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From Resource, October 2007
Copyright by LOMA
Global
Growth:
Room to Grow
Multinational
insurers are flocking to
China
,
India
and the
Middle East
, domestic insurers are digging in, and everyone is branching out. Here’s a
look at who’s doing what—and why.
By
Jennifer C. Rankin
What
does it take to grow? Individuals grow when they dream, set goals, work hard,
persevere in the face of obstacles, and learn humility. Communities grow when
citizens participate in government, contribute financially, adhere to laws and
regulations, and demonstrate a measure of compassion. Corporations grow when
they do all of these things—and then some.
For
the largest players in the global financial services sector, growth is an
imperative. Without it, ratings drop and stockholders sell their shares, profit
margins fall and prices go up, competitors make inroads and market share is
relinquished.
Fortunately,
there’s more than enough room for financial services players to grow. Positive
economic, regulatory and technological changes—combined with increasing life
expectancy rates for aging populations—have given life insurers a unique
opportunity to consider foreign expansion.
These
market forces have piqued C-suite interest around the world. When asked in a
recent EDS/Datamonitor survey why they wanted to expand globally, life insurance
executives named several
reasons: higher margin/returns; risk diversification; capturing a
unique/under-penetrated market opportunity; capturing market share from
competitors; satisfying investor expectations for growth; offsetting competition
in domestic/current markets; following parent company strategy; and leveraging
acquired distribution channels.
What
markets are global insurers targeting? Interestingly, one of the most attractive
markets is the
United States of America
, where multinational financial services conglomerates have made significant
inroads. Other markets of great interest are Central and Eastern Europe (CEE),
the Middle East,
India
and, of course,
China
. And, after a bit of a lull,
Latin America
is back on everyone’s radar screen.
Let’s
take a closer look at three places garnering the most interest:
China
,
India
and the
Middle East
.
Face
Time
These
days,
China
is the place to see and be seen, especially for financial services players.
Since
our last in-depth report on prospects in the country (“Charting a Course”
Resource, October 2005), much has happened in the financial services sector.
For
starters,
China
’s participation in the global equity market is growing by leaps and bounds,
especially with respect to the listed insurance sector.
Until
quite recently, the list of largest insurance initial public offerings (IPOs)
was dominated by the demutualization of traditional life companies in the
U.S.
and U.K. China first caught the global investor’s attention with the 2003 US$
3.5 billion IPO of China Life and the 2004 US$ 1.8 billion IPO of Ping An. The
largest ever equity offering by an insurer is now the US$ 5 billion A-share IPO
by
Ping
An in February 2007. China Pacific Insurance is poised to list next.
The
growth of the listed insurance sector in Asia has been staggering, according to
Peter Goulston, director of ABN AMRO’s financial institutions team in Asia. In
his
in-depth assessment of the sector for the April 2007 ASHK Newsletter, which is
published by the Actuarial Society of Hong Kong, he discusses the particulars.
“In May 2000, the total market capitalization
[for
Hong Kong
,
Singapore
,
China
,
Taiwan
,
Korea
and
Japan
] was US$ 15 billion [and had risen] to US$ 302 billion by April 2007. [That
figure] is set to grow further still, assuming over the next two years the Hong
Kong listing of China Pacific Insurance, the listing in Korea of Samsung Life,
Kyobo Life, Tong Yang Life and Dongbu Life, the IPOs in
Japan
, and the IPO of Bao Viet in
Vietnam
.”
While
Chinese insurers reach out to the global market, foreign insurers are extending
their reach within the country (see
China
: Life Insurers Branch Out). About two dozen foreign life insurers have staked a
claim in
China
, primarily by establishing joint venture life companies with local partners,
but also by buying ownership stakes in local companies. Most are forging
bancassurance agreements to distribute their products through
China
’s extensive network of bank branches. Several have established—or are
working to establish—fund management companies.
They
also are establishing new branch offices throughout the country, which requires
a new operating license from the China Insurance Regulatory Commission (CIRC)
for each
new city
, as well as sales offices by the dozen.
Domestic
players aren’t sitting on the sidelines. For starters, state-owned capital is
flowing into
China
’s insurance sector. Since 2004, the CIRC has approved state funds for the
establishment of 28 insurance companies, according to Yuan Li, the regulatory
body’s assistant chairman and news reporter.
