales forces, but also to more bureaucratic and hierarchical organizations, slower decision-making, and often lower productivity. As a consequence, many of these incumbents have continually lost market share to smaller attackers and foreign entrants when their home markets were opened up. Many of them are now in need of a massive transformation program to protect their market position buttons outlined above - they need to perform a fundamental and extensive upgrade of their sales forces and create a more sustainable model. Furthermore, they need to systematically address weaknesses in other parts of the business system - for example, in IT, operations, and investment management. And they need to strengthen the management bench - renewing the top team and hiring and developing top talent at all levels of the organization.

Given the scale of these companies, this is an enormous task - but it can be done. We have found that a strong leader, a clear vision, a detailed road map, and a strong implementation setup are the ingredients required to succeed. This kind of transformation program usually takes three to five years and requires the whole organization and key stakeholders to be aligned behind the ultimate goals. There has yet to be an example of a completed transformation of an incumbent life insurer in Asia, but there are some encouraging signs. For example, Samsung Life has made remarkable progress in increasing the productivity of their housewife sales force.

There are also success cases in other financial sectors, for example, the transformation of ICICI Bank into a market leader in India. We believe some of Asia's incumbent life insurers will follow this path and a few will regain their strength and market-dominating position. Just as many incumbents though, will not be so successful - it may be difficult to imagine now - but in 10 years time, it is possible that some of these incumbents may become marginal players in their own markets. This in turn will open up new opportunities for smaller attackers and foreign players. Next post, we'll talk about creating new growth horizons. At mean time, you can check out Health Insurance Deductible Self Employed.

Insurance Agency Acquisition - Organic Growth Or Acquisitions

2012-01-01T18:00:00.000-08:00

Insurance Agency Acquisition

We are often asked whether an organic expansion or an acquisition is the best entry model in Asia - and obviously there is no single answer. First, it depends on the market. In general, acquisitions are the preferred option in the more mature markets where organic expansion is very difficult for latecomers and will take a long time. In the high-growth markets on the other hand, such as China and India, and also Vietnam, organic growth is a more likely vehicle for success.

Second, it depends on the availability of acquisition targets - which are generally scarce in Asia. Against the backdrop of high industry growth, consolidation in most markets might still be many years away. And valuations continue to be very high - despite the recent volatility in equity markets. On the other hand, life insurers in many Asian markets are still suffering from high-interest-rate guarantees on their in-force books and are, subsequently, taking on a lot of risk on the investment side (Taiwanese insurers are a good example). This dramatically increases their exposure to market volatility and might open up opportunities. The acquisition of ING's Taiwan business by Fubon is a prime example of such opportunistic acquisitions.

Third, timing is an important factor for consideration. Given the lack of availability of attractive targets, we often find strategies successful where life insurers start building a business organically and use this as a bridgehead to prepare for future acquisitions. This has the advantage of building a network within the industry - rather than just relying on investment bankers - by establishing relationships with local regulators and building a local management bench that will be required in case of a later acquisition anyway.

Finally, players should be very clear about their acquisition objectives: Is this "to get a toe in the water" or is it a transformational deal? In many markets in Asia, there are some small local, and also foreign, companies that might be up for grabs for the right price. The logic for such a deal is not so much the attractiveness of the target itself, but the timing of entry for players who have decided to enter the market. Buying into an existing company can often accelerate the start of operations in a specific life market, and the value is mostly derived from obtaining a license and accelerating the business plan rather than from the existing franchise. At the other end of the spectrum is the possibility of making a transformational move. Insurance Agency Acquisition

Local Asian companies who want to branch out of their local markets should consider a substantial acquisition. Given that their home management teams may lack the experience of operating in foreign markets, a major acquisition of a player with a good management team could be a transformational move to internationalize the company. Often, taking some minoriry stakes to get to know the target better is a good way to start this journey. We have not seen any examples yet for this kind of bold move in the Asian insurance industry, but the aspirations of many of the local Asian players suggest it is likely that over the next several years we will see some of these transformational deals.

Regardless of whether organic or inorganic measures are employed to build a pan-Asian footprint, winning players will be those who systematically build on their strengths while expanding. Whether this is a particular skill in channel management, (for example, agent management, experience in bancassurance), or know-how in direct-response models, or product know-how - such as The Hartford with its variable annuities that led to a market-leading position in Japan - building on existing strengths is a good recipe for success.

Cultural Adaptation

One of the key challenges for a successful expansion is managing cultural differences. This is as true for local Asian companies expanding across the continent as for multinationals. In particular, Asian companies from markets such as China, South Korea, and Japan find it very hard to operate successfully outside their own territory. Why is this? First, there is a language problem. Many top executives, not to speak of the more junior levels, are not comfortable in English, which makes an international expansion much more difficult. Second, the business culture in these markets is substantially different from international practices in many aspects.

The communication style, the organization model, and the decision-making processes are highly idiosyncratic - they are grounded in the cultural and historical context of these countries, but very hard to apply in other markets. Third, many companies in these markets have no history of making foreigners successful in their own organizations - which is a major obstacle when setting up an international operation. But this does not mean that it is impossible to change.

In all three of these markets there have been initial moves from the leading incumbent players to set up businesses outside their home markets. For example, Dai-ichi in Japan has decided to demutualize and to deploy more capital in other Asian markets; in South Korea, Samsung Life has started to build businesses in China and other markets; in Taiwan, Shin Kong has begun hiring non-Taiwanese for its top executive team and has started to expand into China and Vietnam; and Ping An of China has acquired stakes in foreign companies while building the most international management team in the region, with three-quarters of the top 100 having a foreign passport - many of them have an ethnic Chinese background, but not all. Insurance Agency Acquisition

Compared to the Asian incumbents, multinational life insurers have much more experience in building international operations. Nevertheless, many of them have struggled to adapt to the Asian environment. This has much to do with the cultural differences described above. Many MNCs also struggle with building a local management team. It is a common perception within MNCs that they can trust Western managers more - in particular, those from the same country of origin - which, true or not, is often an obstacle to putting the best management talent on the ground to do the job. Furthermore, many MNCs find it hard to adjust to the highly entrepreneurial environment in high-growth markets such as India or China.

In India for example, almost all private life companies set up since deregulation in 2000 are foreign-local joint ventures. But in most of them the Indian partner took over full control and currently runs the operation. The foreign partners were often unable to put the required management talent on the ground to manage the enormous entrepreneurial task of building huge agent forces, numbering hundreds of thousands, in only a few years. Some blame the 26 percent cap on foreign shareholdings for making it not worthwhile to the MNC partner to do all the work but only receive a quarter of the rewards. However, it is unlikely that this is the full story; there are successful examples such as BAJAJ-Allianz, where the German insurer is clearly in the driver's seat and has created one of the largest life insurance joint ventures in India.

One way for MNCs to improve the leadership and management of their local Asian operations is to set up a strong Asian headquarters. AIG and Prudential (UK) have led the way here, with strong Asia CEOs running the Asia business from their respective Hong Kong headquarters. But many other multinationals have not created this management layer, and still have their various Asian country operations reporting directly to a global head office. This often slows down decision making, makes it difficult to build market insights and understanding at European or US headquarters level, and often leads to frustration on both sides. These MNCs should ask themselves if they are really the best owner of these Asian businesses in this kind of set up - and what is the group adding to the individual country operations?

Strategic decisions on the expansion of the footprint across Asia, capital allocation across markets, product guidelines and margin requirements, centralization and regionalization of operations, and talent management are topics where a regional headquarters can add a lot of value - as long as this management layer has real market insights, still encourages local entrepreneurship, and stays close to decision-making in these fast-moving markets. The Asia CEOs of AIG and Prudential (UK) are both members of their global executive board and others will surely have to follow this pattern if they want to become successful pan-Asian players. To find out more, you can check out Insurance Agency Acquisition.

Management Roles In Business - Strengthening the Management Bench

2012-01-01T10:00:00.000-08:00

Management Roles In Business

The insurance industry has under-invested in management talent for decades. This contrasts sharply with the banking business. Until very recently, no insurance company would have shown up on a list of preferred employers at top business schools. Furthermore, compensation was generally less attractive than in other parts of the financial services industry. This is driven partially by the retail nature of the business with a strong focus on mass operations - but it has clearly become an issue for the industry at large, and Asia is no exception. The most aggressive players have already begun to change - globally and in Asia - and have identified talent as a key success factor for further growth and value creation.

In many Asian markets the situation is aggravated by the fact that the insurance industry is still very young and, therefore, lacking a whole generation of managers with more than 5-10 years of experience, notably in India and China. But even here the winners are already pulling away from the pack. Ping An of China now has 74 expats within their top 100 executives - mostly, but not all, with a Chinese background. And ICIC - Prudential is attracting top talent in India, capitalizing on the strong brand and image of the group and a sense of national pride. Management Roles In Business

The key to developing and attracting top talent to life insurance companies is taking a holistic approach. Compensation, although important, is certainly not the only element, and in the eyes of young managers also not the most crucial. For example, graduates from top business schools regularly cite attractive career opportunities and corporate culture as more important than compensation. According to a Hill & Knowlton study, which surveyed 527 MBA students at 12 top-ranked international business schools, 95 percent of the students ranked career opportunities as "extremely" or "very important" factors in selecting an employer, while 86 percent of them ranked corporate culture as equally important.

Life insurers should look at best practices from other industries to upgrade their human resources and talent management functions. Companies such as GE demonstrate that hiring the best, giving them great responsibility early on, and actively managing their professional development through systematic training, career paths, and mentoring is key to building a strong management bench. This is particularly important in Asia where management talent is scarce, and a culture of poaching people from competitors often starts a downward spiral of overpayment and frequent job hopping. Building a strong management bench will be a key success factor in life insurance in Asia for the next decade.

