Insurance in Emerging Markets - 4 reasons for a massive growth runway
Clearly there is a powerful growth theme in emerging market insurance.
Under-penetration in financial services, rising wealth levels, and an increasing agenda of financial inclusion all support a strong growth trajectory for insurance across emerging markets. Combined with the rapid adoption of technology, we see this market evolving at pace and presenting a significant opportunity for investors while also requiring in-depth company analysis.
1) Financial product under-penetration
In emerging markets today millions of people are uninsured or underinsured against death or serious illness. This means the so called ‘protection gap’ – the difference between the amount of insurance coverage required to protect against such an unwelcome event and what is actually purchased – is particularly sizeable in life insurance.
In purely economic terms, the current size of the protection gap in emerging markets represents a large and under-penetrated addressable market as rising wealth levels in EM drive greater consumption of financial services.
Figure 1. Asia has the largest protection gaps across all insurance categories
(Protection gaps by lines of business measured in terms of risk premium equivalents – US$)
Remarks: The figure provides a summary of the result of several protection gap studies. Basis years: Generally 2016; property 2014, agriculture 2015, Europe mortality 2010, extrapolated to 2016 using GDP as a measure. Estimates are for a sample of countries, the size of which varies for the perils studied. Property and agriculture grossed up from studied sample to the world total using GDP as a measure. NA = not available.
Source: Global economic and insurance outlook 2020. Swiss Re Institute. 2018.
2) Income growth means insurance is affordable
Affordability is critical to insurance market growth. Increasing wealth levels in emerging markets therefore feed insurance demand as consumers reach the point where they can afford to buy insurance and they feel they have ‘something to lose’ in lifestyle terms.
Emerging markets are widely seen as dominating the ‘next’ middle-class billion and the table below is an illustration of how the top10 countries by middle class consumption may change in the next 10 years.
Figure 2. Middle class consumption – emerging market countries set to dominate
(Top 10 countries, 2015, 2020, and 2030 – PPP, constant 2011 trillion US$ and global share)
Source: The Unprecedented Expansion of the Global Middle Class – an update. Homi Kharas. Global Economy & Development Working Paper 100. February 2017. Brookings.
3) Financial inclusion driving demand
We believe the political commitment towards financial inclusion (and insurance in particular) will remain high for many emerging market governments creating an additional structural driver in most verticals of the insurance market.
Importantly, the continued emphasis on financial inclusion means this is a key area of ESG engagement for us with companies. Not only are we looking to ensure that companies are aware of all their stakeholder obligations, we also encourage best practice to develop rigorous ESG frameworks around investing and insurance activities.
4) Technology connecting with consumers
Technology can play a key role in tackling the behavioural problems common with selling insurance products, such as a lack of trust or loss aversion. An increasing use of smarter digital processes by emerging market companies are enhancing the consumer experience, building trust and providing valuable links to other aspects of consumers’ lives.
This has been identified by companies such as Ping An Insurance in China, which does not work within traditional boundaries for financial services. Instead, it uses technology to build ecosystems in key areas such as financial services, real estate and healthcare, with the latter specifically designed to promote better health and well-being.
Technology, specifically through the use of artificial intelligence (AI), is also a major factor in enabling improved operational efficiency for emerging market insurance companies. 95% of Ping An’s auto insurance policies in China are now issued within the space of one minute, thanks to policy issuance robots. Meanwhile, 78% of enquiries are answered by robots, and to give a feeling for scale, speech-recognition software handled over 200 million enquiries in the first half of 2019 alone1.
Conclusion: the importance of in-depth company analysis
Clearly there is a powerful growth theme in emerging market insurance. However, the sector carries above-average complexity and risk. The investment and underwriting risks are really significant, the industry is heavily regulated and many of the contracts are long-term in nature which layers on additional risk factors we don’t see in other industries.
Managing these risk factors as well as adopting the right approach to disruptive technology are critical factors we engage with management teams on before investing. Fortunately for us we believe that some of the key emerging market insurance companies display governance, risk management and technology credentials which are unusually strong in a global financial services context. As such, we are confident we are investing in a combination of powerful market opportunities and management teams focusing on sustainable growth.
1Source: FactSet, Ping An Q2 earnings call 2019.
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Risk warnings – Investors should also be aware of the following risk factors which may be applicable to the strategy. Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
Investing in foreign markets introduces a risk where adverse movements in currency exchange rates could result in a decrease in the value of your investment.
Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. Accordingly, investment in emerging markets is generally characterised by higher levels of risk than investment in fully developed markets.
Smaller companies may be riskier and their shares may be less liquid than larger companies, meaning that their share price may be more volatile.