New
domestic insurance companies are springing up as well. In the first half of
2007, for example, the CIRC greenlighted the launch of five new domestic
insurers: Sunshine Holdings Limited, Changjiang Pension Insurance, Yingda Taihe
Life Insurance, Xintai Life Insurance and Taikang Pension Insurance.
In
addition, all eyes are on
China
’s nascent fund management market.
The
country’s first investment fund was launched in 1991, but national rules
governing funds were not introduced until 1997, according to
China
’s Fund Management Joint Ventures—The Growing Flow of Wealth, an
up-to-the-minute assessment of the sector conducted by KPMG and Reuters. The
first authorized fund managers were established the following year.
Since
then, domestic players have built a dominant position in the market. Foreign
competition arrived in 2002 when
China
’s WTO concession allowing foreign firms to establish fund management joint
ventures, with a participation cap of 33 percent, went into effect. That same
year, regulators approved the first Sino-foreign joint venture and the
country’s first bond fund was launched.
In
2003, the first capital guaranteed fund was launched, the first money market
fund was launched, and regulators released the Securities Investment Funds Law.
In 2004, regulators released the Disclosure Guidelines for Funds and raised the
participation cap for foreign firms to 49 percent. In 2005, the government gave
commercial banks permission to set up fund management companies (FMCs). In 2006,
regulators released Trial Guidelines on Corporate Governance for Fund Management
Companies as well as Guidelines to Regulate Fund Managers.
China
’s rapidly developing and increasingly
liberalized fund management sector presents a huge opportunity for international
financial services groups, according to Entering the Chinese Investment
Management Industry, PricewaterhouseCoopers’ recent in-depth analysis of the
sector.
The
economy is soaring, markets are maturing and the country’s increasingly
affluent citizens have built up household bank savings of US$ 1.84 trillion.
This represents a savings to gross domestic product (GDP) ratio of 80 percent, a
potential bonanza for investment managers. Post office savings account for a
further US$ 170 billion.
Among
the other drivers fueling interest in the sector, says PricewaterhouseCoopers,
are:
Ongoing
pension reform.
Recent government initiatives include the licensing of new enterprise annuity
plans (EAPs) and, in July 2006, the authorization of the first enterprise
pension plan.
Government
contracts.
To date,
Beijing
has awarded contracts for nine fund management companies (FMCs) to help manage
the vast investment portfolio of the National Social Security Fund (NSSF). A
prized source of business, these contracts pave the way for managing
institutional funds. Foreign and domestic companies are treated on an equal
footing, according to the State Social Security Fund Management Council, which
selects the candidates.
Overseas
capital.
Fund management investment was originally restricted to a limited pool of
domestic securities. In April 2006, the government took preliminary steps to
allow FMCs to invest in overseas equities via its Qualified Domestic
Institutional Investor (QDII) program, which it piloted with Huaan FMC and its
partner Lehman Brothers. Their first QDII product, which hit the market in
November 2006, raised US$ 197 million and yielded five percent during the
following six months. Since then, dozens of financial services players have
applied for QDII status.
Regulatory
changes. In
the past, only domestic trust, investment and securities companies were allowed
to set up FMCs. Banks, which dominated distribution, were not allowed to
establish investment arms.
Beijing
has begun to relax those rules. Banks may now set up their own FMCs and
insurers are likely to follow.
Rising
foreign caps.
The ceiling on foreign holdings in a fund management JV is now 49 percent and
may rise.
Demographics.
China
’s middle class now numbers 250 million, almost equivalent to the entire
U.S.
population. And the country now has 150,000 super-rich citizens, whose personal
wealth ranges from US$ 5 million to US$ 1 billion-plus.
Where
does the sector stand today? For starters, assets under management have risen
more than sevenfold, according to the KPMG/Reuters report. In 2006 alone, assets
rose by more than 80 percent, driven by impressive product launches and a 130
percent rise in the Shanghai Composite index. On December 31, 2006, assets under
management stood at US$ 113 billion, with domestic managers controlling 61
percent, Sino-foreign joint venture managers controlling 23 percent, and
foreign-invested managers controlling 16 percent.