We believe that this challenge - the need to upgrade and professionalize all key functions of the business system - gives the multinationals a substantial competitive advantage. In general, MNCs have put a higher emphasis on quality than many of the purely growth-focused local players. This has sometimes limited their growth ambitions in the last decade, but increasingly, should become a strength going forward. Furthermore, they have the option to adapt best practices they have learned from their mature home markets, as well as their operations in Asia, to the Asian marketplace.

Over the next several years, we may even see some of these multinational insurers deriving more value from their Asian operations than from their home markets. From nascent markets, such as India and China, to the maturing markets of South Korea and Taiwan, to the "post-mature" Japan market, we can expect to see some MNCs significantly raising their game to gain market share from the local incumbents.

Capturing the Pan.Asian Opportunity

Almost all multinationals are already playing a multi-country game in Asia - but most of them are still operating in just a handful of these countries, leaving significant opportunities on the table to broaden their footprint. Meanwhile, most of the Asian incumbents are still confined to their home markets, with no, or just a few, businesses outside their country of origin. We believe this will begin to change: we will see some of the more adventurous Asian players branch out of their home country to capture opportunities in new markets. While some of them will see neighboring Asian markets as the next stepping stone, some of the players will aim even further and enter the Western markets. Management Roles In Business

Given the difficulties of going global, it is unlikely that all of these moves will be successful. However, it is also important to note that many of these Asian insurers have significantly upgraded their management capabilities in the past decade, and riding on the strength of their successful domestic business, there will surely be a few winners who will be able to force their way into the global elite. In fact, a few Asian players have already risen to the top of the global elite by value, including China Life, Nippon Life, Meiji Yasuda, Ping An, and Millea. We see three main ingredients in a successful recipe to capture the pan-Asian opportunity.

Market Prioritization

As described in earlier posts, Asian markets have very different characteristics and, therefore, very different risk-return profiles from an investment perspective. From "high-risk, high-return markets" such as China and India (markets with enormous long-term growth potential but high regulatory constraints and tough competition), to Japan with its enormous size but little growth, to some of the Southeast Asian markets which offer free entry to foreign insurers but are relatively small in size, the landscape could not be more diverse. Hence, an entry into these markets has very different capital requirements, break-even scenarios, and skills needed to become successful.

For MNCs and Asian life insurers who want to expand in the region, it is very important to understand these trade-offs and requirements before making an investment. For example, we have too often seen Western companies entering China with huge growth expectations, only to be disappointed by the required time horizon and the slow pace of development in the short term. Similarly, we have seen several MNCs entering india through joint ventures, only to witness themselves becoming a very passive partner with little value added to the local venture. Also, previous attempts by many Asian players to expand in the region (mostly from Japan and South Korea), have been met with disappointment. Therefore, fully understanding the realities on the ground, identifying the right entry options and expansion plans on a market-by-market basis, and utilizing the experience and skills learned from other markets in the local context are vital to building a successful pan-Asian footprint. To find out more, you can check out Management Roles In Business.

International Investment Strategy - Professionalizing Investment and Risk Management

2011-12-31T10:00:00.000-08:00

International Investment Strategy

Investment management is a critical pillar of the insurance business, and one that is particularly important for large incumbents who have significant assets under management. The stakes are high. If they get this right it can serve as a structural advantage; on the other hand, the risk of not getting this right can be fatal - Asian life insurers are under tremendous pressure due to the high cost of their liabilities and, thus, any mis-steps in investments can ruin the entire franchise.

Local incumbents have traditionally viewed investment management as an afterthought. For decades, in many companies, the investment function has been organized as a department under finance. This is because for a long time, in most Asian markets, investment options have been rather limited by regulation and an immature capital market. Hence, the investing of insurance assets has been rather straightforward, mostly involving fixed deposits, government bonds, and in some cases, large real-estate holdings. During long periods when interest rates were high, this investment strategy served the incumbents well. However, the situation has changed considerably in recent years.

First, many insurers have issued long-term, high-guaranteed products in periods when interest rates reached heady levels (mostly during the late 1990s). However, during that period, there were not as many long-term assets, such as 20-year government bonds, to invest in - most insurers held their assets for a significantly shorter duration, assets such as short term government bonds and bank deposits. Therefore, as interest rates declined insurers were landed with a big problem - their investments yielded less than the cost of their liabilities. International Investment Strategy

This negative spread is a very serious issue - as is well known, it has brought many Japanese life insurers to the brink of collapse. But this is not just a Japanese phenomenon. For example, the average liability of Taiwanese insurers was in the region of 6.5 percent in the late 1990s while returns on their own investments were around 4.5 percent resulting in a 2 percent gap. South Korean and Chinese insurers have similar legacy issues.

Second, regulators have loosened restrictions on insurers, allowing them to invest in a greater variety of domestic and foreign asset classes, Much of this deregulation is due to the realization of regulators that insurers needed to find ways to alleviate their negative spread problem and to generate attractive returns for policyholders in low-interest-rate periods.

For example, in Taiwan the restrictions on investments in foreign markets have been raised from 5 percent of total investments in the 1990s to 45 percent in 2007. China now allows companies to invest in domestic equities and domestic alternative asset classes, particularly infrastructure products. And in 2006, the Qualified Domestic Institutional Investor (QDII) scheme was launched allowing Chinese insurers to invest part of their assets overseas. The pressure of the negative spread and the opportunity to diversify investments into new asset classes are creating an urgent need for Asian insurers to professionalize their investment management function. The urgency is not only in investment management, but also in risk management, since investing in these new asset classes brings a lot more volatility to the insurer.

There are three ways for Asian life insurers to make their investment management function more professional in the short term.

First and foremost, they need to upgrade their investment management talent. This sounds obvious until one realizes the extent of the culture changes that need to happen in an incumbent insurer. Investment management is a very talent-intensive business, which is not something that insurers are good at managing (retail insurance is much more about size and scale). In particular, domestic insurers have a very tough time attracting the best investment talent since they are competing with local and foreign fund management houses as well as hedge funds. Part of the problem is the pay scale - many Asian life insurers have adopted a very rigid compensation structure and hierarchy over the years, and their approach to investment management falls within that construct.

Compared with the much more flexible and professional environment that fund houses provide, it is not surprising that insurers are far behind in this war for talent. One insurance executive mentioned to us that he had to go through layers and layers of paperwork just to hire one portfolio manager, and there were so many constraints and so much bureaucracy that the new hire just gave up and went to a foreign fund-management company, The asset-management pay structure has also increased substantially in recent years, and presents a shock for most local insurers. In the past, investing was a low-cost activity, where the life insurers would find investment professionals to place their assets into long-term government bonds or they simply negotiated bank deposits. However, as the insurers venture out towards hiring professionals to manage more international asset classes, they are finding that salary expectations are often significantly more than the company's culture and bureaucracy can absorb.

Second, with the right talent in place, life insurers in Asia will need to significantly upgrade investment, asset liability management (ALM), and risk-management processes by learning from best practices. Despite all the peculiarities of the Asian markets (for example, lack of deep fixed-income markets, a legacy of high-guaranteed policies, structural mismatch of assets and liabilities), there is no excuse for not adopting some of the best practice tools that are used by many of the leading global players.

Life insurers in many mature markets have learned the hard way that excessive risk-taking can endanger the very existence of the company. Asian life insurers are well advised to learn from those examples and build the analytical tools required to assess the economic value that is created with more risky investment strategies. The accounting-based, absolute-return number that most insurers focus on - even if required to service liabilities from high-guaranteed, interest rate products in the in-force book - is not a good measure to determine value in the investment function. International Investment Strategy

Using modern analytical tools to derive investment decisions from a rigorous strategic asset allocation is key to improving investment decisions. Many consulting firms and insurance IT vendors can provide the tools and processes that can be adapted to local Asian market situations. While localization of these tools is a significant effort, it is a necessary process that can involve quite a bit of learning for the local insurer. Controlling risks and increasing risk-adjusted returns can be facilitated in a number of ways including ALM, strategic asset allocation (the science of allocating the asset base to different asset classes), stock picking, and running a professional and systematic investment process.

Having a proper risk management process is also critical. The combination of chasing returns to minimize losses on the negative spread and investing in unfamiliar foreign asset classes can be lethal in terms of risk management. For example, a few of the Asian life insurers invested in subprime assets, which led to significant write-offs and subsequent capital calls. Another significant risk is currency exposure - with substantial volatility in currency markets, investing in foreign asset classes can lead to a myriad of new exposures that are very complex to manage. The foreign currency exposures of many assets cannot be easily hedged, and there are also market circumstances where the hedging costs are prohibitively expensive and will take away any incremental gain from the investments. For these incumbent insurers, hiring a proper chief risk officer could be one of their most worthwhile investments at the start of their journey toward upgrading skills and practices in investment and risk management.

The risk of not getting this right is huge. From Japan to South Korea to Taiwan, the contribution of investment management to total returns is higher than it has ever been, and, subsequently, risks have also increased significantly. For example, in October 2008, Yamato Life in Japan filed for bankruptcy after significant losses from its securities holdings. Life insurers have a disproportionate value at stake due to the large sizes of their portfolios, and it is imperative that they upgrade this area as quickly as possible.

Some insurers, once they have successfully professionalized their investment management function, may consider taking the next step - separating the asset-management unit into its own profit center and expanding into third-party asset management. Many European and US insurers have made asset management an important, independent part of their business. Global insurers such as Allianz, AXA, and Prudential (UIO have sizeable asset-management businesses with assets under management (AUM) in the hundreds of billions of dollars.

