With its surging economies, Asia presents a great opportunity for the international insurance industry As Lloyd’s research shows.

Asia continues to outstrip the rest of the world in terms of its economic growth. While China is seen as the engine room powering the charge, the region’s vast population and low operating costs have led global economists to predict that Asia is set to become the dominant force in the 21st century.

With this new global economic giant comes massive potential for the international insurance markets. Asian economies will need to cover increasing levels of risk that come with exporting vast amounts of goods to the Western market. Commercial and personal lines of insurance are also set to be in high demand as personal wealth and standards of living continue to increase across south east Asia.

Economic overview

The two ends of the Asian region offer the biggest and most immediate opportunities. India’s huge, low-cost workforce is building a successful global centre for outsourced office administration services, particularly as it has a highly educated workforce. At the other end of the regional spectrum, China, the fastest-growing economy in Asia, is building a dominant manufacturing sector. Economists predict that within a decade, Chinese brands will be as well known to consumers as Japanese brands such as Sony, Yamaha and JVC.

The pace of economic growth shows no sign of slowing. In its 2005 outlook report the Asian Development Bank (ADB) and the World Bank expect the region’s growth to be around 6.6% and 6.2% respectively. However, there are factors that give rise to uncertainty.

Challenges facing the Asian economy

Economic progress in Asia is tempered by its thirst for increasingly expensive fuel, the threat of terrorism, the possibility of a slump in its export markets and vulnerability to outbreaks such as SARs and bird flu. All of which have the potential to stunt the growth of what remains a very young and in some ways fragile economy.

The ADB’s chief economist, Ifzal Ali says: “Oil prices have risen by almost 75% since the beginning of 2005. Signs of strain are beginning to show across the region. Failure to adjust could put prospects at risk.”

China and a number of other Asian states have been busy signing agreements for the supply of oil and natural gas, whilst also working on the rapid construction of power stations as they seek to power the economy. Ali says: “Despite all this, we continue to be cautiously optimistic on developing Asia. Healthy expansion is expected to continue drawing on strong internal dynamics, particularly growth in the People’s Republic of China and structural improvements in south Asia.”

The World Bank mirrors this optimism, and argues that if anything, there could be a modest slowdown in Chinese economic growth, but faster expansion in South Korea, Thailand, Malaysia, Indonesia and the Philippines which would continue to drive the region’s economic growth rates. They said that despite the increase in oil prices, the region’s economy has been resilient to the shocks. However they do warn that the potential for a widespread avian flu outbreak could cause serious damage. The Bank’s chief economist for Asia, Homi Kharas, describes the avian flu threat as “the big risk that overshadows the region”. He goes on to say that “while the cost of dealing with this has so far been limited to around 0.1% of GDP, from culling birds and implementing better animal health surveillance systems, the potential impact of a serious pandemic is grave”.

The longer-term future for Asia

Global banks and leading economists are agreed that Asian economies are set to dominate the rest of the world, but how will this be achieved? Douglas McWilliams, chief economist at the Centre for Economics and Business Research, has argued that investors will start to become more global in their outlook, and that more investment into capital equipment and businesses will see these low labour cost countries become super powers.

During a recent speech he said: “At present, despite what many may think, the financial markets are not truly international, and many investors such

as pension funds feel more secure investing their money in the same territory as their risks.” He explains that as risk premiums become lower in the East, previously conservative investors will move there. Currently it’s estimated that 80% of investment is made into domestic markets, but the percentages could be reversed as international opportunities become more attractive. He finished by saying: “Asia will be the economic powerhouse for the rest of this century. The future economy will create pressure, but it will also create opportunities.”

Asia and the insurance market

Standard & Poor’s estimates that Chinese insurance premiums reached RMB432bn (£30.5bn) in 2005, making it the third largest insurance market in Asia behind South Korea and Japan. Asian market regulatory risk and management systems are as immature as the industries they aim to protect. This makes international underwriters and brokers, who bring with them developed risk management, much more attractive.

