Against a backdrop of a competitive and difficult trading environment, pressure on pricing and thin investment returns resulting from the sustained period of low interest rates, insurance businesses continue to look at all options in the pursuit of growth. Where M&A remains difficult, be it due to a lack of attractive targets, challenges around valuations or regulatory barriers, there are a number of other options to pursuing growth. These include setting up a branch office or subsidiary, entering into a joint venture or accessing new markets via the Lloyd's platform.
Setting up shop regulatory support is the swing factor
In a number of key emerging markets, recent and upcoming regulatory changes are having a significant impact on those seeking growth.
India on the up
In India, there has been a raft of changes to the legal framework over the last couple of years. Now that the new legislation is bedding in, international players are finally able to start building or strengthening their presence in one of the world's most promising insurance markets.
At the start of 2017 Munich Re, Swiss Re, Hannover Re, Score and RGA have received regulatory approval to open a branch office in India. In a statement Hannover Re spelt out the rationale behind the move: "With a total population of some 1.3 billion, a rapidly growing middle class and a comparatively low insurance density relative to other national economies, India constitutes an attractive market of the future." A number of other international businesses including AXA, Gen Re and XL Catlin are also in the process of application.
The Indian insurance market continues to grow and the outlook for 2017 is optimistic. If you look at the last two years, 2015 was about the introduction of new rules and 2016 was about their implementation. Indian businesses are looking for foreign capital to expand and foreign businesses are looking to find partners to help establish a business or create a joint venture. We expect the market to welcome new entrants in 2017.
Vineet Aneja, Mumbai
South Africa set for challenges ahead
The situation in South Africa could hardly be more different.
If anything, those looking at South Africa as a venue for expansion may be slowed down by the upcoming Financial Sector Regulation Bill and the Insurance Bill. This will tighten the prohibition of foreign insurers and reinsurers conducting business in the country without a licence. The vast majority of operating models which were utilised by foreign re/insurers, for example the typical `fly-in fly-out' models, will in most instances no longer be viable.
South Africa accounts 80% for of all insurance premiums in sub-Saharan Africa
Foreign direct insurers caught by the prohibition will have to consider whether they will seek to amend their model to comply (though this may be more challenging under the new dispensation), incorporate a local insurer in South Africa, operate via a Lloyd's underwriter, or simply abandon their South African business.
Given the regulatory and cost burden of establishing a fully incorporated entity, we foresee a substantial up-tick in business by way of Lloyd's underwriters and it is likely that Lloyd's will expand its local capabilities ahead of this. We expect that 2017 will see a flurry of activity as foreign re/ insurers scramble to restructure their businesses in line with those provisions envisaged in the new Bills. Although the impact is likely to be broadly positive, the introduction of the Bills will pave the way for some (a minority) to withdraw from underwriting South African risks where their footprint does not justify the higher cost base.
Southeast Asia continues to be very much on the agenda for any insurance business with international ambitions. Growth rates are high, especially in comparison to more mature markets in Europe and the US. The region is prone to natural catastrophes, home to a growing middle class and is characterised by a lack of insurance penetration across multiple markets including Indonesia, Vietnam and Thailand.
ASEAN is expected to require more than USD 2 trillion USD in infrastructure spending by 2030
The launch of the ASEAN Economic Community (AEC) at the end of 2015 has resulted in considerable optimism in the insurance industry in the region and beyond. While, unlike the EU, ASEAN does not have a single oversight body and it is early days in terms of policies such as tariff reduction, there are signs that the AEC is moving in the right direction, facilitating cross-border business, and thereby promoting new paths to growth. Furthermore, the ASEAN region is expected to require more than USD 2 trillion in infrastructure spending by 2030, according to some estimates which will translate into significant opportunities for the insurance industry.
The key question for insurers looking to enter the ASEAN market is whether to buy or build a presence. The answer is different for everyone but the main challenge is finding the right targets businesses of the right size at the right price unencumbered by the unwanted baggage of legacy issues.
Ian Stewart, Singapore
Sophistication of Singapore is a big draw
Singapore remains the most sophisticated market in ASEAN and its regulator the Monetary Authority of Singapore (MAS) continues to actively pursue a policy of supportive regulation in order to position itself as a hub for wider access to the region and attract investment from international players. In a recent example, Qatar Re announced in October 2016 that the MAS had granted the company a licence to operate a branch office in Singapore. Acquiring branch status strengthens Qatar Re's presence in Asia's rapidly evolving insurance and reinsurance markets, and at the same time contributes to the expansion of the company's global reinsurance footprint and risk diversification profile, the company said in a statement.