A significant part of this business comes from third-party institutions and retail investors. Some of the players in Asia have started on this trend. In China, Ping An and China Life are seeking to replicate the Western development and have started to build their own asset-management businesses. In January 2007, China Life announced a partnership with Franklin Templeton to form a joint venture in Hong Kong for its overseas asset-management business. Ping An announced a joint venture with Singapore's UOB to create a new domestic funds business in China, and paid US$154 million for a 9 percent stake in Value Partners, one of Hong Kong's leading asset managers in November 2007.

Building a brand in the third-party, asset-management business will take time and a track record. On the retail side insurers need to develop distribution channels with banks and other distributors (for example, securities brokers) in order to reach customers. In most Asian countries, banks dominate mutual fund distribution; a strong distribution team that can work closely with banks will be one of the critical factors for success. It typically takes over five years to achieve the required scale when building a third-party, asset-management business (meaning that as a percentage of total assets, third-party assets need to reach 20 percent or more), and insurers embarking on this road should ready themselves to learn quite different skills in order to compete.

Acquisitions may be a way to accelerate this process; indeed most leading global insurers with sizeable asset-management businesses have at some point relied on acquisitions to grow. For example, Allianz bought PlMCO in the US, while AXA bought Sanford Bernstein's asset-management businesses and Rosenberg, a well-regarded, quantitative asset manager. To find out more, you can check out International Investment Strategy.

Life Insurance Product Development Process - Winning Through Product Innovation

2011-12-30T10:00:00.000-08:00

Life Insurance Product Development Process

We have already talked about the shift across Asia from traditional life products to investment-linked vehicles, along with the need to tailor products much more to the needs of individual channels and customer segments. All this requires an upgrade of product development capabilities at life insurers across Asia.

First, life insurers need to link product development much more closely to channels and customer segments, systematically understanding their specific needs better and incorporating their insights into the product development process. For example, Prudential (UK) has been very successful in South Korea with products that are linked to specific investment themes that hit the nerve of the market - such as a Viemam fund incorporated into a investment-linked policy in 2007 (although given the volatility in these emerging markets these products obviously have a highly speculative element and can pose large risks mis-selling).

Second, many life insurers need to upgrade their skills in understanding the value creation of individual products and product components. The more complex products are becoming more important and it will be vital to fully understand their economic impact. For example, in South Korea many life companies are selling riders with such additional protection elements as health insurance - but without the data and experience to price these riders adequately. And more often than not, it is unclear if the additional benefit is worth the cost from the customer perspective.

Many life insurers today have no clear understanding of the exact value contributions of the different products they are selling and the channels they are using to sell them. Revisiting the product portfolio through a "value lens," pruning less profitable products, and adjusting product features to enhance value contributions, (for example, through riders or longer durations), are often sources for major improvements in the value of new business. Life Insurance Product Development Process

Analyzing the channels with regard to their value contributions, adjusting commissions to align with product profitability, and defining clear targets for value improvements by channel are also major value drivers. We often hear the argument that this is a clear trade-off between profitability and growth - but frequently companies are claiming this without having a full understanding of the value drivers they could leverage in the product and channel composition. This is not about closing channels or product families, but about the transparency of economics and the alignment of value creation and incentives. Better understanding leads to a multitude of little changes that add up to significant value creation over time.

Third, life insurers need to think through the organizational implications of product innovation. Many global insurers have begun to drive the actuaries out of their ivory tower and marry the product development with a strong product-management function. This integrates marketing, channel management, and actuarial skills. It also allows for more rapid reaction to changes in market trends and for constant re-evaluation of the product portfolio in terms of sales effectiveness and value creation. However, many Asian life insurers have yet to build up the talent pool and the cultural readiness to adopt these types of organizational changes.

Revolutionizing IT and Operations

The life insurance industry around the world is not well known for world class IT and operations skills. This is often a neglected function that suffers from a dependency on legacy systems and that is not recognized as a source for value creation. Asia is no exception - but we believe this might change. First, in the vast markets of China and India, IT and operations play a crucial role in allowing continued fast growth by running massive distribution networks across enormous countries, delivering customer and agent service to the most remote places, and tapping into rural opportunities. Life Insurance Product Development Process

The large local players in these markets have begun to realize that they need very strong IT and operations functions to gain full control over their networks and to guarantee customer satisfaction (and lower churn rates) across geographies. Most of the time, they realize quickly that gradual improvement is not sufficient to address these challenges. Some players in these markets will jump directly to state-of-the-art IT and operations models to cope with the enormous challenges resulting from their size and growth. Ping An in China has already embarked on this journey of revolutionizing IT and operations by centralizing the back-office functions in a nationwide operating center and by centrally building and managing customer service and call centers.

Second, as more insurance companies operate across Asia they are looking at ways to create synergies across the region. This is a huge challenge given the different regulations, languages, and maturity of the various markets. But the case is compelling for the few players who have sufficient scale to build some key functions centrally that will allow for more control and quality. AIG is the natural leader in this field, given their footprint across the region. They have already begun to operate some back-office functions across Asia and are continuing down this path. Others will follow.

Third, IT and operations are, of course, key enablers to control cost. While most life insurers have not focused on this topic in the past, given the priority to grow the top line during the landgrab stage, this is likely to change with increasing margin pressure. In particular, in markets where growth rates are coming down, fierce competition requires tight cost management to maintain margins. In a similar fashion to Western life companies only a few years ago, many Asian life insurers measure operational efficiency by cost ratios only. This is a highly misleading indicator, and best practice globally has moved to more industrial measures like unit cost.

Given that centralization, or even regionalization, of operations, streamlining of processes, and effective operations management take time to achieve, the leading life insurers of tomorrow have to start to address these issues today. To find out more, you can check out Life Insurance Product Development Process.

Job In Bancassurance - Creating Value In Bancassurance

2011-12-29T10:00:00.000-08:00

Job In Bancassurance

Bancassurance has grown from almost zero in the year 2000 to a range of 30-50 percent share in most Asian markets. However, insurance companies have found it increasingly hard to generate value in this channel that is proportionate to the top line. Banks have been able to negotiate very competitive commissions across Asia, and products are mostly very simple, single-premium, investment products that offer little differentiation in the market beyond price. Life insurers and banks often have arm's length relationships where the life company is barely more than a capacity provider.

Banks have mostly focused on converting their customers' deposits into simple savings products that have a more attractive interest rate - and hence, the product has generated strong customer demand. In this scenario it is very difficult for the life company to add a lot of value to what the banks are doing; since the banks are adding all the value, the low share of the profits to the insurer is probably justified. But, as we described, we believe that in most Asian markets, banks will soon have collected the low-hanging fruit and growth in these types of products will max out - if they don't change their model.

This should create an interesting opportunity for life insurers to create a second generation bancassurance model - with much closer relationships between insurer and bank, selling more complex, higher margin products that allow life companies to generate a lot more value in this channel. Job In Bancassurance

Banks across Asia are discovering the retail and wealth-management opportunity. While in markets such as China, corporate lending has been the key profit driver for banks, the retail and wealth-management businesses are catching up fast. We predict that in China the retail and wealth-management business will grow from 29 percent of financial services profits, in 2007, to 59 percent by 2015. To capture this opportunity, banks are building client advisory and sales skills in their often vast branch networks. The pace of this development varies by market - and it will, of course, take time in markets such as China and India with their huge institutions and relatively weak starting positions.

But eventually this development will enable banks to advise their customers much more holistically on financial products - including more sophisticated insurance products. From a life insurance perspective, the key to unlock this potential will be to build much more integrated business models with the banks. Experience in Europe has shown that bancassurance is really successful when products are bundled based on customer preferences, life insurance is integrated into the banks' incentive systems, processes are tightly integrated, and the insurer delivers value-added support in the form of tailored marketing materials, training, and customer relationship management.

We are seeing some initial signs of banks and life insurance companies moving in this direction. For example, Prudential (UK) and Standard Chartered have built a much more integrated business model in Hong Kong.

We believe we will see a lot more of this in the next decade - including more joint ventures between banks and foreign insurers who have built the relevant skills in other markets and can leverage them in Asia. This will change the nature of the bancassurance opportunity and create a win-win situation - for those players who manage to find the right banking partners and build and apply the required skills in the local market context.

Compared to bancassurance all the alternative channels are still miniscule in size. But they are growing fast - and if the mature markets in Europe and North America are any indication these channels will continue to capture market share. While for most players this is still a niche opportunity, we believe that this is an area worth exploring. We already see retailers selling life insurance products in countries like Japan and South Korea - and increasingly India. Brokers and independent agents are also on the rise. They usually have a higher credibility with customers given their independence from single producers and can capitalize on the increasing affluence and sophistication of customers across Asia who are demanding higher quality advice. Job In Bancassurance

As described previously on South Korea, the Mirae Asset Group approach of using investment centers to sell financial products is one example of this. In China, CNInsure is an independent agent company listed on the NASDAQ. And even the direct channel - that is, selling life insurance through call centers and the Internet is building some scale. In China, Ping An and MetLife have been pioneers in this field with encouraging results. Although still at an early stage, the prospect of building a nationwide call center network with tens of thousands of sales representatives is very real and can be extremely compelling if done properly.

Experience from Western markets shows that the prize in these channels goes to players that build a specific business and support system and tailor products to these channels' needs. Some of the multinationals in Asia should be able to leverage their experience but we also see some of the leading local companies, such as Ping An in China, conquering this space.

Upgrading the Business Model to Combat Intensifying Competition

Growth has been the key value driver in life insurance in Asia in the past decade and is likely to remain so - but the basis of competition is changing. In the past, insurers achieved high growth using a "landgrab model" - being one of the first into many regions and segments. However, this model is beginning to run out of steam. There is hardly any uncovered territory in Asia and competition from local and foreign companies is increasingly fierce.

