Safety first

Rampant economic growth makes Southeast Asia’s insurance market one of the world’s most vibrant, but dramatic expansion also impacts the industry’s priorities

By Rob Curtis
To properly understand the growth potential of insurance in Asia, it is best to separate the region into two distinct markets – the ‘emerging’ Asia of Vietnam, Thailand, Philippines, Malaysia, Indonesia, India and China; and the ‘developed’ Asia consisting of Taiwan, Korea, Japan, Singapore and Hong Kong.
The net premium growth rate in emerging Asia is estimated at nearly 12% this year and more than 9% in 2015. This represents the world’s highest non-life growth market. Similarly, expansion in emerging Asia for life insurance is predicted to be the second fastest behind Latin America, with a premium growth rate of about 8% for 2014 and nearly 10% for 2015.

 
However, this stunning growth leads regulators to focus increasingly on consumer protection issues. Supervisors across Asia continue to seek the fair treatment of customers in general, and supervisory reviews are increasingly focused on sales practices and the management of the risk of mis-selling. We have also seen European regulators challenge their firms on how they ensure their customers are treated fairly across the whole business, including in Asia.
Insurers and their agents will therefore need to ensure that evidence is maintained that clearly illustrates compliance: from needs-based sales assessments to internal policy compliance. Similarly, the management of conflicts of interest and remuneration of intermediaries continues to be an area of increasing interest for regulators, including the overall internal controls environment and procedures relating to customer interaction and the management of customer complaints.
In particular, new focus will be centred on whether insurers are employing ethical sales practices, on the degree of transparency and the level of information provided before, during and after sales, as well as on reducing the risk of sales which are not appropriate to customers’ needs. In addition, ensuring that any advice given is of a high quality and the insurer’s dealing with customer complaints and disputes in a fair and timely manner will draw attention and, last but not least, the management of reasonable customer expectations, including adequate protection concerning the privacy of customers’ information.
In addition to increased supervisory attention, all of this growth will have important implications on product design and pricing, marketing, sales service and distribution and policyholder protection funds within the Asia region. For example, India’s insurance regulator IRDA is working through several proposals to boost consumer protection. In China, product and pricing regulations are undergoing relaxation and this is expected to drive innovation in product variability and choice – although both the regulator and the market are keeping a close eye on the likely competitive pressures that a relaxation of the pricing controls may trigger.
Local regulators in Hong Kong are tightening the regulations of investment-linked products with particular focus on fair dealing and suitability assessment. In Thailand, the regulator is focusing on non-agency distribution channels, such as telemarketing, direct marketing and the use of mobile phones as insurance undergoes rapid growth.
Singapore is going through the Financial Advisory Industry Review (Fair) in the insurance sector due to concerns in areas such as potential conflicts of interests in the sales process. Enhancements have also been made to the Policy Owner’s Protection Scheme, which compensates policyholders in the event of default of a registered insurer.

 
Malaysia has proposals to relax regulation on the pricing of motor insurance, which may drive further product innovation and diversity now that a new Takaful operational framework for conduct of business has been introduced. The insurance sector in Indonesia is also experiencing rapid growth and changing its regulatory structures is on the agenda. A new ‘Know your Customer’ regulation has been issued and customer treatment rules are under consideration. It has been suggested that a levy may be imposed on the financials services industry, which in turn may be passed on to consumers.
So with all this potential consumer growth, what does it mean for risk and capital regulation within the region, and what might be the potential impact on the industry? The model of jurisdictional-based insurance regulation is unlikely to change. However, on a local level, regulators are adopting increasingly common approaches to Insurance Core Principles (ICPs) and the development of risk-based capital frameworks.
Regulators are also working closer together, for example, through the Asean insurance regulatory meetings. Larger international groups will likely face additional regulation through the International Association of Insurance Supervisors (IAIS) and the requirements for global systemically important insurers. These developments have the potential to widen the gap between large and medium and small groups.
The competitive dynamics may change in some markets from changes in capital requirements. Insurers will need to assess these competitive shifts, which will impact business projections. In particular, the fungibility of capital between entities within a group may be impacted and there will likely be new requirements for some insurers to put in place a capital recovery plan. There are ongoing efforts through the IAIS at fostering global regulatory convergence and greater consistency would be welcomed by the industry. Our own estimates that the additional annual cost of regulation to the global insurance sector may be between $15 billion and $25 billion, of which insurers in Asia are bearing between $4 billion and $7 billion.
The introduction and enhancement of risk-based capital regimes across Asia will also change the appetite and drivers of M&A activity. Regimes where minimum capital requirements are set to increase may find consolidation a viable option in terms of increasing the capital base.
Capital, tax and operational efficiencies are expected to drive insurers to reconsider existing group structures, though many legacy group structures are not optimised for today’s regulatory and tax landscapes. The trend will see a focus on ‘leaner’ operations, which will likely see Asian insurers seeking new and innovative sourcing solutions to improve their operational efficiency.