WIN Magazine - Summer 2017 - 33
high-risk and safety-critical products not
only for China, but also for markets in Asia,
Middle East, Europe and Africa.
Insurers confront a variety of internal
and external challenges hindering their
expansion. "...The penetration rates
haven't actually changed much in ten
years", CEO of AIG, Peter Hancock said.
The reason behind low market penetration mostly comes from under-stimulated
demand and restricted supply.
On the demand side, challenges for foreign insurers originate from low customer
awareness, misconception about insurance products and consumers' home bias,
especially in low-income areas. In some
emerging markets where there is a lack of
enforcement of regulations against fraud
and corruption, such as Russia and India,
high administrative costs, fraud, adverse
selection and moral hazard diminish the
profitability of underwriting business
(Allianz AG, GTZ and UNDP Public Private
Partnership). It is critical for insurers to
cautiously assess customer demand and
risk exposures while designing products
for target overseas markets.
On the supply side, there are also
threats to the profitability of foreign
insurers. Regulators in several emerging
markets, such as Mexico, Brazil, Chile and
China, are developing and synchronizing
their regulatory framework around EU
Solvency II. Under tighter capital control
in these markets, foreign insurers face
higher capital pressure. Overseas branches
have to undertake higher cost of capital
including opportunity cost and agency
cost, leading to less competitive pricing.
Small or specialized insurers, in such situations, could suffer from mergers and
acquisitions or exit the market (Swiss Re).
Foreign insurers face the threat from
domestic players who benefit from market
access restriction, discriminatory taxation,
wide distribution network and familiarity with local markets. Compared to local
insurers with those inherent advantages,
underwriting expertise is the core competitiveness for foreign insurers to expand
the market share. Continuous product
innovation is critical to outperformance
the local competitors. Technology growth
in mobile and online service also poses
in mobile and
also poses threats.
Wholesalers need to
threats. Wholesalers need to rethink distribution strategies and customer service.
According to Risk-Opportunity Matrix
created by Ernst and Young, the most
attractive markets with high growth
and low risk (China, India, Indonesia
and Malaysia) are in Asia. The risk index
defined by Ernst and Young focuses on the
economic and political environment at a
national level. The risk dynamics affected
by regional natural catastrophes and the
loss severity within each country are
excluded. Unexpected loss in emerging
markets can be even more expensive with
the urbanization raising the population
and property density. In fact, there are
past records where insurers geographically diversifying in emerging low-risk
zones suffered bigger loss than those in
high-risk zones in 2011 (Guy Carpenter).
United States' withdrawal from the TPP
and anti-globalization trade policies under
the new administration could dampen
the trade and cause currency volatility in
some export-driven emerging economies.
Geopolitical instability, including refugee
crisis, terrorism and political turbulence,
triggers currency risk in markets such as
Brazil and Turkey. The volatility in exchange
rates will complicate the repatriation of
profits and capital if insurers choose to exit
these markets given the rising global and
regional uncertainty in the future.
Even for multinational insurers with years
of experience and global presence, there
are high institutional uncertainties and
transaction costs to obtain licenses and run
business effectively in developing economies. The key is to seek win-win opportunities with regulators and stakeholders. "The
regulatory challenge and the stakeholder
challenge we face are many", said Peter
Hancock, "what I feel the most important is
not to feel regulators as your enemy. Apart
from negotiations with government, cooperation with local NGOs or international
organizations based on common goals and
incentives helps reduce the amount of friction with stakeholders.
For wholesalers with a limited entry
strategy, there are alternatives to access
the emerging markets by participating
in associations. Lloyd's of London, the
largest wholesale specialty marketplace
in the world (Fairfield), has obtained
licenses and established overseas offices
to provide specialist insurance in emerging markets enabling wholesale members to access the developing markets.
Entering new markets suggests reform
in product design, distribution, customer
service and marketing. Wholesale professionals and human resource managers face new requirements on talent: a)
cross-cultural communication skills; b)
specialized and localized knowledge; c)
proficiency in advanced technical tools.
There are numerous opportunities and
significant challenges in entering emerging markets, which require proactive
adaptation to the dynamic regulatory and
competition environment for wholesale
professionals. Internally, customer-centered products, strong risk management
mechanism, innovative talent with global
market insights and advancing modeling
techniques will help enhance the sustainability and profitability of the diversification portfolio. Externally, the ultimate
success also relies on the networking and
collaboration with multiple parties such
as local stakeholders and professional
Jialu Ma is a student at
Howard University, and
is one of the winners of
the AAMGA's 2017 Risk
Management & Insurance
Student White Paper Contest.
Her advisor is Professor B. Paul Choi, Ph.D.,
CPCU. Contact her at: jialu.ma@bison.
howard.edu, or come and meet Jialu in
person at the AAMGA 2017 Annual Meeting.
AAMGA.ORG | S U M M E R 2017 | 33