The much-anticipated goal was to implement the ASEAN Economic Community (AEC) by 31 December 2015, thereby forming a single market and production base across ASEAN member countries (AMC). The insurance industry will have many opportunities and challenges to overcome as the AMC continue their progress to integrate the market across the ASEAN region. However, with a new AEC Blueprint for 2025, economic integration still seems some way off.
THE ASEAN ECONOMIC BLUEPRINT AND THE INSURANCE INDUSTRY
In November 2007, the ASEAN leaders adopted the ASEAN Economic Blueprint (Blueprint 2015) to serve as a master plan in guiding the implementation of the AEC by 31 December 2015. At that time, ‘free flow of services’ was one of the five agreed core focus areas in the implementation of a single market. Whilst this deadline has passed, completion of any unfinished measures under Blueprint 2015 before the end of this year is a priority under the subsequent AEC Blueprint 2025. According to Blueprint 2015, there will be substantially no restrictions to ASEAN suppliers in providing services and establishing companies across national borders within the region, subject to domestic regulations.
ASEAN Financial Services Sub-sectors Identified for Liberalisation
Click here to view table
Blueprint 2015 stipulates that the liberalisation of insurance services would cover four ‘modes’ of supply for the delivery of services in cross-border trade, which consist of:
- ‘Cross-border supply’ e.g. an insurer based in Singapore writing policies for policy holders based in Indonesia;
- ‘Consumption abroad’ e.g. a policy holder based in Malaysia travelling to Singapore to buy a policy from an insurer based there;
- ‘Commercial presence’ e.g. an insurer based in Singapore writing policies in Thailand through the Singapore insurer’s Thai branch or subsidiary; and
- ‘Presence of natural persons’ e.g. an insurer based in Singapore managing a claim through an employee working in Thailand.
The member states have agreed that there should be no restrictions to the first two of these four modes, with exceptions due to bona fide regulatory reasons only, such as public safety, which will be subject to agreement by all ASEAN member countries on a case-by-case basis. Liberalisation of these two modes is still far from complete. The cross-border supply of insurance services and cross-border consumption of insurance services are still widely restricted in the AMC.
For the third of these modes, ‘commercial presence’, foreign (ASEAN) equity participation of not less than 70% should be allowed for the services sectors and other market access limitations should be progressively removed, a goal which has not yet been met across the board.
Finally, in a move towards the implementation of the last mode, ‘presence of natural persons’, the ASEAN agreement on the Movement of Natural Persons was signed in November 2012 to facilitate the conduct of natural persons engaged in the trading of goods, services, and investment between member states. The scope of this agreement is a limited measure affecting the temporary entry or stay of persons of a member state, into the territory of another member state. This will cover business visitors, intra-company transferees and contract service suppliers, but does not apply to measures regarding residency or employment on a permanent basis.
OPPORTUNITIES FOR THE INSURANCE INDUSTRY
The ASEAN Economic Blueprints will encourage an increase in cross-border trade within ASEAN, which we anticipate will directly boost demand for commercial lines such as trade-credit, marine and surety insurance business.
Insurance penetration rates in ASEAN markets are generally low, less than 6% according to the Swiss Re Sigma Report, 2013. With increasing awareness, low penetration rates and strong economic growth prospects, we would expect the demand for life and accident and health insurance products to grow.
We anticipate that the surging digitalisation in ASEAN will change the marketing landscape from the traditional agencies and brokerage models to digital mass-distribution of insurance products.
As the insurance industry opens up in ASEAN, there will be the free flow of key skill employees among member states to support growth. The anticipated free movement of key skilled labour would also aid the development of the financial and regulatory framework of the AMC.
CHALLENGES TO LIBERALISATION
There is no formalised institution, such as the European Commission, to push through reforms and execute agreed policies. The ASEAN Secretariat supports the implementation of ASEAN initiatives. However, the AMC coordinate the efforts to liberalise and reform local markets among themselves with regard to the AEC.
As can be expected in emerging markets, the AMC are progressing economically and socially at different rates, reflecting the political, social and operational factors of each member country. There is also no uniform regulatory framework, therefore insurers engaging in cross-border supplies will be subject to market conduct, consumer protection, data privacy, cyber security, and tax laws applicable to the local jurisdiction of each member country.
