During my last visit to Hong Kong, I attended a conference to discuss various opportunities in financial services along with industry experts and executives from both Asian and global institutions. The key theme that emerged from the event was how Asia is typically viewed as the world's primary growth market in this important sector, particularly given the slowdown in Europe and the regulatory environment in the U.S. Indeed, the consensus was that Asia is poised to increase its consumption of financial products due to its rising wealth, high savings rate, higher life expectancy and aging population.
Changing consumption trends seem likely to have a significant impact on Asia's insurance market. As people gain affluence and education, they tend to move beyond basic financial products, such as deposit accounts, credit cards and mortgage loans, to products such as life insurance. As Asia’s middle class continues to expand, the region seems fertile ground for the insurance industry. Global management consultant McKinsey estimates that more than half of the expected growth in spending on insurance premiums over the next five years will come from Asia. A 2011 study by a Swiss reinsurance group further estimated that the protection gap—the difference between a desired level of insurance coverage and actual insurance coverage—in Asia, excluding Japan, was as wide as US$32 trillion. Even consumers in relatively developed markets, such as Singapore, are estimated to be under-insured by US$373 billion.
Despite the favorable backdrop for growth of the insurance industry in Asia, executives have highlighted a shortage of talented personnel, particularly among actuarial and sales teams, as a structural challenge to overcome. A strong sales force is often a top priority for insurers because an effective distribution channel provides a significant competitive advantage. Many insurance firms in India and China have held a grow-at-all-costs philosophy over the past 10 years, but some are now seeking to reposition their models for sustainable growth over longer time horizons. Focus has shifted therefore to extensive recruitment and training. Some firms have even begun to develop comprehensive training and leadership programs, offer better industry career paths and create new incentives for improved productivity—little of which existed before.
Investment-linked products have been the driving force behind the growth in insurance premiums in larger markets such as China and India. But both changes in regulations as well as changes in customer needs have forced insurers to provide a wider range of products with an emphasis on protection. Health insurance, annuities and more recently “Takaful insurance,” which is an Islamic concept grounded by the regulations of Islamic law, have been introduced. Communicating the benefits of the new products through effective marketing and education requires a savvy sales force as such protection products continue to be difficult to sell in Asia.
As Asia’s economies evolve, we expect the insurance industry to continue to develop stronger distribution channels, trusted brands and relevant product portfolios and, above all, sound risk and capital management. These developments, which may bring about a more sophisticated insurance market, will also in part rely on further capital market reform and stronger cultures of corporate governance to build trust and efficiency in investment markets. We believe the insurance industry could contribute to—and benefit from—one of Asia’s most pressing areas for reform.
Tarik Jaleel, CFA
Matthews International Capital Management, LLC
© Matthews Asia