Maintaining rapid value creation going forward, therefore, requires players to be able to outcompete the competition through superior business models. These require higher quality skills along the value chain, not just in distribution but also in product innovation, IT and operations, and investment and risk management. And it will also require them to significantly strengthen their management bench. To find out more, you can check out Job In Bancassurance.

Success In Insurance Sales - Restructuring Of Sales Force

2011-12-28T10:00:00.000-08:00

Success In Insurance Sales

We see rejuvenating sales forces as the number one priority for most established insurance companies in Asia, in particular the local incumbents. However, it is also probably the most difficult endeavor for them, since this involves facing up to a lot of legacy issues, and potentially challenging some highly engrained cultural values at these companies. The pace of these changes reflects the resolve of the top management.

There are some encouraging signs. A few of the large incumbents have started to hire new, better-educated agents and provide them with improved training while gradually eliminating unproductive sales people. Some of the bigger players in Japan and South Korea have started to cut down the size of their housewife agency sales forces.

One of the biggest challenges in building a more sustainable agent channel is to standardize the way it operates. Sometimes these sales forces, especially in countries with large geographical spreads, look so different from region to region that they give the impression that they belong to different companies! This is due to the fact that during the ramp-up period, the entrepreneurial branch managers each dictated the direction and culture of the sales force in their region. However, without standardization and a sharing of best practices across the organization, it is very difficult to improve beyond the initial buildup.

These sales forces are also extremely vulnerable to the turnover of their founding managers. Tough decisions will have to be made as standardization takes away some of the local flavor. In extreme cases, it may even involve removing some of the founding managers and agency leaders in order to direct change.

A restructuring program typically is designed around four key elements:
(i) best practice agency management,
(ii) improving the quality of recruiting;
(iii) systematic improvements in agent productivity; and
(iv) an overhaul of the incentive system.

This kind of program has been proven many times in mature markets, but nowhere at the scale of some of the Asian sales forces. Implementing such a program in rapid growth markets, for hundreds of thousands of agents, is a unique challenge.

Part of the restructuring involves more rigorous management of the agents. Since agents are paid entirely on commission, it has long been the tradition to "leave them alone." However, in order to upgrade the agents' skills and improve their productivity, it is important to start managing these agents in a more systematic and professional manner. For example, even the simple task of getting the agents to show up more frequently for reviews and morning meetings runs into fierce resistance. This often brings into conflict the "old guard" versus the "reformers." Given the large resistance of the agents to change, their behavior, and the management's fear of alienating the top producers, a lot of change programs never get off the ground.

Improvements in the sales force model also entails finding better recruitment methods and abandoning the practice of simply recruiting large numbers (which used to mean employing anyone who walked through the door). Finding better qualified agents also involves fundamental reassessment of compensation (especially base compensation), as well as training in the initial ramp-up period.

Furthermore, as the quality of agents improves and productivity rises, there is a counter process of reducing the number of unproductive, part time agents, many of whom rarely sell anything and have other jobs. In many cases, up to a third of the overall agents could be part-timers, which creates a significant challenge since in absolute terms, their contribution is still quite substantial.

Finally, the incentive system is often purely top line and growth focused - with little incentive for pulling the improvement levers laid out above - and does not reflect the profitability margins of individual products. Given the high share of variable pay and the enormous responsiveness of agent forces to changes in the commission structure, this is a highly sensitive topic. The risk of getting it wrong, thereby endangering growth and losing top producers, has led many companies to shy away from touching the commission system. Yet, without this any substantial progress in the transformation program is unlikely. In fact, we see a lot of commission systems that continue to reward agents who sell large amounts of barely profitable products.

Revamping the sales forces will take years to implement. Radical change is probably unrealistic - what is required is continuous improvement that becomes part of company culture, There are no silver bullets for upgrading a large sales force and the process is extremely painful as difficult decisions need to be taken on legacy issues. It may even involve a temporary dip in revenues. The likely winners are those players who adopt a long-term perspective to ensure the sales forces that have served them so well in the past continue to be a strength of their strategy for the future.

Developing the Next Generation of Agents
The restructuring of legacy sales forces is likely to be a long-term exercise and the traditional sales forces will largely remain focused on the mass market. Therefore, to capture the fast-growing, affluent-customer segment, a new approach is required. New sales forces that can target this segment with a more professional advisory approach and with a larger arsenal of financial products are likely to emerge and grow very fast. This requires recruiting agents with higher quality backgrounds and providing better infrastructure support.

An example of how this can be achieved comes from Germany where MLP has built a sales force that targets specific niches of affluent customers. For example, MLP recruits agents from specific professions, like doctors, who will then cater mainly to doctors and others in the medical field. By having a sales force specialized in the same profession, MLP has managed to capture a large market share within these highly valuable segments since its sales force has the unique credibility and capabilities to understand and connect with their target segments. This model has been very successful, and provides a good example of how to develop a more professional and highly targeted sales force.

We anticipate that a few insurers in Asia will be successful in developing much higher quality, advisory sales forces that will be able to penetrate deeply into the more affluent customer base. While the scale of such sales forces will be small compared to the traditional, mass market agency forces, the quality, and thus value, of such sales forces will be significantly higher. As such, one can anticipate much greater diversity of life insurers as they each develop their niches in various customer and product segments.

The affluent segment opens up an opportunity for newcomers to the market who cannot, and probably should not, replicate the model of the large local incumbents if they want to be among the winners in Asian life insurance markets at the end of the next decade. But even some of the large local companies should take a close look at this opportunity and consider setting up a separate channel to capture the affluent customers in a more systematic way. As the incumbents restructure their legacy sales forces, creating new, high-quality, agency forces alongside could be an effective shortcut to addressing the fast-growing affluent segment. This is not easy though, since the buildup of such targeted sales forces is slow and their financial impact is insignificant in the beginning, thereby making it very difficult to get the proper attention during the development stage.

Channel conflicts will surface with existing sales forces that also have some agents serving affluent customers. Long term though, this initiative may well be one of the most important investments an incumbent insurer can make today. To find out more, you can check out Success In Insurance Sales.

Success In Insurance Business - What It Takes To Win In Asia

2011-12-27T10:00:00.000-08:00

Success In Insurance Business

When viewed from 10,000 meters, the pace of change in life insurance in Asia can appear almost glacial. Most of the large players have been dominant for a very long time, and the market-share rankings in most countries barely shift from year to year. However, there are many forces that are about to change the industry fundamentally. In fact, life insurance in Asia is reaching an inflection point, where the industry; in the next 5-10 years, will likely witness some very dramatic changes that will make it look very different from the one in 2008.

Key Success Factors
Asia is entering a new phase of development following a period of extraordinary growth. While the overall growth drivers in Asia remain very strong for the next 5-10 years, competition is increasing significantly, margins are beginning to erode, and local and foreign players alike will have to build superior skills in distribution, product innovation, operations, and investment management to be able to sustain current levels of value creation. We see five key success factors to win in Asia over the next decade:

Building a sustainable agent force
Creating value in bancassurance and alternative channels
Upgrading the business model to combat intensifying competition
Capturing the pan-Asian opportunity
Sustaining margin pressure

Building a Sustainable Agent Force
Over the last decade, most of the enormous value in life insurance in Asia has been created through the agent channel. Bancassurance only started to take off in the early 2000s and, in most markets, has much slimmer margins. However, the model of the past - building vast but low-qualified agent forces with a "landgrab mentality" - is unlikely to lead to success in the next decade. In fact, we believe that some of the massive agency sales forces that have provided the core growth engine of life insurance distribution in Asia are likely to reach their maximum size and will slowly begin to erode. This is already happening in Japan and South Korea, as the housewives sales forces gradually scale down in number and influence.

While the pace of this development will differ from country to country, the sizes of the agency forces will not grow indefinitely at the current growth rates. At some point, even in a country as large as China, we anticipate the growth of the agency forces will "max out" and move into the next phase, which will be characterized by consolidation, upgrade of capabilities, and management of quality. In many countries, reform of these sales forces is already underway and the process will accelerate as, for example, most of the unproductive and part-time sales agents leave the business. Over the next several years, the nature of the competition will change from size to quality, and this will pose serious challenges to many insurers who will not be able to manage the transition. Success In Insurance Business

It is well known that the massive sales forces of large Asian insurers suffer from problems such as low productivity, high agent turnover (up to 80 percent annually in countries like China and India), and, in extreme cases, mis-selling. On the other hand, there is no doubt that these sales forces are also tremendous assets for those who have been able to build them, since their distribution power is unmatched. In the past, these sales forces have carried insurance companies through upturns and downturns, and the loyalty and strong bonds between the agents and these incumbents are legendary. Nevertheless, the traditional sales model, relying on a large number of low-quality sales agents, is staffing to show cracks due to three interlinked factors.

First, there is an emerging segment of mass affluent consumers in Asia that are demanding a better level of service, which includes better understanding of products and customer needs, as well as more professional advice. These mass affluent customers are typically not well-served by the agency forces of the incumbents, since the education levels and sophistication of the agents are quite different from those of their customers.

Second, the growing complexity of products, particularly in the investment-linked area, is creating difficulties for the traditional sales forces. For example, the push tactics of the mass sales force can create mis-selling practices as agents understate the risks of the investments. While there are signs that insurers are finding ways to control mis-selling, their agents are not the most natural investment advice-providers. Success In Insurance Business

Third, a lot of these agency forces are aging. While the relationships the sales forces have with their customers remain strong, aging sales forces are quite difficult to motivate and manage. For example, many agents are almost semi-retired, living off their existing customer portfolios. For these agents, and their managers, who have spent the last two decades pursuing the same mass market with a push-driven business model, one can imagine how difficult it is to inject more professional skills. Compared to some of the latecomers - in particular foreign players - with their younger and more professional sales forces, it is easy to see why, in many markets, the incumbents are losing momentum.