This points to an emerging trend we have seen in the market as insurers look to expand an existing footprint. Businesses already permitted to sell reinsurance are opting to apply for a licence to write direct business as well. One example of this was in May 2016 when W. R. Berkley Corporation announced the formation of Berkley Insurance Asia. This new operating unit has begun offering specialty commercial insurance coverages to clients in North Asia and Southeast Asia through offices in Hong Kong and Singapore, respectively.
Indeed, the attractiveness of Singapore has recently been highlighted by developments in other markets in the region. Obtaining new licences has become increasingly difficult in Malaysia and foreign ownership restrictions make it comparatively difficult to enter the market. Meanwhile, Indonesia is seeing a shift towards a policy of greater protectionism, and there is a suggestion that the regulator is considering a range of measures aimed at further limiting foreign participation in the local market.
Malaysia is making headway
One company that has managed to win a licence to provide reinsurance services in Malaysia is Berkshire Hathaway Specialty Insurance Company (BHSIC). It announced in January 2017 that it had established an office in Kuala Lumpur to provide non-life reinsurance services. This is the latest step in the US conglomerate's strategy to expand its operations in Asia, a process that began in 2014 with the granting of its first licence in the region - in Singapore. BHSIC has since established operations in Hong Kong and Macau.
Myanmar - the final frontier
Elsewhere, we expect to see an increase in investment in Myanmar over the next 12 months. This is one of the region's - and indeed the world's - final insurance frontiers.
Over 20 foreign companies have opened representative offices in Myanmar
The first step in the opening up of the country's insurance market was the granting of insurance licences to domestic participants a number of years ago. The regulator then allowed a small number of Japanese insurers into freetrade zones and in 2017, it is expected that the market will be more broadly opened up to allow wider participation by foreign players. However, many of those looking to do business in Myanmar will have set up representative offices some time ago. Those that did not do so and are looking to enter the market will be starting from a position of comparative disadvantage.
Pursuing the hub model
Singapore has long positioned itself as the gateway or hub to other markets in Southeast Asia. There are instances of a similar approach in other regions.
More inbound interest in South Africa
In South Africa, although the new Insurance Bill will require some re/insurers to restructure their operations in the country, it is also expected to pave the way for an increase in inbound investment. The new regulations are a clear statement of intent that South Africa is very much open for business and the bill also serves to strengthen South Africa's position as a hub from which to access the wider African continent.
Despite the risks of doing business that have been traditionally associated with Africa, there is still considerable appetite and we continue to see foreign re/insurers expressing interest in entering the South African market. It offers a hub to access the wider continent, with the right legal and payments systems in place. We are confident that we'll see an increase in investment in 2017 with more and more re/insurers looking to establish a presence in the country.
Ernie van der Vyver, Johannesburg
Dubai Dubai has been pursuing a similar path in the Middle East for some time. Although the reinsurance market in the Dubai International Finance Centre was not as active in 2016 as it had been in the previous 12 months, the number of reinsurance brokers is increasing and more MGAs are being set up. There has also been an increase in independent MGAs underwriting on behalf of one or more insurers.
Miami is the gateway for LatAm and Caribbean markets
In the US, Miami has long been seen as an ideal location to establish operations to access insurance markets in Latin America and the Caribbean (LAC). In January 2017, Axis launched a direct and facultative platform in the city as it looks to expand its offering to LAC market. Axis Miami will operate as part of the carrier's international insurance division and will provide D&F coverage to the LAC market with a focus on energy and property. With its existing Axis Re Brazil representative office in Sao Paulo writing treaty business, the carrier said the Miami launch allowed it to deliver a full range of facultative and treaty reinsurance solutions in the LAC region.
Entering into a joint venture
For those unwilling or unable to satisfy their growth ambitions via merger or acquisition, or by setting up on their own in a new market, entering into a joint venture (JV) has long been an attractive option. Over the last 12 months, there's been plenty of evidence that this remains a popular strategy.
India makes a strong play while China and Brazil play catch up
For example, in India, a change in the law in March 2016 raised the foreign direct investment limit for insurance companies to 49% up from the previous limit of 26% via the automatic route i.e. without prior approval of the government. This resulted in a number of foreign insurers moving quickly to increase their stakes in Indian ventures including Liberty, Sun Life, Tokio Marine Holdings and AXA.
