Successful Business Strategies for Insurers Entering and Growing in Emerging Markets

Amman, JordanJune 2009

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Emerging Market Opportunity

Source: EIU, BMI Industry Reports, Datamonitor, IRDASource: EIU, BMI Industry Reports, Datamonitor, IRDA

Insurance industry is experiencing higher growth in emerging markets compared with the developed economies

‒ Over the past five years, insurance premiums of emerging economies such as India, China, Brazil have grown at CAGR of over 20% whereas those of mature markets such as US and Japan are below 5%

Gross domestic products in emerging markets are growing at a higher rate compared with the developed economies and are poised for higher growth in future

Emerging markets are underpenetrated providing huge potential for growth

‒ In 2007, insurance penetration in India, Mexico, Brazil, and China was 3.8%, 1.9%, 1.3%, and 2.5% respectively

Key Observations

CAGR

India

Japan

USA

China

Brazil

31.7%

0.8%

3.8%

22.9%

27.7%

Insurance premium growth (%)

Note: Growth indexed to base year 2002

With limited organic growth opportunities existing in their mature home markets, insurers have now started looking seriously at the opportunity provided by emerging markets

The importance of emerging markets is increasing. While insurance growth rates in mature markets, such as the U.S., UK, and Japan have fallen flat, insurance sector growth rates in emerging markets are rising rapidly.

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Insurers are responding to opportunity with significant investments

Indian Life Market Share Change ($BN) Indian Nonlife Market Share Change ($BN)

Source: IRDA, Deloitte AnalysisSource: IRDA, Deloitte Analysis

Prior to 1999, the Indian Insurance sector was comprised of only public insurers – LIC in the Life segment and United India, New India, Oriental & National Insurance company in the Nonlife segment

In 2007, out of 21 life insurers ,18 are joint ventures with foreign players and out of 18 non life insurers, 13 are joint ventures with foreign players

In the joint ventures, foreign insurers can hold a maximum 26% ownership stake

Key Observations

$7.5 BN $14.6 BN $51.1 BN $2.2 BN $3.6 BN $7.1 BN

Insurers are investing significant capital into emerging markets to tap growth opportunities, as illustrated by the recent dynamics of the Indian insurance industry.

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Unique challenges in emerging markets

Immature markets

Insurance in emerging economies is in nascent stage with limited data available for assessing market performance

Very limited access to experienced insurance talent High administrative and procurement costs associated with targeting underinsured and rural markets Lack of infrastructure to support insurance processes

Cultural differences

Insurance is “sold not bought”

‒ Consumers do not typically actively pursue insurance coverage

‒ Requires agents to actively find and convince consumers to purchase Average buyers are less sophisticated and may not understand complex insurance products, therefore

requiring a greater emphasis and reliance on consultative sales

Challenging regulatory environments

Insurance industry in emerging markets is evolving and with regulations changing as the markets evolve. Insurers will need to change their business model to adapt to changing regulations

In many emerging markets, foreign companies cannot register for operating an insurance business independently (e.g., foreign players need to partner with a domestic company to enter Indian market)

Huge investment costs

In order to be successful in emerging markets, companies need to place huge investments as the infrastructure for selling insurance is underdeveloped

‒ Distribution channels in emerging countries are not well established

‒ Existing products may not work well in emerging economies, so investments may be required to launch new products in order to attract consumer. This also increases risk tremendously

In emerging markets, unlike developed markets, insurance companies sometimes have to compete with government/ quasi government firms

‒ In India, LIC (a government firm) holds 75% of life insurance as of 2007

Success in emerging markets requires more than simply transferring existing business models to new geographies. Insurers must adapt to the challenges of very different operating environments.

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Risks to emerging market entry

Risks to emerging market entry

In addition to the unique challenges posed by emerging markets, there are inherent business risks for entry to emerging markets. For insurance executives, “getting it right” amid the numerous challenges continues to be a major concern.

Risk Description

Economic and Financial Risks

• Currency devaluation, volatility and instability necessitates financial sophistication in matching revenues to expenses in foreign currency and/or use of hedging instruments

• Optimal financial leverage is often difficult to determine in new markets

• Limits on remittance, currency transfer restrictions and inconvertibility to domestic currency disrupt the stream of revenue back to home country

Operational Risks

• Lack of established infrastructure affects underwriting, sales, service and claims

• Distribution channels are unlikely to be mature and require development

Reputational Risks

• Entry and exit can damage a company’s reputation in the emerging market and potential future markets

• Increased incidence of corruption can expose a company with loose governance to penalties at home and abroad

Regulatory Risks

• Patchy legal and regulatory regimes tend to favor incumbents

• Ineffective regulatory institutions unable to ensure fair market practices

Political Risks

• Expropriation or nationalization of company capital and assets resulting in total loss of investment

• Negative government actions against foreign companies – taxation, discrimination, etc

• Contract repudiation such as payment default or unilateral termination

• War or civil strife affecting physical operations, employees, and supply chain function

Talent Risks• Labor markets can be restrictive, limiting access to necessary talent and resources

• Use of expats can be expensive with fewer candidates possessing emerging market experience

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Strategies for success in emerging markets

In addition to strategic characteristics, the authors isolated specific strategies for success that are positively correlated with certain characteristics found in emerging markets.

Success Strategies

Market/Country Characteristics Strategy for Success

• High Corruption Ratings• Low Market Competition• Low Trade Openness

Diversification

• High Per Capita GDP• Low Insurance Penetration• Low Trade Openness

Growth

• High Per Capita GDP• Strong Market Competition• Low Insurance Penetration• Low Stock Market Turnover• Low Trade Openness• High Corruption Ratings

Business Focus on Life Insurance

In their paper entitled, “Successful Business Strategies for Insurers Entering and Growing in Emerging Markets,” authors Berry-Stölzle, Hoyt, and Wende provide valuable, data-driven insights for insurers that can help to inform an emerging market strategy. The author’s framework and analysis can be replicated by company leadership to survey an array of emerging market opportunities, determine the risk adjusted rate of return, and make smarter decisions on emerging market entry.

Elements of Successful StrategiesSuccessful business strategies for entering emerging markets have the following elements in common:

High growth rates, increased size, and an emphasis on life insurance

When adjusted for country risk an additional two components are discovered:

Lower financial leverage and mutual organization structure