LIBERALISATION OF FOREIGN OWNERSHIP RULES
The seven countries (listed in figure 1) that were set for liberalisation across various insurance types by the end of 2015 are likely to have a greater structural backbone, once ASEAN leaders have agreed how, in practice, to proceed with liberalising the insurance industry. For Laos, Myanmar and Thailand, however, specific plans are yet to be developed and therefore full liberalisation of the insurance industry is not likely until nearer 2020.
In Indonesia, foreign equity participation is already fairly liberalised. Indonesia permits up to 80% foreign ownership in insurance companies and insurance intermediaries. It is possible to retain foreign ownership beyond 80%, upon a request to the insurance regulator Otoritas Jasa Keuangan (OJK). The OJK will approve applications on a case-by-case basis, subject to certain requirements, including a mandatory need to increase the capital in the company.
The Malaysian insurance industry is open to foreign investors, with a limit of 70% on foreign equity ownership of insurance companies, and no limits on the foreign ownership of Malaysian insurance intermediaries.
In Singapore, there is no foreign equity participation limit on Singaporean insurers and insurance intermediaries, providing for a much more liberal market compared to other member countries.
Thailand did not specifically commit to the liberalisation of its insurance industry by the milestone date of 31 December 2015, and currently implements one of the more restrictive of the ASEAN regulatory insurance regimes. The foreign investment threshold is low, generally 24.9%, which can be lifted up to 49% with permission from the insurance regulator (The Office of the Insurance Commission). However, a November 2015 proposal indicated that both life and non-life insurance will be removed from the list of businesses for which permission is required for foreign ownership to exceed 50%. This change is due to come into effect at the end of this year.
In Indonesia, the cross-border supply of insurance services relating to insured objects in the country through an unlicensed foreign insurer is not allowed, except under limited circumstances where Indonesian insurance providers are either unable or unwilling to provide the coverage. A new state-owned Indonesian reinsurance company however was set up by Presidential Regulation in October 2015, PT Reasuransi Indonesia Utama (or Indonesia Re). The purpose of Indonesia Re is to provide reinsurance capacity to the local Indonesia insurance market.
In Singapore, unlicensed foreign insurers, who are not carrying on insurance business in Singapore under a foreign insurer scheme, such as the Lloyd’s Scheme and the Lloyd’s Asia Scheme, may not carry on insurance business in Singapore. Further, Singapore does not permit non-admitted insurers to advertise or promote their insurance products.
As the insurance industry shifts to adapt to the digitalisation of the ASEAN markets, particularly with regard to cross-border supply, data privacy regulations and cyber-security laws of each member country may expose the insurance industry to new compliance risks. Equally, it could also present opportunities to the insurance industry as businesses in the region look to mitigate their own cyber-security risks by purchasing cyber-related insurance products.
DATA PRIVACY ISSUES FROM CROSS-BORDER SUPPLY
Indonesia, Malaysia, Philippines and Singapore have data protection laws, but the rest of the AMC do not have comprehensive legislations that regulate the processing and protection of personal data. Instead, member states without comprehensive data protection legislation have sectorial regulations with respect to information on certain industries, e.g. usually the telecommunication and financial sectors.
Thailand’s Civil and Commercial Code allows an individual to seek compensation if it can be proven that the damage was caused by a wrongful act regarding their personal data. There are also broad provisions in the 2007 Constitution that recognise an individual’s right to privacy. The fact that the application and enforcement of existing data privacy legislation is different among the AMC means that insurers carrying out cross-border supplies will need to navigate through a complex web of data privacy protection provisions.
Whilst the end goal of the AEC is to remove boundaries amongst the AMC, local regulations restrict cross-border marketing of businesses, thereby creating a barrier that hinders the free flow of commerce.
In Indonesia, unlicensed foreign insurers are not currently allowed to advertise their business. An Indonesian resident or citizen outside Indonesia may purchase insurance overseas for a temporary or long-term period, but only for the period they are outside of Indonesia. The consumption of insurance services abroad is therefore subject to the residency status of the individual.