In China, another market that has been traditionally challenging to enter for foreign insurers, we also continue to see new JVs. In September 2016, Euler Hermes partnered with China Pacific Property Insurance Company (CPPIC) to launch a credit insurance JV in China, based in Shanghai. The move marks a further expansion of CPPIC's relationship with Euler Hermes' parent Allianz, with the company also cooperating in areas including health cover, automotive and roadside assistance. In another example, in early 2017, Singapore-based health technology start-up CXA Group announced plans to collaborate with Chinese conglomerate Fosun International to launch a new insurance platform on mainland China that automates employee health care programmes and creates a marketplace for wellness providers.
40,000 insurance brokers and agents are registered to Brazil's Bradesco Seguros
In Brazil, another emerging market with huge potential for the insurance industry in which it is difficult to obtain a foothold, Swiss Re Corporate Solutions agreed to form a JV with Bradesco Seguros, the insurance arm of Bradesco Group. Under the terms of the deal, Swiss Re will take a 60% stake in the new vehicle and Bradesco's team responsible for commercial large risk business in Sao Paulo and Rio de Janeiro will join the new vehicle. Approximately 40,000 insurance brokers and agents are registered to Bradesco Seguros.
Despite economic and political headwinds, Latin America is still attracting the attention of foreign investors, who are considering a range of ways into the market including acquisitions, joint ventures or via the Lloyd's platform.
Stirling Leech, Sao Paulo
Companies also targeting JVs as a fast route to tech enablement
However, companies are not just entering into joint venture agreements in order to tap local knowledge. There are an increasing number of cases where this is happening to get access to technical expertise that will open up opportunities in new and emerging product areas.
In a move targeting the market for small and medium-sized enterprises, AIG entered into an agreement with Hamilton and Two Sigma to potentially access a market that Hamilton chairman and CEO Brian Duperreault said was worth USD 80 billion in premium and which is largely untapped.
And, with the demand for cyber insurance increasing, so is the number products available. A JV can be the most effective way of combining capital and expertise. One example saw Neon Underwriting launch its first managing general agent JV with former Barbican cyber liability head, Geoff White, to create Avalon.
The lure of Lloyd's
Another perennially attractive route into new markets is via the Lloyd's platform. The ability to write business as a Lloyd's syndicate offers immediate access to around 60 countries where it has licences to operate. However, Lloyd's has not been resting on its laurels and in the last 12 months has expanded its international presence still further. In January 2017, it received final regulatory approval from the Insurance Regulatory Development Authority of India to open a reinsurance branch in in the country, in time for the April major reinsurance renewals.
Opening up in Bogota
In the middle of last year, Lloyd's opened an office in Bogota, to build its trading relationships in the fast growing Latin American market. Two Lloyd's insurers - Advent and Brit - will be represented on the Lloyd's Colombia platform alongside the Lloyd's representative office. Colombia is a fast-growing centre for facultative reinsurance and Lloyd's is already a well-established provider of energy, property, financial lines and aviation cover. John Nelson, Lloyd's Chairman, said: "Colombia is an important part of Lloyd's future growth strategy, both as a fast-growth market and as a gateway to Latin America."
Malaysia in the cross-hairs
On the other side of the world, in Malaysia, Lloyd's also has plans to expand. It currently serves the Malaysian market as a Tier 2 reinsurer through its nine Labuan Service Companies, and as a cross-border reinsurer primarily from London and Singapore. However, Lloyd's is working closely with the Malaysian authorities on an application for an onshore Tier 1 reinsurance licence which will enable it to contribute greater capacity and specialist underwriting expertise in emerging and complex risks to serve the growing demands of the domestic insurance sector.
Finally, at the time of writing, there is still some uncertainty surrounding Lloyd's post-Brexit plans. It will certainly have to set up some operational infrastructure in one of the EU 27 countries with Ireland, France and Germany among those locations under consideration. The exact nature of the underwriting model has yet to be determined although Lloyd's may opt for a similar model in the EU to the one it has in China where the Lloyd's P&C company authorised in Shanghai funnels business back to London through a set of reinsurance contracts.
Wherever in the EU Lloyd's chooses to establish its subsidiary could present interesting opportunities for local re/insurers and those across the region.