According
to Asian Investor, 58 FMCs are registered with the China Securities Regulatory
Commission (CSRC), 26 of which are Sino-foreign firms. The early foreign
entrants have made significant inroads; in fact, Sino-foreign FMCs now manage 39
percent of the total assets under management. Among these early birds are the
world’s leading fund companies, banks and insurers (see
China
: Fledgling Funds Market).
A
number of other JVs are in the pipeline. Among the foreign players in the
process of launching FMCs are the Royal Bank of
Canada
(Minsheng Bank), Credit Agricole (Agricultural Bank of
China
), AXA Financial (Shanghai Pudong Development Bank), AEGON, and Manulife-Sinochem.
Although
a number of global financial firms have made decisive plays in the sector, there
is considerable room for growth. For starters, only US$ 58 billion of the US$
1.84 trillion in household savings is invested in mutual funds. Second, the US$
25 billion NSSF, which is expected to reach
US$ 123 billion by 2010, will continue to generate opportunities for FMCs.
There’s also the US$ 123 billion in insurance fund assets that someone must
manage.
There’s
also room for growth on the product front. As the number of FMCs rises, so do
the number of funds they offer. Nonetheless, today’s 58 FMCs manage only 300
or so funds.
Beijing
seems to be trying to change that. This summer, the government approved a
string of new stock funds.
In
June alone,
China
’s securities regulator approved proposals by fund management companies ABN
AMRO TEDA, Great Wall, ICBC Credit Suisse, UBS SDIC, Da Cheng, BoComm Schroders
and KBC-Goldstate to issue new stock fund products. Shortly thereafter,
Everbright Pramerica
,
U.S.
insurer Prudential Financial’s fund management JV, launched a large-cap stock
fund. China Post & Capital FMC—the fund arm of the national postal
agency—launched a new mutual fund that was oversubscribed the first day it
went on sale.
China
’s nascent QFII and QDII programs offer
additional opportunities to financial services companies. Until recently, the
government allowed fund managers to invest only in a limited pool of domestic
securities. That changed in 2003, when
China
, for the first time, allowed select foreign players to invest in its main stock
and debt markets through its Qualified Foreign Institutional Investor (QFII)
program. Three years later,
China
launched the Qualified Domestic Institutional Investor (QDII) program, which
allows domestic players to invest in foreign stock and debt markets. Under the
QDII program, insurers are allowed to help local clients invest their money
abroad, usually through investment-linked insurance products.
Regulators
have given the top 10 domestic banks, one domestic fund manager (Huaan), and
seven foreign banks QDII status. Huaan launched its first QDII product late last
year, while
China
Southern, China Asset Management, and Harvest intend to launch QDII products by
year end. Allianz China Life just applied for QDII status.
Although
demand for QDII products has been tepid thus far, an infusion of foreign capital
into financial products is generally a good thing. Foreign capital allows
investors to participate in the global market place and greatly increases fund
differentiation, which may lead to higher investment returns, which typically
increases consumer demand.
Inexpensive
access is another plus for companies that wish to capitalize on
China
’s fledgling fund management sector. In fact, the investment needed to gain a
foothold in the sector tends to be far less than banking or insurance. According
to PricewaterhouseCoopers, as little as US$ 12.5 million has enabled foreign
investors to establish a sizeable stake in a
greenfield
JV and play a significant role in its management and development.
The
development of the corporate pension market is opening up further opportunities.
Of the 29 companies granted licenses to set up EAPs in 2005, four are part-owned
by foreign institutions, according to PricewaterhouseCoopers.
Although
there’s plenty of room for growth, the fund management sector has its
challenges.
The
biggest challenge comes from domestic players, which dominate the sector. As of
August 31, 2006, the top 10 fund management companies in
China
, ranked by assets under management, were Southern,
E-fund
,
China
, Huaan, Bosera, Guangfa, Harvest, Yinghua, ICBC Credit-Suisse and Dacheng. Only
two—Harvest and ICBC Credit-Suisse—are Sino-foreign joint ventures.