The Asian market has plenty of opportunities for international reinsurers. There are an increasing number of Asian domestic carriers seeking quality capacity, as well as international primary carriers who are being asked to manage emerging risks as the region becomes the manufacturing centre of the world.

It is against this backdrop that international insurance companies have been working to establish offices in the region. Indeed Lloyd’s has been given a green light to establish an onshore presence in China.

Currently China Re has a monopoly in which insurance companies have to cede 5% of their business to the reinsurer; however, that arrangement ends this year.

The broker market reports that the long-awaited opening of Asian opportunities has begun. While the doors to the region’s businesses may not have been thrown wide open, the level of business presented to international markets is growing at a pace that matches Asia’s economies. As Asian brands seek to establish themselves in the western market, the region’s businesses are seeking to partner Western brands to boost their balance sheets.

Insurance is no different and the Lloyd’s brand is set to prove a significant selling point for the market as it seeks to build a bridgehead in the region.

Lloyd’s research finds major marine opportunities

Lloyd’s presence in Asia has been growing steadily. Premium income from the region has doubled in the last five years to more than US$2bn. Against this backdrop Lloyd’s commissioned research to identify and assess the business classes which would offer the most significant growth opportunities for the London market over the next few years.

The study of over 300 insurers, reinsurers and brokers identifies the opportunities that exist in the region across eight specialist insurance classes. This research was compiled by Lloyd’s and the British Chamber of Commerce.

On the whole, China remains the major driver for economic growth throughout the region, with its admittance to the World Trade Organisation only adding to the momentum. There is a strong feeling that continued deregulation in the emerging markets would provide further opportunities for the international companies.

However, in reinsurance terms, the continued reliance on self-insurance in some markets is seen as an impediment to the increased use of international capacity. And those who felt there were some barriers to international access believe these will be removed in the next three to four years.

Even though broker distribution is largely underdeveloped in the region, due to the dominance of the agency model, Lloyd’s survey shows that there is significant demand for broker services in Asia. Around 28% of all cedants expect to increase their use of brokers by 2007.

With the growth in the levels of exports from the region, it is of little surprise that marine insurance is seen as offering the most favourable opportunity at present and in the foreseeable future. Respondents think that manufacturing capacity and exports will fuel much of the future growth, the movement of raw materials and finished goods will provide the greatest opportunity.

Product liability is the second biggest growth area; this is tied to prospects for increased manufacturing output. Cover, like the marine sector, is strongly associated with the import and export of goods and services. Western importers also require a high level of product safety, which is also cited as a driver for the increase in demand for product liability cover from Asian firms.

Growth in the employers’ liability sector is expected to be low, given the current high penetration in some of the region’s developed markets. This is in marked contrast to the professional indemnity (PI) market where, despite the current low levels of usage, it’s expected to increase in importance to support the financial, legal and project management services which are driving growth in the region. Brokers believe that PI cover will be the biggest opportunity for growth.

Directors & Officers (D&O) cover is expected to provide opportunities. This is because businesses in the developed and emerging Asian markets are becoming aware of the need for this cover as regulatory regimes are developed.

Surprisingly, given the threat and incidents of terrorism in the region, for many it is viewed as a niche cover, as is medical malpractice and fine art & specie. Despite Social and political unrest in the region, particularly in Indonesia, Singapore and the Philippines there has not been a rise in the regional demand for terrorism cover and those questioned said they still view terrorism as a niche and very localised class of business.

However, both terrorism and medical malpractice are viewed by the brokers as potential opportunities for international insurers, as capacity for such covers from the local insurers was limited, given the traditional lack of enthusiasm for the class.

All of the research points to the same conclusion, industry professionals expect significant premium growth for a number of specialist insurance classes throughout the region.

This premium growth is based on strong economic fundamentals, growing trade flows, and the increasing specialisation and sophistication of the Asian corporate landscape including its insurance markets. The need for local insurance markets to provide risk management techniques for rapidly maturing economies form the basis of strong premium growth.

At the same time, the majority of insurance markets in this study are playing catch-up in terms of technical sophistication. Underdeveloped distribution channels in combination with heightened international competition may limit growth opportunities to niche products.