Rapid-growth markets provide significant opportunities for global insurers despite entering period of slower growth

Global insurance companies seeking to expand their businesses are increasingly looking to a new wave of rapid-growth markets (RGMs) as well as the BRICs. According to EY’s Waves of Change: The shifting insurance landscape in rapid growth markets report, the overall contribution of rapid -growth markets will continue to be very significant. This is in spite of the slowing growth experienced by some of the larger economies within the BRICs. It is likely that China will continue to play a dominant role in driving premium growth in international markets but new emergers in Latin America, such as Mexico and Columbia, and in the Asia Pacific region such as Thailand and Indonesia are offering valuable long-term opportunities.

EY’s report features a risk-opportunity matrix ranking 21 rapid-growth markets in terms of their future prospects for insurers, based on projected economic and premium growth until 2020, financial stability, regulatory change, macroeconomic volatility, liquidity risk and other factors. Opportunities for global expansion into new markets represent a powerful force accelerating the growth in insurance premiums today – especially as economic performance languishes in much of the developed world.

Malcolm Rapson, EY’s Africa Insurance Sector Leader, comments, "South Africa and other African countries continue to be attractive for insurance investment. South Africa showed the fourth largest absolute growth in insurance premiums within 21 Rapid Growth Markets. This was behind China, India and Brazil, but ahead of Russia, Mexico and Indonesia. South Africa is also seen as a good trade route into Sub-Saharan Africa, with South African companies being amongst the most successful to penetrate into African markets. South Africa is also acknowledged for its solid regulatory environment and its trend to follow best practice regulatory developments”.

Rapson continues, "EY’s ranking matrix which plots the 21 Rapid Growth Markets based on opportunity and risk reflects Turkey, Indonesia and China as topping the opportunity ranking, whilst Hong Kong, the United Arab Emirates and Chile are seen as lowest risk. Nigeria just edged out South Africa in terms of opportunity of the three African countries included in the survey, with both ahead of Kenya. However, South Africa is seen as lower risk followed by Kenya and Nigeria.”

Shaun Crawford, EY’s Global Insurance Leader, comments:

"The overall contribution of rapid-growth markets to insurance premium growth will continue to be very significant. Some of the larger economies, such as Brazil, Russia, India and China, appear to have entered a period of slower growth but they continue to possess high, long-term potential. And new waves of market liberalization and rapid consumer adoption of new technologies are opening additional markets such as Mexico and Thailand to non-domestic firms. However, each market has its own distinct risk profile. Insurers will need to model the risks across all the geographies to clearly evaluate the drivers for growth andpick their targets carefully.”

High growth, low risk

According to the matrix, China, Mexico and Thailand will offer the best risk versus opportunity potential for insurers between now and 2020. China, despite a recent modest slowdown, continues to boast extraordinary income growth that spurs auto and home ownership. In addition, an aging population will drive the development of life and health markets. However, while some regulatory restrictions have been relaxed, market entry remains difficult for foreign firms.

Mexico has also undergone a period of extensive liberalisation, opening its market to foreign insurers. On some measures, Mexico is the most open insurance market in the study. Yet the pace and unpredictability of regulatory change can be risky for investors.

Thailand offers intriguing near-term growth potential, with modest risk but unlike other markets, such as Malaysia and UAE which also fall into this category, Thailand’s future growth prospects are also strong.

Malaysia and the UAE are both Islamic nations where rising incomes, a sustained construction boom and the increased adoption of sharia-compliant insurance products are creating new opportunities, but both markets are fairly small and so insurers are going to need to look elsewhere for rapid growth.

High growth, higher risk

Brazil and India remain important opportunities given the size of the markets despite recent slowing growth. India is second only to China in terms of absolute forecast growth in insurance premiums. Yet the regulatory environment has proved extremely challenging for investors. In addition, a large current-account deficit and reliance on portfolio-capital inflows elevate liquidity risks.

South Africa is fourth, behind China, India and Brazil, in terms of market size. Following a program of liberalization, Brazil is the most accessible of the BRICs for foreign insurance companies.

Indonesia offers an extremely strong economic growth picture – second only to China and Vietnam in EY’s Rapid-growth markets forecast. However, it is challenging to obtain licenses, so acquisition is the main entry route.

Colombia is also a notable market that ranks relatively high in opportunity and only moderately on the risk scale. Despite low interest rates, the insurance market there has expanded at greater than 10% annually over the past four years and offers high growth potential because of relatively low insurance penetration. Significant regulatory liberalisation that took effect in 2013 has also created new opportunities for foreign firms.

Shaun comments, "While investment in RGMs will continue to be vital for global insurance firms, outsized returns will not come easily. The wave of regulatory change across the world, consumer buying habits, social media and cultural change, as well as macroeconomics such as the impact of QE, -these are all things that are easy to overlook but which are absolutely critical when deciding to enter and grow in a market. The companies that use this information to carefully tailor products and develop market-entry strategies suited to particular economies and their cultures will see the greatest rewards.”