Indeed, across Asia most of the incumbents are losing market share. Life Insurance Corporation (LIC) of India's gross written premium (GWP) market share in India plummeted from nearly 100 percent in 2000 to 82 percent in 2006. This trend is even more pronounced in the larger cities where competition is fiercer. For example, in China, China Life's GWP market share in Shanghai dropped from 29 percent to 22 percent between 2000 and 2007. Furthermore, measuring by gross premium masks the effect somewhat. These incumbents may still have a large market share overall, but in terms of new business, they are losing momentum rapidly.

For example, by GWP, the market share of South Korea's Big 3 dropped from 76 to 57 percent between 2002 and 2007, but by first-year premiums (FYP), their share dropped even further - from 77 percent to 44 percent. Next post, we'll talk about restructuring of the sales force. At mean time, you can check out Success In Insurance Business.

Diffusion Of Innovation In Health Care - Innovating In Insurance Health Care

2011-12-26T10:00:00.000-08:00

Diffusion Of Innovation In Health Care

Distribution Innovation - The emergence of real, online approval has been the major innovation in distribution in the Australian life insurance industry. Historically, Australians have bought the majority of their insurance as part of their mandated, retirement-savings plan, or for a small percentage of relatively wealthy Australians, via financial advisors. Recently, high quality, online coverage options are beginning to emerge, increasing the ease of access for ordinary Australians. This online approval functionality is also being rolled out to third-party intermediaries (such as financial planners) in the hope that it will increase sales of the product given the quick turnaround time for approval. ING Direct recently launched an online approved product allowing the customer to buy up to US$450,000 of coverage in 10 minutes.

Allianz have launched a similar product allowing coverage of up to US$1 million. This market is still young with great potential for growth. In particular, offshoring or outsourcing the underwriting and claims processing for these types of polities has the potential to yield significant cost savings.

Beyond online approval, innovation is also needed in the delivery of effective advice, without directly linking advice and sales. The current model places excessive reliance on the role of intermediaries and commission-based sales. Establishing independent advisory services would provide a solution to this, as would the delivery of advice through the workplace.

Such services could be funded through service fees, industry-sponsored funds set up for this purpose, or in the case of the latter, through salary packages. This would help to dispel consumer confusion and misinformation around available insurance products. It would also encourage product innovation among insurers as consumers become able to make more informed financial decisions.

Product Innovation - Many industry participants see product innovation as the key to creating and capturing new growth opportunities in the Australian life insurance industry. For example, Simon Swanson, the managing director of Australia's largest life insurer, CommInsure, sees three main opportunities in the life insurance market.

But product innovation should not stop at the creation of new risk products. For annuities, there is "also significant scope for innovation in the structured payout market, which has large potential given the gap between the US$56 billion of superannuation outflows and the US$6 billion of annuity sales in 2007. As we have seen above, Australians are not prepared for the risks they will be exposed to in retirement. In particular, they are not prepared for longevity and morbidity risks such as home care, nursing, and prescription medicines.

While there has been resistance against annuities due to their high capital cost and the forfeiting of residual value in the event of early mortality, there may be other options. Such alternatives may include reverse mortgages (popular due to the high concentration of Australian wealth in primary residences), longevity insurance, and retail longevity options.

There is also scope for innovation in the market for hybrid products, which integrate savings and risk-transfer components. Potential products that have seen success in other markets, such as in the US, include variable annuities with guaranteed minimum balances and wrap accounts that allow investors to move funds between investment and risk-management products, allowing a greater level of control. Due to the central role of agents in the sales of insurance products, hybrid products - that include both savings and risk-management functions and retain the need for ongoing financial advice (to maintain agent commissions) - should prove popular.

Finally, the wholesale risk-management market is also in need of further innovation. However, this is likely going to be driven by innovation in countries with more developed retail insurance and annuity markets. Interesting developments are already happening. For example, the UK bulk purchase annuity businesses (such as Paternoster) provide a viable way for transferring longevity risk exposures to specialist risk managers. Longevity and mortality bonds, forwards, and options are also areas of active research and development on the international stage, which may in the future provide new methods for managing wholesale risk exposures.

Cost Innovation - In the Australian market, cost efficiency and effectiveness remain an area of critical importance. For many players, the major constraint to creating more efficient and flexible cost bases is a legacy of archaic and overlapping systems.

Distribution cost savings involve pursuing the development of online approval and revisiting the use of existing channels. Alongside the convenience and data-mining advantages of real online approval, it also presents significant cost savings through reduced overheads and the capacity to outsource back-office operations. In the UK, Prudential has utilized its joint venture with ICICI to supplement its advanced online distribution channel with outsourced back-office operations in India.

The emergence of online underwriting programs has the potential to provide a window into the once opaque art of insurance underwriting. Greater transparency in underwriting standards may lead to more standardized underwriting practices. This will then provide scope for competitive advantage in those players able to maintain distinctive underwriting practices.

Wholesale risk-management developments will provide the ability to more efficiently manage risk exposures through the transfer and hedging of mortality, morbidity, and longevity risks. If effectively structured, these have the potential to reduce the level of required capital. These reductions could then either be translated either into more attractive profit margins or be passed on to policyholders through reduced premiums.

Foreign Entrants

Given the modest size of the market, the large number of existing, sophisticated foreign players (for example, AXA, ING, and MetLife), and the consolidation that has already taken place in the industry, a pure-play life insurance entry into the Australian market is not likely to be attractive at this stage.

A combined life and wealth strategy that brings together risk- and wealth-management skills is a plausible proposition. However, creating an end-to-end presence in the wealth-management space is unlikely to be achievable due to the critical importance of platforms in accessing distribution. Platforms bring together multiple product manufacturers to wrap products for retail investors and financial intermediaries. There are currently six scale platforms in Australia and the opportunity to create or acquire a platform is low.

The likely implication is that new entrants would need to focus on a play in either the distribution or manufacturing ends of the value chain. A number of players (for example, AXA) have been focusing on rolling up independent financial advisors. The industry is fragmented; it comprises around 16,000 planners but the five largest groups only account for around 30 percent of planners. However, rolling up planner groups is a complex and risky process. Holding onto individual planners during the roll-up process is risky, and driving economies of scale and preferential distribution through the network are equally challenging.

In summary, the nature and size of the Australian life insurance market is unlikely to justify a pure-play organic entry. The wealth-management market is extremely sophisticated, well-populated, and has a critical choke point around platforms with few significant assets likely to be for sale. However, the consumer and regulatory drivers for the industry are attractive, highlighting the opportunity of creating an innovative new model that can connect directly with planners and disrupt the current platform-based status quo. To find out more, you can check out Diffusion Of Innovation In Health Care.

Australian Annuity - Collective Failure To Respond

2011-12-25T10:00:00.000-08:00

Australian Annuity

There are a number of reasons why the Australian life insurance and annuity markets have not penetrated the retail customer base more effectively. These include

inadequate product offerings,
perceived attractiveness of alternatives,
insufficient consumer education, and
a laissez-faire government approach.

Inadequate Product Offerings

The current range of available products contains a number of gaps and does not satisfy the demands of both the retail and wholesale markets. In the annuity market there are very few products structured attractively to capture and manage the outflows from the superannuation industry. Currently, the market is split approximately evenly between term and residual capital value products. For example, very few lifetime annuity products are available.

There are also few integrated savings and risk mitigation products covering a number of risks for example, longevity risk, market risk, and healthcare expense risk. As has been outlined, the past three decades have seen a disaggregation of the savings and risk management components of insurance products. This has made the products more accessible to consumers, but this simplistic disaggregation seems to have missed the opportunity to satisfy certain needs. For example, we believe that there is a demand for risk-management products - especially in retirement - that incorporate savings components to satisfy motives such as bequeathal among retirees.

Many retail risk-mitigation products are also not offered at attractive prices. This is primarily due to wholesale methods for managing risk. Longevity-linked products are a case in point, with some insurers declining to offer them at a competitive price as they see the risk as "toxic." These products will become increasingly attractive to both insurers and consumers when wholesale methods are available to transfer the risk, reducing the capital strain on insurers. Australian Annuity

Perceived Attractiveness of Alternatives

A range of attractive alternatives to life insurance products has been available in the investment markets. In particular, pure savings funds have, with the exception of the financial year just ended, enjoyed excellent returns over the past 14 years as a result of strong equity markets. These vehicles are also relatively simple and provide greater consumer control over where their funds are invested than risk-only insurance products. As a result, many consumers have chosen to manage their financial health through conscientious saving rather than investing in risk-management products, consciously or unconsciously ignoring the shortcomings of this approach.

Insufficient Consumer Education

In keeping with the laconic "she'll be right mate" national persona, more than half the Australian population believe they "do not need insurance" and approximately half regard it as a "waste of money.'' Closely linked to this is the extreme optimism of Australians about remaining healthy. Despite this optimism, Australians have also neglected the risk that they will outlive their retirement savings, as seen in the US$6 billion of annuity sales in 2007, compared to superannuation outflows of US$56 billion.

Australians are also confused about how and when it is appropriate to purchase life insurance within a superannuation product wrapper. Currently, there are tax incentives in place which allow for life insurance premiums (under certain conditions and with some limits) to be paid from pretax dollars. However, superannuation trustees and administrators cannot legally offer advice. This, coupled with a tendency to avoid seeking financial advice and the problems of dual coverage, has led to investor confusion.

Efforts to improve consumer awareness and education have largely failed to hit the mark. Forty percent of Australians use no information to assist in their financial decision making and 56 percent of respondents said they felt they needed further education or information about financial matters. The top two sources of financial advice for Australians are family and friends, and accountants. This has made Australians, relative to their mature market, less advanced in their understanding of financial matters. In a recent OECD survey, 67 percent of Australian respondents indicated that they understood the concept of compound interest, yet when they were asked to solve a problem using the concept only 28 percent had a good level of understanding.