Another
challenge is domestic banks, which dominate fund product distribution. Fund
managers have relied heavily on the bank distribution channel; in return, banks
got a share of the front-end loads. Their longstanding relationship took a more
competitive turn in February 2005, when domestic banks were given a green light
to sell stock, bond and money-market funds. Now Industrial & Commercial Bank
of
China
, for example, which has more than 30,000 branches, can use its huge network to
flog its own investment products. This domination, of course, has a big upside
if you happen to be ICBC’s joint venture partner. Consequently, both foreign
and domestic insurers and fund houses are forging tie-ups with the country’s
banks. Insurers also are hoping the government will allow insurance companies to
set up their own FMCs in the not-too-distant future.
A
third challenge is investor education. Thus far, Chinese citizens have been
satisfied with the returns on bank deposits and treasury bonds, which generate
very low yields. In addition, the concept of “buy and hold” is new. In fact,
many large mutual fund launches have been followed by significant redemptions
just months later. In many cases, Chinese investors are trading mutual funds as
if they were individual stocks—that is, selling successful funds and using the
profits to buy funds with a lower net asset value.
Finally,
there is a shortage of fund industry talent in
China
. On average, a Chinese fund manager will run a fund for about one year, with
more than 30 percent of funds managed by one manager for less than half a year,
according to the KPMG/Reuters report. To address the issue, regulators issued a
guideline late last year that makes it more difficult for fund houses to hire
senior executives and managers who jump from employer to employer.
Foreign
financial players are tackling these challenges head on, in hopes of getting a
leg up on their competitors in the fastest-growing fund management market in the
world. How fast? McKinsey believes assests under management will reach US$ 1.4
trillion by 2016, generating US$ 3 billion in annual profits.
Red
Hot
Another
country to which financial services players are flocking is
India
. The allure? Life insurance—a sector that’s sizzling—as well as banking
and asset management opportunities.
India
’s ratio of life insurance premiums to its
gross domestic product (GDP) is about four percent, much less than the six to
nine percent in the developed world. McKinsey, among others, expects that ratio
to exceed six percent by 2012. That means the country’s total premiums could
rise from the present US$ 40 billion to as much as US$ 100 billion over the next
five years.
The
driver of this anticipated growth is a mix of attractive demographics and the
recent opening of the market to foreign entrants.
India
’s booming economy is producing an upswing in
the number of mass affluent citizens. According to Datamonitor, affluent wealth
in
India
grew at a rate of almost 18 percent between 2000 and 2005. And Datamonitor
analysts believe the country’s large skilled population and robust domestic
stock market will result in one million individuals having a collective wealth
of more than US$ 2 billion by the end of 2008. In addition, only 20 percent of
India
’s total insurable population has life insurance coverage. A burgeoning middle
class and high per capita savings also are making the market attractive.
Deregulation
is another big business driver in
India
.
Between
1956, when
India
nationalized its insurance sector, and 1999, when the government dismantled
state monopoly, the country was closed to private sector players, both domestic
and foreign. The situation changed with the passage of the Insurance Regulatory
Development Act (IRDA). A much awaited and debated Act, it met with strong
resistance from the political institutions of
India
and took almost six years to see daylight.
The
deregulation of the Indian insurance market loosened the monopoly of big public
companies such as the Life Insurance Corporation of India (LIC). Since that
deregulation, the LIC’s market share has dropped to 71 percent of the life
sector, according to the Bharat Book Bureau, which gathers and disseminates
global business intelligence. Despite the inroads made by foreign players,
public sector insurers such as the LIC dominate the market and have experienced
double-digit growth.
During
the past eight years, billions of foreign investment dollars has poured into the
Indian insurance sector. By 2005, 21 privately-held insurance companies had
opened their doors for business, 12 of which were Indo-foreign joint ventures.
Today, some two dozen privately-held Indo-foreign life insurance joint ventures
operate in the market (see
India
: Global Players Queue Up). They—and their domestic counterparts—sell a mix
of term life, whole life, endowment, unit-linked and pension products to both
individual and group customers.
The
agency system is the dominant sales channel in
India
, but the new Indo-foreign JV insurers have introduced multi-channel
distribution to the market. Bancassurance, in particular, has made phenomenal
inroads, with several Indo-foreign companies deriving more than half of their
premium income from the channel. That success, in large part, has driven the
increase in the proportion of the insurance market held by privately-owned
companies.
