‘First movers’ to get advantage in frontier insurance markets

Behind the excitement created by leading emerging markets such as Brazil, India or China, there is a group of “frontier markets” that have a promising outlook for economic growth and offer attractive long-term potential for insurers, according to Swiss Re’s latest “Sigma” study looking at 21 frontier markets.
The report provides an outlook for premium-income growth and an overview of the economic fundamentals that will lead to increased demand for insurance in these countries. It also looks at the individual features of each market, covering topics such as impending regulatory changes and the influence of external factors such as regional trade agreements.
Frontier markets are typically emerging countries with small economies, low income levels and insurance sectors in the early stages of development. Across these markets, annual real gross-domestic-product growth is forecast to be strong (5-10 per cent) in the near term, and total insurance penetration rates are less than 1.5 per cent, pointing to significant catch-up potential.
Most of the markets are in sub-Saharan Africa. The report also assesses frontier markets in the Commonwealth of Independent States, Latin America and Southeast Asia.
“Capturing the potential in frontier markets will require a long-term strategy. Nonetheless, this work shows that there is a real ‘early-mover’ advantage to be gained for insurers who understand how to access and develop these markets,” said Swiss Re chief economist Kurl Kart.
“The benefits will come once these markets reach the critical middle-income threshold when consumers and businesses start buying more insurance.”
Swiss Re’s report identifies a typical growth pattern for insurance within frontier markets. In the initial years, growth will likely favour non-life and commercial business over life and personal lines.
Later, as incomes rise, premium income from life products, with their emphasis on savings, could grow more rapidly.
However, there is no “one size fits all” approach to increasing insurance penetration or doing business in the frontier markets. To be successful, insurers will need to understand the different macroeconomic conditions, socio-economic factors, regulatory regimes and cultural characteristics of the various markets.
The report looks at how insurers can access the markets. For example, it analyses the advantages and disadvantages of joint ventures between international and local insurers.
It also highlights the opportunities in markets that already have tech-savvy consumers, such as how to leverage digital distribution and the role of simple, easy-to-understand products. An important consideration is how the deployment of technologies can disrupt the established growth path for insurance and allow some markets to leapfrog to a higher stage of development.
In Southeast Asia, Cambodia, Laos, Myanmar and Vietnam (CLMV) are four of the smaller markets, and they have had significant development in recent years. The CLMV economies have benefited from more stable domestic socio-political environments and further integration into the global economy. The insurance industry in CLMV is at an early stage of development and is being driven by the non-life sector. Vietnam is the most developed market in the region, and has the highest insurance penetration.
The CLMV markets are revising insurance and related regulations to enable faster sector growth. For example, a new Insurance Law in Cambodia took effect in February 2015.
In Myanmar, where the insurance market has been in state hands since 1963, 12 private companies were granted conditional approval to provide insurance services in 2013.
Two other developments that will potentially act as growth drivers for insurance in CLMV, alongside stronger GDP growth, are the Asean Economic Community |and China’s One Belt, One Road policy.