Laissez-faire Government Approach

Finally, the government took an arm's-length approach in supporting the development of a private infrastructure for managing consumers' risk exposures. While the UK has made the purchase of life annuity products by retirees compulsory, Australia does not provide tax incentives for the products. In the 2006-07 federal budget, tax incentives for taking superannuation benefits as an annuity stream were removed. This was done by reducing all superannuauon outflow taxes, which effectively equates the treatment of annuity and lump-sum benefits.

Furthermore, default life insurance coverage levels within superannuation funds are extremely low. The standard level of coverage is two to three times income while recommended standards are up to 10 times. Surprisingly in Australia - a country with one of the world's most advanced retirement savings systems - post-retirement, risk-management policy and infrastructure are lagging behind significantly. Australian Annuity

Opportunities Ahead

The nature of the opportunities for domestic incumbents and foreign entrants is markedly different in Australia to the rest of the Asia-Pacific region. Domestic incumbents must influence government and educate consumers to create and capture significant value from the management of savings, as well as retirement, morbidity, and longevity risks. In addition, there are a range of distribution, product, and cost innovations available to improve the attractiveness of the industry for participants.

For foreign entrants, a pure-play, life insurance entry strategy seems unlikely to be financially attractive. A combination of a life and wealth play - focused on combining savings and risk-management skills - to meet the needs of the Australian "wealth builder" could be one attractive option. However, the Australian wealth-management market is extremely sophisticated and well-populated with few assets likely to be for sale. For example, with a few exceptions, most wealth-management franchises are core to the major Australian banks and unlikely to come up for sale.

Domestic Incumbents

We believe players already in the market should focus on two central issues
(i) reshaping the industry through influendng regulators and educating consumers; and
(ii) innovating in distribution, product, and cost management.

Reshaping the Industry Through Influencing Regulators and Educating Consumers

Government intervention is the most direct way of rejuvenating the current life insurance and retirement savings industry. Given the impact of government regulation on the current life insurance and retirement savings industry any significant change to the industry, will require government intervention to amend the relative incentives and benefits of different products. This intervention can be explicit, through providing incentives and tax concessions for investing in risk-transfer products; or implicit, through encouraging consumer education programs and rewarding innovation with supportive regulation.

Achieving this requires the education of government bodies on the enormity of the latent risks already in the system, the advantage of private risk-management schemes, and the need to develop legislative support and tax concessiom for these products. To make this happen, we believe that the life insurance industry in Australia needs to become more effective at creating industry-level lobbying. By comparison, the superannuation players have worked relatively effectively at an industry level.

In addition, consumer education is required on the level of risk exposures and the types of products available. For example, retirees need to be convinced that life annuities are not simply a "gamble" on their own life expectancy where they may see life savings forfeited to insurance companies. Rather, they must be shown that by using life annuities to manage their retirement savings, based on expected rather than maximum lifetimes, their yearly pension income can be substantially increased, improving their quality of life.

Next, we'll talk about innovating in distribution, product and cost management. At mean time, you can check out Australian Annuity for more details.

Australian Superannuation Companies - Australia Financial Sector

2011-12-24T10:00:00.000-08:00

Australian Superannuation Companies

Deregulation and the Emergence of Bancassurance Models

Since the deregulation of the Australian financial sector, the major banks' desire to develop bancassurance models has played an important role in shaping the life insurance industry. A large percentage (63%) of the Australian banking sector is shared between its top four banks-Commonwealth Bank of Australia (CBA), Westpac, National Australia Bank (NAB), and Australia and New Zealand Banking Group (ANZ).

However, prior to the 1980s these colossi of the local market were not able to offer insurance products as a result of strict domestic regulation. For a period of 35 years, the Australian banking sector was one of the most heavily regulated in the world, as the government operated through the banks to implement monetary policy. While the tight regulation did not directly affect life insurers, it did prevent banks and other financial institutions from entering the industry.

Deregulation of the financial sector began in 1983 following a government-sponsored, broad-based review of the financial sector (known as the Campbell inquiry). The banks quickly took the opportunity to enter the insurance market, starting with NAB in 1985 and swiftly followed by the others in the subsequent years. Deregulation also led to other new entrants; the number of registered life insurers grew from 45 in 1980 to 58 in 1990. Since then, a consolidation has occurred, with the number dropping to 37 by 2008.

Once the banks had established a foothold in the insurance market, they quickly gained market share on the back of strong brand recognition and extensive retail distribution networks. By 1990, bank-owned life companies held 9 percent of the Australian insurance market. By 2000, this had grown to 44 percent, though much of this growth has been through acquisition. The competition presented by the bancassurance model placed new capital demands on existing life insurers as they sought to develop products to compete in new areas. This eventually led to the shift away from the "mutual" structure of life insurers during the 1990s.

Overall, the introduction of the bancassurance model has linked captive distribution channels and encouraged significant cross-selling between traditional banking and insurance products, reshaping the face of the industry. Australian Superannuation Companies

Demutualization and Changing Business Models

Traditionally, a handful of mutual life companies accounted for the majority of assets in the industry. In 1980, of the 47 registered life insurers, only four were mutually owned but they accounted for 69 percent of industry assets. However, since then all four mutuals have demutualised, starting with Capita (now MLC Life) in October 1990, National Mutual in September 1995, Colonial in December 1996, and ending with AMP in January 1998.

The goal of demutualization was to allow insurers to address the forces of banking deregulation and the more competitive environment faced by the insurers during the 1990s. Banking deregulation introduced a number of large, well-capitalized players into the market that were offering a full suite of financial services. The unbundling of insurance products brought insurers into direct competition with other financial service providers. The traditional information asymmetry considerations that inspired mutual structures seemed to no longer apply as data processing improved and the size of insurers grew. Intergenerational equity issues also began to arise as reserves were established from one generation's premiums yet paid out to another.

Therefore, all four mutuals decided to raise capital through issuing ordinary shares in exchange for membership rights, and listed on the Australian stock exchange.

Demutualization quickly led to a period of turbulence for the newly listed public insurers as they faced the harsh realities of the market. They quickly broadened their product offerings and sought to become integrated financial services providers. However, many did not effectively manage the major organizational transformation required. With competition heating up, rationalization took place in the market. National Mutual was purchased by AXA in 1998 and MLC was acquired by NAB in 2000. In the same year, Colonial was acquired by CBA. Only AMP managed to maintain its independence.

The combined effects of the introduction of superannuation, deregulation of the banking sector, and demurualization of life insurers have created the Australian life insurance market of today. We will now shift from a historic perspective and discuss the changing customer needs and the opportunities in the market.

Increased Risk, Responsibility, and a Collective Failure to Respond

Despite the maturity of the market, Australians today are still very much underinsured against the list of ever-growing risks (for example, health and adequate retirement savings). Coupled with this has been a shift in the responsibility for managing these risks from the public and private sector to the individual. The result is effectively a "double whammy" for Australians. A range of factors, including poor consumer understanding, limited product innovation by life insurers, and a laissez-faire government approach have contributed to these risks not being effectively managed today.

Increased risk and responsibility

Over the past 20 years, four significant changes have increased the level of risk for Australians.

First, Australians are more financially stretched than ever before, increasing their exposure to potential hardship following premature death, sickness, or accident. For example, in May 2008, mortgage repayments accounted for 29.1 percent of an average first-home buyer's income - the highest percentage on record. Australian Superannuation Companies

Second, Australian mortality rates are decreasing and this trend looks likely to continue with advances in healthcare. This is particularly the case at older ages, which increases significantly the spending on healthcare in the twilight years.

Third, retirees face longer retirement periods than at any other time in history, increasing the chances that they outlive their retirement savings. As seen in much of the developed world, longer life spans are being compounded by increasingly earlier retirements. Since the 1970s, the Organization for Economic Co-operation and Development (OECD) rate of labor participation by males aged 60-64 has dropped from 60-90 percent to 20-50 percent.

Fourth, as in many mature markets, due to the aging "baby boom" generation, fewer workers are supporting a greater number of individuals in retirement. This reduces significantly the ability for the government to provide an effective safety net.

At the same time, the responsibility for managing these risks - particularly in retirement - has shifted from the government and the private sector to the individual. Superannuation-defined benefit schemes, which provide consumers with a guaranteed benefit at retirement, are being phased out. In their place are the defined-contribution schemes that provide only an accumulation benefit, leaving consumers with exposure to investment and longevity risks that may leave them with insufficient savings in retirement.

Also, in retirement the preference has been for allocated rather than lifetime annuities. This is a result of their relative simplicity, strong investment returns in recent years, and the fact that consumers are generally unwilling to cede any residual savings they may have on death to insurance companies (as is generally required in lifetime annuities). Alongside this, the government pension provides only 25 percent of the male total average weekly earnings, all of which means that consumers are more exposed to longevity, morbidity, and market risk in retirement.

The result of these increased risks and the shifts in responsibility will have a real impact on many Australians. Approximately one-third of the population have no coverage, one-third are only covered through their superannuation fund, and only the remaining third have voluntary coverage. More surprisingly, two-thirds of Australians are fully aware that their level of insurance coverage is either inadequate or nonexistent. They simply choose to do little about it. This fact of underinsurance is well known and every year or so a new report is released revealing its extent. One of the drivers is the generally optimistic attitude of Australians.

For example, in 2007, AXA released its Protection Report which asked respondents whether they think something bad (for example, serious illness) may happen to them. Out of 11 developed countries Australians came out as the most optimistic in four out of five areas, and as the second-most optimistic in the fifth!