Like all
markets, this one has challenges. For starters, IRDA prohibits 100 percent
foreign equity in insurance. It requires an Indian company to invest either
wholly in an insurance venture or team up with a foreign insurer, with a 26
percent cap on a foreign partner’s equity. The Indian company may offer equity
to the Indian public, via a public offering of shares, only after 10 years, at
which time the equity structure may consist of equal participation between the
Indian and foreign partner, each of which may take a 26 percent stake.
Another
challenge is consumer education. Many Indians look at insurance products as a
means of savings, according to a 1996 LIC survey; risk coverage is a secondary
objective. Nearly 26 percent of insurance policies are purchased with old age
security in mind. Only 18 percent of insurance policies are sold on death risk
considerations. In addition, the LIC is deeply entrenched in the popular psyche,
making it difficult to sell the concept of private insurance.
Life
insurers in
India
, then, are targeting both the mass affluent and middle class citizens. They
have not, however, forgotten the less fortunate. In fact, two of the most
exciting trends in the country are life microinsurance and rural penetration,
which go hand in hand.
Microinsurance
is risk protection designed specifically for low-income individuals. The sector
has enormous growth potential, according to “Building Security for the
Poor”, a 2007 United Nations Development Program position paper. At present
only about 10 percent of
India
’s population is served by the insurance industry. This means some 950 million
people, mostly in rural areas, are uninsured. The present outreach of
microinsurance in
India
is around 5.2 million people, covering only two percent of the poor in the
country. In addition, one-third of
India
’s population earns less than US$ 1 per day and 52 percent earns less than US$
2 per day.
Two
regulations have shaped microinsurance in
India
. The first is Obligations of Insurers to Rural Social Sectors, a set of
regulations published in 2002 that requires insurers to sell a percentage of
their insurance policies to low-income Indians. The regulation was imposed
directly on the new insurers that entered Indian insurance after the market was
liberalized in 1999. While the old public insurance monopolies had no specified
quotas, they must ensure that the amount of business done with the specified
sectors “not be less than what had been recorded by them for the accounting
year ending March 31, 2002”.
In
August 2004, the IRDA began to refine its thoughts on the microinsurance topic,
publishing “Concept Paper on Need for Regulations on Micro-Insurance in
India
”. While not a regulation, it reflected the intentions of the insurance
regulator.
IRDA
signaled its full support of the microinsurance sector with IRDA
(Micro-Insurance) Regulations 2005, which it passed in November 2005.
The
regulation defines both general and life microinsurance products. General
microinsurance is a health insurance contract that protects assets such as a
hut, livestock, tools and instruments or an accident contract, either for an
individual or a group. Life microinsurance is a term insurance contract, with or
without return of premium; an endowment insurance contract; or a health
insurance contract, with or without an accident rider, either on an individual
or a group basis. For each of these policies, IRDA has set a minimum and maximum
coverage amount, coverage term and age of entry. Companies must design products
that meet these specifications and must get special approval from IRDA for them
to qualify as microinsurance products.
Despite
its growth potential, the microinsurance sector faces several challenges.
First,
privately-held life insurers are interested primarily in the middle class to
affluent citizen and are targeting urban areas with formal employment
opportunities. The public insurance companies have not made significant inroads
either. When
India
nationalized financial services in 1956, the banks expanded their branch
operations deep into the countryside; insurers did not.
Additional
challenges include the lack of appropriate products, figuring out how to
distribute products to remote locations, the high administration costs of
servicing thousands of small-premium insurance policies, and limited demand
arising from low awareness.
Despite
these challenges, microinsurance is poised to take off. One of the most
innovative features of the new IRDA regulation is that it legally recognizes
non-government organizations (NGOs) and self-help groups as microinsurance
agents, which has the potential to significantly increase rural penetration.
And in October 2004, India’s central bank, the Reserve Bank of India,
permitted regional rural banks (RRBs) to enter the insurance sector as corporate
agents (not underwriters). Because RRBs have networks of branches in rural
areas, they could play an important role in increasing outreach.
Where
does life microinsurance stand today? Domestic
and Indo-foreign insurers began offering microinsurance products about a year
ago and virtually everyone either has launched products or is close to doing so.
In fact,
India
has the most dynamic microinsurance sector in the world and many countries are
studying its progress.
