Look into 2013

Market transformation pressures continue

Asian property and casualty (P&C) insurers that have grown accustomed to adapting to change should not expect any let-up in the next few years. Peter Lee,

Director & Head of General Insurance Consulting, Asia Pacific, Towers Watson

2012 was another year of rapid developments in Asian P&C insurance markets, thanks to both ‘customer pull’ and ‘regulatory push’. But the changes witnessed are only part of a broader market shift that is likely to pick up pace.

For the most part, insurers have dealt with the evolving situation well. It is likely to be considered a good year in most countries in the region – barring disaster in December.

Nature has played a part. Much as there have been some tragic and costly natural catastrophe events – floods in China in July and The Philippines in August, for example – loss events to date have clearly been nowhere near the scale of 2011 when the region was rocked by the Japanese earthquake/tsunami and the disastrous floods in Thailand.

Companies have learned lessons from 2011, which provided the highest ever global annual level of earthquake and flood losses - around half of which came in Asia.

Initiatives seen in 2012 have been multi-pronged, and have included:

Improvements to catastrophe models.

Talking to regulators/governments about industry catastrophe pools, improvements to physical infrastructure and

planning/building regulations.

Individual company examinations of regional exposures and, critically, accumulation of exposures.

Dominant motor sector

Away from the perils that nature can bring, however, motor insurance remains the largest business in all territories. Here again, most country markets and businesses should be profitable in 2012.

India continues to be something of a special case. Motor profitability has generally been poor since de-tariffication in 2007, particularly for commercial business. Third party rates (which are still tariff-based) were further increased in 2012 by around 5% and 20% for private and commercial vehicles respectively after the substantial increases applied in 2011. In a further effort to improve results, the government has also encouraged the public sector insurers to desist from writing business at substantial loss making rates.

But, even in the more profitable countries, there are worrying signs. While underwriting results are currently mostly good, the outlook is less promising. Profitability is on a broad downward curve, partially as a result of price reductions and rising agent commission arising out of the increased competition seen in many countries.

At the same time as pressure has affected premium income, the region has also shown signs of succumbing to the ‘disease’ of inflation-busting increases to third party claims costs that have plagued many developed market insurers in recent years. How would the industry cope if the problem escalated to a level such as that seen in the UK, where one in four motor claims now involves a third party injury component?

Impact of regulation

Not all pressure for change is market-driven. Typically, regulation in the region to date has been quite prescriptive, but with a narrow scope and has resulted in a market where differentiation between products is quite limited.

So, while the global rise of risk-based solvency regulation and the regional focus on less rate regulation that continued permeating through the region in 2012 clearly add to the regulatory considerations, they are also likely to give greater freedom on how businesses are actually managed and prices are set.

Regulatory changes related to solvency in 2012 have included:

The Internal Capital Adequacy Assessment Process (ICAAP) regime introduced in Malaysia this year that requires insurers: to identify the key risks to their business

to assess capital required to operate within internally defined risk tolerance levels

to put in place risk management processes

A consultation paper published for Risk-Based Capital 2 (RBC2) by Singapore’s regulator the Monetary Authority of

Singapore (MAS) that proposes moving the solvency capital formula to a more risk-based approach.

The Chinese regulator asking the industry to quantify the impact of moving to a EU Solvency II and US RBC formula basis

and starting to prepare the industry for China’s own version of Solvency II.

In Japan the RBC formula has been strengthened and is also expected to move to Solvency II type regime.

Rate regulation changes included:

In China foreign insurers being allowed to apply for authorisation to write compulsory third party liability (CTPL) coverages as well as the optional covers for motor. This is particularly important because consumers do not buy CTPL separate from optional covers. The Chinese regulator has plans to introduce further price freedom.

Malaysia plan to de-regulate the tariff in 2016, although it is not clear how much freedom will be given to insurers.

Figure 01. Global influences in the P&C insurance sector Rate deregulation Distribution Internet & technology Consumer awareness Data explosion Claims in_ation & price rises Data-driven strategy Global trend is increasing competition and more demanding customers Markets are changing.

Pace of change

More generally, the Asian insurance industry is facing challenges (see Figure 1) that are common to insurers around the world. What marks out Asia is the pace of those changes. What took 15 years to develop previously in the mature markets of Europe and US is likely to occur in timeframes of around five years in Asia.

Distribution is likely to be particularly dynamic. Over 2012, we have seen continued efforts by the banks to distribute P&C insurance (bancassurance) – many of whom have established strategic partnerships with insurers. For example, as part of their acquisition of HSBC’s P&C businesses in Hong Kong, Singapore and Mexico, AXA agreed a 10-year exclusive distribution agreement in those countries, as well as India, Indonesia and China.

In many Asian countries agency distribution still dominates. But, direct sales (telesales and online) have grown significantly in China with noticeable growth also in Singapore and Hong Kong.

Consumers, and the increasing technology available to them, have the power to change the market dynamics across the region. As Asian economies continue to grow and consumers become more affluent, the information available to them through the internet (and increasingly accessible through devices such as smartphones and tablets) will blur the distinctions between distribution channels and mean they are likely to become more demanding of value for money.

Companies will need to be wary of price wars, particularly as low interest rates and equity returns are unlikely to subsidise underwriting losses. The move to risk-based solvency regulations is likely to increase capital requirements and also expenses, putting further upwards pressure on profit requirements. As insurers in developed markets have already found, technology can be something of a double-edged sword – good for business efficiency but requiring careful management of portfolios. Technology itself can spawn new products such as usage-based motor insurance.

And all this is likely to be taking place against the backdrop of the arrival of foreign insurers, with struggling home economies, looking to Asia for growth and exporting their methods to Asia.

The way forward

General insurance is a data rich industry, and data is increasingly seen as a front line competitive differentiator – not just in insurance. Anyone who followed the recent US presidential election will have read about the sophisticated data machine behind the Obama campaign that many commentators believe gave him the edge in delivering his vote.

The benefits of data analytics are already proven in more developed markets. Hygiene in these markets is to collect, store and make data accessible, as well as enhancing it with external data sources. The best know more about their customers and agents. All are sound steps for Asian insurers, along with measures such as:

Of course, there has to be a realistic timeframe for managing changes. An organisation can only cope with so much change. Prioritise. Understand the market to identify what is needed to level the playing field and what can gain you a competitive advantage.

We all know that change inevitably leads to winners and losers. How insurers across Asia respond to the growing pace of change stretching beyond 2012 could determine which category they fall into just a few short years down the road.

So how can Asian insurers make sure they don’t get left behind?”

Leverage any data improvements immediately by improving management information to facilitate more active portfolio management.

Adopt proven predictive modelling techniques to improve performance and guide strategy.

Make claims reserving add value to the business. Claims reserving, performed well, can be a health check on your business and not just a number on your balance sheet.

Generate business value from evolving risk-based regulation – treat it as sound business management.

Pro-actively manage distribution channels – learn which channels are more profitable and what segments are driving this profitability.

Enhance decision making processes to improve information utilised and responsiveness.

Improve efficiency through appropriate centralisation and automation, maintaining risk control and customer service.