Similarly, Australians are not effectively managing their longevity risk exposure through superannuation and the annuity market: 3.4 million Australians, or one-third of the workforce, are expected to suffer from inadequate income in retirement at current rates of saving. On average those falling short will do so by US$3,125 a year (in today's terms). Even more worrying, of workers aged 45-55, 38 percent are expected to have insufficient retirement savings, suggesting that these shortcomings may start to materialize in the not-too-distant future. To find out more, you can check out Australian Superannuation Companies.

Australia Life Insurance Market - Life Insurance In Australia

2011-12-23T10:00:00.000-08:00

Australia Life Insurance Market

Despite its geographical proximity, the Australian life insurance industry bears little resemblance to the other markets. It is well established, having matured over the past 15 years, and remains relatively small, with US$31.2 billion of sales in 2007. Australian insurers have not connected more with the rest of Asia due to a history of poor expansion outcomes and ongoing fears about regional fundamentals, including fallout from the Asian financial crisis of the late 1990s.

Although there are few growth prospects remaining in Australia, we are cautiously optimistic about the future of the industry. In particular, there are opportunities to more effectively extract value from the risk and savings needs of Australian consumers. For example, there are many unmet risk management needs that must be addressed, such as longevity and morbidity risk, that have been opaquely transferred from government to individuals over the last 20 years or so.

An Introduction to Life Insurance and Retirement Savings in Australia

A fundamental aspect of the Australian life insurance and retirement savings market is the extent to which risk and savings products have been unbundled. Although there are some products that combine both elements, they are a small minority of the total business and tend to take the form of an investment product with guarantees rather than an insurance policy with investment attributes. Australia Life Insurance Market

The superannuation (retirement savings) industry has a legislated mandate to provide retirement savings for all working Australians and provides the vast majority of the retirement and savings infrastructure. This legislated mandate has seen the superannuation industry grow to US$1,036 billion in assets by 2007, making Australia the fourth-largest assetmanagement market globally. Furthermore, there have been recent discussions about increasing mandated superannuation contributions (potentially up to 15 percent, from 9 percent today), which would drive growth for at least the next 10-15 years. By contrast, the domestic life insurance market languishes in its shadows with US$224 billion in assets. The Australian life insurance market is comprised of three very distinct segments:

Risk products: These include term-life, temporary and permanent disability, and business continuity insurance covering both individual and group business. Annual sales are around US$1.5 billion. There is a negligible amount of whole-life products sold in Australia.
Annuities: These are typically termed with residual, capital-value guarantees. There is a negligible volume of life annuities sold in Australia (around 1 percent). Annual sales are around US$6.0 billion.
Investment products: These include conventional, individual, and group investment accounts and investment-linked business. Annual sales are around US$23.8 billion.

Compared to the rest of Asia, the growth numbers here are weak; overall premium has grown at only 2 percent annually from 2002 to 2007. The only highlight has been that risk products grew by around 12 percent - although a large part of this growth has been driven by stepped premiums that carry their own risks. By comparison, annuities and investment products have shown little growth. In fact, annuities have yet to clearly demonstrate their value proposition against traditional, allocated pensions. Therefore, new sales have predominantly been in the term-annuity space with relatively few players offering guaranteed or lifetime annuities. Moreover, little product innovation has taken place in recent years.

Despite their size in terms of sales, the annuity and investment segments are relatively modest profit contributors, as a percent of sales, compared to risk products. They are distributed in similar ways to the majority of asset-management and retirement products in Australia - via wholesale or independent retail distribution channels (that is, independent or tied financial-planning forces). Our focus is primarily on risk products.

Distribution of individual risk products in Australia is primarily through aligned and nonaligned dealer groups. These groups include, for example, Commonwealth Bank Financial Planners, AMP, and Genesys Financial Advisors (now owned by AXA). However, many of the bank-owned life insurers are enhancing their cross-selling of insurance products through the bank channel to maximize the value of their proprietary distribution channels. This channel has grown relatively quickly in recent years as a result. Group risk product sales are mostly done via the "wholesale" channel. The wholesale channel covers premiums associated with stand-alone corporate, government sector, and industry superannuation group risk schemes.

CommInsure (a subsidiary of the Commonwealth Bank of Australia), NAB/MLC (a subsidiary of the National Australia Bank), and ING Australia have leading positions in nearly all five products. A number of other players, notably Tower and AXA, have leading positions in specific products. Compared to other parts of Asia Pacific, the competitive dynamics in Australia has been much more stable. With the exception of a small number of acquisitions and joint ventures (for example, the acquisition of Asteron by Suncorp in March 2007 and the tie-up between ANZ and ING in 2002), this landscape has remained remarkably similar over the past several years.

The Development of the Australian Life Insurance Industry

Three major trends, each of which has been the result of government intervention, have shaped today's Australian life insurance and retirement savings landscape:

(i) the introduction of superannuation and the unbundling of risk and savings products;
(ii) deregulation and the emergence of bancassurance models; and
(iii) demutualization and changing business models.

The Introduction of Superannuation and the Unbundling of Risk and Savings Products

With the emergence of superannuation onto the Australian financial landscape, risk and savings products effectively became unbundied. Compared to the rest of Asia Pacific, where there is still significant opaqueness in product structures and, therefore, high embedded margins in life policies, Australia presents the opposite picture. Australia Life Insurance Market

To understand this, one must appreciate a bit of history. Superannuation schemes were introduced in Australia after World War II as a way of providing for servicemen in retirement. During the 1960s, these schemes emerged as major competitors to the traditional savings and risk management products of life insurers. By the end of the 1960s, superannuation had taken over from traditional products as the way Australians thought about savings and retirement.

To address this new form of competition, Australian insurers responded through innovation in product design. In particular, during the 1970s, they started to unbundle traditional life insurance products into separate risk and savings products. There were a number of reasons for this. Unbundling produced products made them much easier for retail consumers to understand. The new products could then compete directly with those from the superannuation industry. Furthermore, it allowed investors the opportunity to better tailor their product portfolio and have greater control over decisions, such as where their funds were invested.

Also, government intervention has completely changed the face of the insurance industry through concessionary tax treatments and the introduction of compulsory superannuation contributions in 1992. Compulsory superannuation quickly enlarged the size of the industry to such an extent that it is now a fundamental element in the Australian financial system. Many Asian governments have studied the superannuation scheme, and a few countries have actually put mandatory systems in place, such as the Central Provident Fund (CPF) in Singapore and the Mandatory Provident Fund (MPF) in Hong Kong. However, the extent to which superannuation took off in Australia and "crowded out" retail financial products is truly unique. None of the markets has anything dose to the 360-kilo gorilla that superannuation has become in Australia.

Next post we'll continue to talk about deregulation and the emergence of bancassurance models and demutualization and changing business models. At mean time, you can check out Australia Life Insurance Market for more details.

Insurance Competitor Analysis - Increasing Competition Between Foreign and Local Players

2011-12-22T10:00:00.000-08:00

Insurance Competitor Analysis

A hallmark of the Southeast Asian market is the proliferation of foreign players. In all five markets, foreign players have more than 50 percent of market share, with a handful of leading multinationals - namely AIG, Prudential (UK), and Manulife - enjoying entrenched positions. However, there are signs that domestic insurers in Southeast Asia are growing in sophistication and ambition. In all of these markets, there are one or two prominent domestic insurers - these include Thai Life in Thailand, Bao Viet in Vietnam, Bermasa Bumiputera in Indonesia, and Great Eastern in Malaysia.

For foreign players seeking first-time entry into these markets, the golden period of "first-mover advantage" has gone. While foreign market share had increased over the past five years, the number of foreign insurers has held steady and in some cases declined. For example, there were 22 foreign insurers in Indonesia in 2001. By 2007, there were only 16. Similarly, in the Philippines, the figure dropped from 20 to 11.

Foreign players who are well established in the region, namely AIG and Prudential (UK), often enjoy a market-leading position. AIG, for example, raked in a gross premium of US$3.6 billion from these five Southeast Asian markets for 2006, equivalent to 5.4 percent of the company's global GWP and 33 percent of its business in Asia. It is the market leader in two of the five countries, and ranks within the top five in all five markets.

For these players, Southeast Asia currently contributes more profits than the giant markets of China or India combined. The China market, for example, is significantly larger, but AIG - the top foreign player - only collected US$1.2 billion in premium, in 2007. In the same year, AIG collected premium amounting to US$2.3 billion in Thailand alone, where it has a whopping 39 percent market share. This dominance in the Southeast Asian markets has a lot to do with the multinationals' leverage of international expertise, a favorable regulatory environment towards foreigners, and their early entry with regard to market development. Insurance Competitor Analysis

In these markets, insurance is often one of the first financial products bought by customers - a McKinsey consumer survey found life insurance consistently ranked within the top five most popular financial products held in the region. Traditional savings accounts always top the list with a penetration rate of over 90 percent, while debit cards are the other consistent product across the region. However, consumers are less knowledgeable on the risk/return profiles of different investment products. Foreign insurers have been able to take advantage of the developmental stage of these markets, and have created products that are designed to fit the needs of emerging-middle-class customers. For example, we had mentioned earlier Prudential (UK)'s combined protection and investment product, PRUVantage.

Indonesia provides a good example of the dominance of MNCs - two of the top four life insurers are multinationals, AIA and Prudential (UK). Foreign players outperformed the market by aggressively positioning themselves in the growth sector - investment-linked products. While foreign insurers have a significant proportion of their business in investment linked sales, the three largest domestics have virtually none.

There are still some restrictions on foreign ownership in the Southeast Asian countries, albeit less than those in China and India. Vietnam allows for 100 percent foreign ownership of insurance companies; foreign ownership in Indonesia is only limited to 80 percent, and in Thailand and Malaysia, the limit is currently 49 percent.

Changing regulatory environments and consumer needs are moving these countries towards greater market involvement by local players. In the Philippines, for example, foreign players are allowed to own 100 percent of an insurance company, but asset restrictions favor local players.