The
government-owned Life Insurance Corporation of India (LIC) got the ball rolling
with Jeevan Madhur, the country’s first microinsurance product, which roughly
translates as “sweet life”. The product offers US$ 110 to US$ 650 in
coverage, term periods of five to 15 years, and low weekly to monthly payments.
New India Assurance, United India Insurance and Oriental Insurance, which the
government also owns, also sell microinsurance.
Indo-foreign
players have jumped in with both feet and it’s these companies where the
innovations are occurring, especially with respect to distribution. While both
government-owned and privately-held insurers are distributing microinsurance
through non-governmental organizations (NGOs) and microfinance institutions (MFIs)
such as SEWA and SKS MicroFinance, the privately-held companies are exploring
how to tap rural commercial enterprises such as grain suppliers, rural Internet
kiosk operators, and the 25 million farmers who own Kissan credit cards. TATA
AIG has embraced a micro-agent model, the central building blocks of which are
rural community insurance groups (CRIGs) that are supervised by rural
organizations such as churches, NGOs or MFIs. A CRIG is a partnership firm
comprised of five women from a self-help group. The leader of the CRIG is
licensed as an agent.
Insurers
also are studying mobile technologies to reach the rural poor. Nokia and
Vodafone, for instance, have teamed up with microlenders around the world to
enable customers to make financial transactions by mobile phone. Mobile
point-of-sale devices, magnetic-stripe cards and fingerprint authentication make
it possible for financial services companies to create electronic branches in
remote locations.
What
possible reasons could the world’s leading insurers have for entering the
microinsurance sector, with its distribution challenges and low return on
investment? Advocates—and there are many—say microinsurance:
*Gives
them a point of entry into a country’s untapped informal economy
*Contributes
to the establishment of a middle class (with assets and lives to protect) in the
emerging markets they wish to tap
*Enables
them to be socially responsible, which resonates with shareholders and
prospective customers and builds good will for their brand.
India
’s asset management sector also is heating up,
though it trails asset management developments in
China
.
India
’s mutual fund industry was launched with the
formation of the Unit Trust of India (UTI) in 1963, according to the Association
of Mutual Funds in
India
. In 1987, the first non-UTI, public sector mutual fund was launched by
state-owned bank SBI. Between 1987 and 1993, state-owned insurers Life Insurance
Corporation of India (LIC) and General Insurance Corporation of India (GIC) as
well as several state-owned banks (SBI, Canbank, Punjab, Indian Bank, Bank of
India, Bank of Baroda) launched additional non-UTI, public-sector funds.
Private
players entered the arena in 1993 and regulators crafted the country’s first
mutual fund regulations, which required financial services companies to register
all non-UTI mutual funds and allow regulatory governance of said funds. Kothari
Pioneer (now merged with Franklin Templeton) was the first private sector mutual
fund.
The
1993 SEBI (mutual fund) Regulations were supplanted by the more comprehensive
and revised 1996 SEBI Regulations, under which the industry now functions.
Since
then, the fund sector has experienced very rapid growth and a significant
increase in the market share of private fund managers, especially after the
government gave mutual funds a tax break in 1999. Assets under management
reached US$ 68 billion in August 2006, a year-on-year increase of more than 50
percent, according to PricewaterhouseCoopers. Today, there are close to three
dozen players in the mutual fund sector.
Among
the leading players, which include a number of privately-held Indo-foreign JVs,
are Reliance Capital Asset Management, Prudential ICICI Asset Management, UTI
Asset Management, HDFC Asset Management, and Franklin Templeton Asset Management
(
India
). Among the foreign life insurers
that have entered the asset management arena are AIG, Sun Life, Prudential
(U.K.), ING, and Principal Financial.
With
assets under management in
India
only accounting for around 12 percent of bank deposits, the potential for
growth is evident.
What
does the future hold for financial services in
India
? According to India Insurance 2012, a major study of the sector by McKinsey,
the life insurance market could easily double to US$ 100 billion during the next
five years, driven primarily by growing per capita income. To achieve that
success, however, life companies must move beyond narrow, single-premium
policies and unit-linked insurance products, which are a staple for them in
India
. ULIPs account for almost half of the fresh premiums in 2007, according to
report co-author Anu Madgavkar, associate partner, McKinsey. As a result, the
non-unit-linked, long-term investible asset base of the life insurance industry
is only 16 percent of GDP, compared to 70 percent in the European market. Life
companies also must improve agent management. According to McKinsey, less than a
third of the country’s life insurance agents meet the minimum training and
sales standards set by their companies.