In Malaysia, foreign insurers may provide insurance services through local brokers, if they are approached outside Malaysia by an approved Malaysian insurance broker to issue life policies for clients in Malaysia. The soliciting and advertising of insurance policies in Malaysia by unlicensed foreign insurers is not permitted, but the consumption of insurance services abroad is allowed, provided the insurance policy is concluded outside of Malaysia.
Cross-border consumption of life insurance by Singapore residents is allowed, if such sales do not render the offshore life insurer’s business activity to be carrying on a business in Singapore.
In Indonesia, foreign insurers wishing to issue insurance policies to Indonesian citizens or residents must establish a local presence, either by setting up a local entity or by acquiring shares in a licensed Indonesian insurance company.
Any party wishing to undertake insurance business or provide insurance to property in Indonesia must obtain a licence from the OJK.
In Thailand, a non-admitted foreign insurer must be licenced to carry on any insurance business locally, which is a significant restriction on cross-border supply and consumption. A non-admitted foreign insurer is prohibited from marketing direct insurance products and it cannot facilitate insurance contracts, although such restrictions do not apply to reinsurance. Conversely, there are no restrictions on Thai nationals or residents on the purchase of insurance from a non-admitted insurance company.
By contrast, in Myanmar, foreign owned insurance entities with a Representative Office set up in accordance with the Myanmar Companies Act 1914 may apply for a license to operate in Myanmar’s special economic zones. A US$30,000 application fee applies for these new licenses. To date, three well-known Japanese insurance companies have been granted temporary licenses to operate for six months within the Thilawi special economic zone under the new initiative, mainly offering non-life insurance products.
PRESENCE OF NATURAL PERSONS
In order to work in an AMC, expatriates are required to satisfy the local visa requirements of that particular member country. The history, socio-economic and national security concerns affect the immigration and expatriate policies of each AMC. Consequently, immigration and work permit requirements for each AMC vary greatly.
In some member countries, such as Indonesia and Malaysia, this process can be very complex and lengthy. Other member countries have a maximum duration of stay for an expatriate as a foreign worker. For instance, there is a maximum duration of two years and three years for completion of employment contracts in Brunei and Vietnam, respectively. An expatriate’s term of work is less clear in Indonesia as it depends on the individual’s expertise and local workforce’s capability; only natural persons who are either ‘directors’ or ‘specialists’ may supply certain, specified, insurance services.
We can see that advances towards the implementation of the AEC are varied among the AMC. Local state regulations remain heavy, particularly in the AEC goal areas of cross-border supply and consumption of insurance services.
Although integration had been set to happen before the end of 2015, it has been extended by the AEC Blueprint 2025. It is indeed uncertain when these agreed changes will occur, but it is expected that the integration will occur in the years leading up to 2025. We see that the legislative and regulatory changes already made by the AMC as evidence of a firm commitment to fulfil their obligations under the AEC.
To facilitate the implementation of the AEC, what is required from the AMC is convergence of regulatory frameworks, consistency across the region and improvements in prudential standards. However, barriers to achieving those goals still need to be overcome, including:
- Differences in maturity of regional markets;
- Protectionist attitudes; and
- The logistical and language issues that surround the filing of policies on an international scale.
What cannot be underestimated is the scale of the opportunities the AEC can offer to the insurance industry, which should open up a market incorporating 10 countries and 600 million people. The harmonisation of regulatory regimes across the ASEAN region could lower costs substantially when it comes to cross-border trade in the insurance industry, as complexity is reduced and efficiency increases.
Opportunities in electronic selling as a distribution method are also expected to open up across the region, in line with the AEC’s ‘e-ASEAN’ objective. The deep penetration of tablets and smartphones across the region presents ripe opportunities for e-commerce, which the Asian insurance industry has yet to exploit. The principles of the free movement of persons provided by the AEC should encourage the movement of talent and knowledge across the insurance industry, as well as making further efficiencies possible in the form of outsourcing.
It will be advantageous for insurance businesses to have a clear strategy in relation to the upcoming changes, and to be positioned in such a way to take full advantage of the opportunities offered when the time comes. The insurance industry depends on an open trading environment, and the introduction of the AEC should eventually allow insurance businesses to share information and spread risk across a global market place.