Channel Upgrades to Reach More Customer Segments

As in other parts of Asia, agency distribution is still dominant in Southeast Asia, but bancassurance has been a big driver of recent growth. In Vietnam, Prudential (UK) made rapid progress by building a national network of 70 branches and customer service centers in 47 cities and towns through agreements with Vietnam Commercial Bank and Agribank. In Malaysia, first-year premium sold through banks went from 21 percent of the market in 2002 to 45 percent in 2005.

And the proliferation of bancassurance is allowing newer players to access the market through alternative channels. In both Malaysia and Thailand, local banks are becoming active in the insurance industry by partnering with foreign insurers in bancassurance deals. This includes Siam Commercial Bank in Thailand and Maybank in Malaysia, who partnered with New York Life and Fortis respectively. Insurance Competitor Analysis

The growth of bancassurance is also driven by more demanding customers who associate banks with higher trustworthiness and better advice. And what makes the trend for better distribution even more pronounced in Southeast Asia is the increasing need for customer segmentation. Urban customers are becoming more sophisticated and seeking improved service. Meanwhile, rural segments require cost-effective channels - such as bancassurance and other alternative channels - that are more capable of reaching these underserved regions.

Unlike the more established markets in Asia, where the local incumbents have the legacy agency channels, in Southeast Asia, it is the multinationals that are faced with the urgent need to revamp their sales forces. But they have been quicker to react than incumbents in other Asian markets - insurers are stepping up their efforts to improve their existing channels and innovate in direct channels. In Malaysia, there has been a movement to introduce more quality into the sales force. Great Eastern launched the Life Planning Advisor program, while Allianz developed the Allianz Achievers Academy (AAA).

Meanwhile, innovative distribution strategies are also at work. Thailand has been in the vanguard of call center sales. Thai Life, Thai Cardif, Allianz, ACE, ING, and Prudential (UK) are some of the players developing telemarketing as an alternative channel. Of these companies, Prudential (UK) in particular relies heavily on call centers as a distribution channel - it accounted for 85 percent of their total sales in 2007. In contrast, in Prudential (UK)'s other markets, only 4 percent of sales were derived from direct channels.

Alternatively, insurers in the Philippines have exploited the wide usage of text messaging among young Filipinos in their sales and marketing drives. Filipinos sent an average of 2,300 text messages per person in 2003, far more than in neighboring Southeast Asian countries and other regions, notably Europe and North America.

The Future: Reaching Scale

Looking forward, all multinational incumbents, local players, and foreign insurers seeking entry will need to focus on scale in Southeast Asia. Whereas a 5 percent market share in China or India is large enough to be attractive,
it is not so for the smaller Southeast Asian markets. As the Philippines example illustrated, foreign players who did not reach adequate scale chose to exit rather than increase their investments. In this environment, the ability to leverage footprint across the region theoretically helps regional players to benefit from economies of scale. Many are now engaged in projects to upgrade and consolidate their operations in an attempt to reap more synergies; whether they will succeed only time will tell.

Meanwhile, with a single-country focus, local incumbents need to step up their competitiveness in alternative methods to make up for less scale. Players are leveraging their more extensive channel networks or local knowledge in certain products. For bank players, the natural strategy is to leverage their banking networks, while in Indonesia and Malaysia, takaful products could also provide a future growth engine.

For potential new players, there is an ongoing debate as to whether there is still room to enter into these markets. A lack of ability to reach scale may be an impediment. On the one hand, given the growth trajectory, there should be ample room for more competitors. Markets with strong fundamentals such as Indonesia and Vietnam should offer interesting opportunities. On the other hand, the increasing competitiveness and smaller scale of these markets renders them less attractive, especially vis-a-vis the long-term growth opportunities in China and India. Many companies eyeing the Southeast Asian markets are also deterred by the entrenched positions of the large multinationals that went before them, such as A/G, Prudential (UK), and Manulife.

In all, Southeast Asia looks set to remain a market in which multinationals will maintain a heavy presence alongside a few local heavyweights. Threatening newcomers will be few, but given the early development stage of these markets, there will be room for some new entrants. We predict that among the entrants there will be a mix of MNCs and a few, select Asian players. Competition is intensifying and domestic companies have recently turned up the heat on their large MNC rivals.

Southeast Asia may not be the largest market in Asia, but for players committed to a pan-Asian footprint, it deserves a close look. Furthermore, its openness to foreign players makes this region an interesting play. For those with the right strategy, these markets can be extremely profitable and added together, can be a meaningful part of an overall Asian portfolio. To find out more, you can check out Insurance Competitor Analysis.

Indonesia Insurance Association - Indonesia Insurance Snapshots

2011-12-21T10:00:00.000-08:00

Indonesia Insurance Association

The life insurance market in Indonesia enjoyed a strong annual growth rate of over 30 percent during 2002-07. This growth was evident across all product lines, but most noticeably in investment-linked products, which alone accounted for 42 percent of gross premium growth. The proportion of investment-linked premiums in total gross premium increased from 9 percent in 2002 to 31 percent in 2007.

Indonesia is a relatively consolidated market dominated by foreign players. In 2006, the top seven players accounted for about 58 percent of the market in gross premium; four of the top seven AIG, Prudential (UK), Manulife, and Allianz - were multinational insurers.

Growth prospects remain bright; we forecast gross premiums could expand by 25 percent annually from 2007 to 2012, driven by continued economic growth and high market potential as indicated by a current low premium penetration at 1.1 percent of GDP.

Growth is also expected to come from the development of Shariacompliant takaful insurance, which allows life companies to tap into the 200-million strong Muslim population of the most populous Muslim country in the world. Penetration of Islamic banking and takaful is still low compared to neighboring Malaysia. At the moment this is a small market segment, accounting for just over 1 percent of Indonesia's gross life premium but it grew 34 percent annually from 2001 to 2006, compared with a 25 percent growth rate in the overall life market.

To sustain this growth, government support is needed to increase transparency and develop the Islamic banking system, as well as increase the service quality of takaful players so that they are competitive with conventional insurance offerings. Islamic insurance is not limited to local insurers. Multinational players such as Allianz, Manulife, and Prudential (UK) are also committed to developing this market. Indonesia Insurance Association

Despite the various peculiarities in each of the Southeast Asian markets, they have as much in common as they have differences. The three major themes across the region are:

Growth opportunities via diversified product portfolios
Increasing competition between foreign and local players
Channel upgrades to reach more customer segments

While the large markets of China, Japan, and India are undoubtedly attracting more investments than Southeast Asia in absolute terms, the region is providing good value for those who can navigate the waters. Multinationals have traditionally dominated most of the markets in the region, which have been meaningful profit contributors for these players.

However, it is important to note that most of these multinationals entered in a period when they had significant first-mover advantages. This dynamic is changing somewhat; while foreign incumbents have a tight stronghold, local players are becoming savvier. New players contemplating entry will encounter greater challenges than those that went before them.

Growth Opportunities via Diversified Product Portfolios

Between 2002 and 2007, the Southeast Asian life insurance markets grew at an astonishing average pace of 15.4 percent per annum. While fundamentals played an important part in this growth, life insurers' efforts to reach new customer segments also played a significant role. Increasingly, insurers are designing products catering to specific segments in Southeast Asia, from micro-insurance for rural areas to takaful insurance for the Muslim population in the region. Indonesia Insurance Association

There is good reason to be optimistic about the fundamentals in this region. For a start, the economy grew between 5 and 8 percent per annum in real terms from 2002 to 2007, which is comparable to the growth rate in India at 8.3 percent and China at 8.8 percent. Despite increasing insurance sales, the current level of market penetration remains low at 1.8 percent of GDP. Furthermore, product awareness and understanding of life insurance benefits is still nascent among consumers. Consumers are increasingly making use of life products as savings vehicles and to capture taxation benefits, but protection coverage remains low.

The urban population has traditionally been the target customer segment for life insurers. Part of the challenge in the future will center on how to move beyond the large city centers into the more rural areas. To some extent, traditional tied agents, such as Lili Lim, had tapped the rural markets through personal relationships, traveling to rural areas regularly to visit their networks, but large-scale, systematic distribution to these segments will require changes in both distribution and product offerings. In this aspect, some players have been quick to move and gain market share.

AIA, for example, is aggressively targeting rural markets in Thailand and has devised a new, single-premium insurance product. The new product, 1 Pay Life, which is targeted at farmers whose incomes may not be consistent, will provide lifetime coverage for 99 years on the payment of a one-time premium. The launch of this product coincides with the record margins being earned by farmers from the increase in rice prices and AIA is hoping to significantly increase the share of premium from rural areas from the 5 percent it accounted for in 2007.

Another insurer joining the bandwagon is Muang Thai, which has started selling to lower income customers and is also active in rural areas. The insurer intends to recruit one agent per village - the agents themselves actually being from these villages. This can be quite important, since 60 percent of the Thai population lives in 70,000 villages spread across the country. The policies sold have a low face value and are no-frills products, so volume is key. For example, one product is designed purely to help finance cremation costs. In 2007, up to 20 percent of Muang Thai's clientele was from rural areas and this was their fastest-growing segment.

Meanwhile, an emerging middle class has driven insurers to create tailored products that bundle risk and savings. Thus, in Malaysia, insurers are offering retirement, education, takaful, and other product combinations. Prudential (UK), for example, launched PRUVantage, which is a combined traditional and investment-linked product that allocates a portion to a traditional, guaranteed-return account and the remainder to an investment-linked account. Another popular product in this region is the combined protection and education savings plan.

Finally, the small but burgeoning Islamic finance sector will see increased penetration particularly among the significantly untapped Muslim population in Malaysia and Indonesia. To find out more, you can check Indonesia Insurance Association.