Untapped
Market
A third
region of the world that’s attracting lots of attention from life insurers is
the
Middle East
, in particular its prospects for Islamic financial services.
A
historical and political region of Africa-Eurasia without clear boundaries, the
“middle east” is defined variously by different groups of people. The term
was coined in the 1850s by the British India Office and popularized after
American naval strategist Alfred Thayer Mahan used the term in his article
“The Persian Gulf and International Relations”, which he published in 1902
in the National Review, a British journal. Since then, the list of which
countries comprise the Middle East—and which do not—has shifted, depending
upon the point of view of those using the term.
For
the purposes of this article, we will take a closer look at the countries
comprising the Persian Gulf Cooperation Council (GCC), which many refer to as
the Gulf Cooperative Countries. The group also goes by the moniker Cooperation
Council for the Arab States of the Gulf.
Created
in May 1981, the GCC is made up of the Persian Gulf states of
Bahrain
,
Kuwait
,
Oman
,
Qatar
, Saudia Arabia and the United Arab Emirates (UAE). Not all of the countries
neighboring the
Persian Gulf
are GCC members. Both
Iran
and
Iraq
are excluded.
Yemen
currently is in negotiations for GCC membership and hopes to join by 2016.
All
of the Gulf Cooperative Countries belong to the World Trade Organization (WTO).
Bahrain
and
Kuwait
joined in 1995, followed by
Qatar
and the UAE (1996),
Oman
(2000) and Saudia Arabia (2005).
The
Council is a trade bloc having many stated economic and social objectives, among
them formulating regulations for a wide variety of business sectors, including
financial services; setting up joint ventures; encouraging private sector
growth; and establishing a common currency (the Khaleeji) by 2010.
The
bloc has a population of about 36 million and contains some of the fastest
growing economies in the world, thanks to the oil, natural gas, and real estate
sectors. The untapped status of many GCC markets, rising awareness of the
importance of insurance and a series of government initiatives taken by
governments in the region are all resulting in double-digit growth in the
insurance sector. These changing market conditions are creating a major
opportunity for growth for both domestic and foreign players.
In
2007, the GCC approved opening up the insurance sector across all member state
borders and launched the Gulf Insurance Institute (GII) to nurture regional
talent and help transform the insurance and financial sector in the Gulf region
to meet the challenges of the global marketplace. The GCC also is working to
implement a common market by year end.
Total
insurance penetration in the Gulf Cooperative Countries is quite low, with total
premiums comprising 0.5 to 1.7 percent of GDP in 2006, virtually all of which
come from general (property/casualty) insurance, according to SwissRe. This is
understandable, given the fact that Muslims deem conventional insurance to be in
conflict with Sharia (Islamic law). For starters, it is deemed to have a large
element of gharar—that is, uncertainty, ambiguity or deception—because the
payoff from an insurance contract depends upon events that may or may not
happen. The investment strategies underpinning conventional insurance contracts
also are suspect; because riba (interest) is forbidden under Sharia,
conventional bonds and other sources of funding are not acceptable.
These
challenges have paved the way for Islamic financial services, which have grown
significantly over the past decade, and many analysts believe the sector offers
the next big growth opportunity for insurers, asset managers and banks.
Islamic
financial products are Sharia-compliant—that is, they avoid violating key
principles of Sharia law, which is derived from several sources, among them the
Qur’an (Muslim holy book), the Hadith (sayings and conduct of the prophet
Mohammed), and fatwas (the rulings of Islamic scholars). Sharia governs all
aspects of a Muslim’s life.
Islamic
insurance products are called Takaful (joint guarantee) and they respect that
Sharia prohibits traditional insurance, which Sharia regards as a bet. With
Takaful, a community of insured parties pays into a fund, which then aids each
member in case of a loss. The insurance company only receives a set fee for
managing the risk pool and a share of the money invested according to the rules
of the Qur’an. The framework resembles the mutual form of corporate ownership
in non-Islamic countries, minus the religious component.
There
are two main lines of Islamic insurance—general (non-life) and family
(life)—and three primary operational models—Al-Wakala, Al-Mudharaba and Waqf—and
Takaful reinsurance capacity, or Re-Takaful, is emerging. The Takaful industry
has been successful in distributing products through agents, direct channels,
e-commerce and, to a limited extend, banks (bancatakaful).
Takaful
has become one of the leading segments of the financial sector across the Asian,
Arab and African regions, with growth rates of 10 to 30 percent over the last
couple years, according to a report from the Dubai-based Salama Islamic Arab
Insurance Company. There are
currently some 60 Takaful operations in 30 countries worldwide. At present, the
major Takaful markets are
Malaysia
,
Iran
,
Pakistan
, and the GCC countries.
Total
Takaful premiums are now close to US$ 2 billion. The Arab countries provide
around 63 percent of the global Takaful business, followed by
Malaysia
(27 percent) and other Asia Pacific countries (nine percent). The rest of the
world contributes the remaining one percent.
Although
Takaful premiums comprise less than one percent of worldwide insurance premiums,
analysts expect them to increase tenfold by 2020, with the market growing 15 to
20 percent a year between now and then. The GCC and
Malaysia
will continue to be Takaful leaders, but significant growth is forecast
worldwide.
Many
industry executives believe Takaful products are an excellent way to grow market
share and may be the only way for foreign insurers to make headway in Islamic
countries.
Germany
’s Allianz certainly thinks so. The
multinational started selling Sharia insurance in
Indonesia
18 months ago. Within nine months, Allianz Life
Indonesia
had sold more than 2,200 life insurance policies, collecting close to US$ 2
million in premiums, tripling expectations. Training is an executive priority
and the company now has more than 2,100 Sharia-certified agents. Allianz Life
Indonesia
is developing a Sharia individual health plan as well as a Sharia unit-linked
product to distribute through its Indonesian bank partners. Allianz Utama is
developing a Sharia personal accident insurance product, among others.
Indonesia
is not the only country Allianz is targeting.
In October 2006, The Assurance Saudi Fransi Cooperative (Taaounia) Insurance
Company, a joint venture between AGF and Saudi Fransi Bank, was granted a
license to operate in Saudia Arabia, where it will sell life, non-life and
Takaful products. Through an existing bancassurance agreement with the bank,
Takaful education plans and retirement insurance have been offered since
December 2006. It just launched Allianz Takaful (
Bahrain
), a wholly-owned subsidiary that will serve as the company’s global hub for
Islamic insurance operations and will sell Takaful life insurance,
investment-linked insurance, health and medical insurance. And in
Egypt
, Allianz offers products with Sharia-compliant funds and is considering the
introduction of fully-fledged Takaful insurance.
Lots
of other companies are maneuvering for a space in the GCC insurance sector as
well. In 2007:
*AIG’s
Enaya unit launched Takaful coverage for Gulf Arab customers.
*Prudential
(
U.K.
) received a license from the Dubai Financial Services Authority (DFSA) to
operate as an authorized firm of the Dubai International Financial Center (DIFC).
Prudential will target the largely untapped and growing wealth management sector
in the UAE by selling its suite of mutual funds and launching new funds backed
by assets from the region as well as Sharia-compliant funds that will be
available internationally. Prudential also purchased a 39 percent stake in a
venture that will acquire Takaful Ta’awuni (a Saudia Arabian life insurance
company owned by Bank Aljazira) as well as a stake in Bank Aljazira’s new
asset management business.
*ING
Groep opened an office in
Dubai
to expand its wholesale banking operations into the Gulf region.
*AXA
Group signaled its intent to enter the
Middle East
’s Islamic finance sector in early 2008 with Takaful life products, but did
not disclose distribution channel details.
*ACE
International Life received a license to sell life insurance in the UAE and will
sell a full range of life insurance products there via a variety of distribution
channels.
As
you can see,
China
,
India
and the
Middle East
offer much room for growth in the financial services sector. Insurers, bankers
and fund managers are entering these markets in record numbers and those with a
head start are strengthening their ties to JV partners and expanding their
branch and sales office networks. As always, Resource will keep you posted as
new developments unfold.
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