Insurance in Emerging Markets - a massive growth runway

Insurance In Emerging Markets Abstract

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.

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.

Another hugely important ‘protection gap’ exists in relation to private health insurance where out-of-pocket-expenditure in emerging markets as a percentage of total health expenditure is a multiple of world averages.

Detailed estimates of these gaps have consistently risen over time and are often now regarded as underestimations. Behind all protection gap theory is genuine financial stress for households in the event of either death or illness, as well as a lack of access to treatment to prevent such events in the first place.

Closing these gaps is therefore societally important and linked implicitly to many of the UN’s Sustainable Development Goals. 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$)

Asia Protection Gaps

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.

https://www.swissre.com/dam/jcr:6f636d75-1c86-4386-a5e0-52368124fc97/sigma5_2018_en.pdf
Source: Global economic and insurance outlook 2020. Swiss Re Institute. 2018.

Another hugely important ‘protection gap’ exists in relation to private health insurance where out-of-pocket-expenditure in emerging markets as a percentage of total health expenditure is a multiple of world averages.

Income growth means insurance is affordable

Emerging markets are widely seen as dominating the ‘next’ middle-class billion and the table below is an illustration of how the top-10 countries by middle class consumption may change in the next 10 years.

Not only are the biggest emerging market countries more likely to lead consumption levels in the future, but we are likely to see more emerging market countries dislodge developed markets from the top 10, for instance, Indonesia and Mexico. Even smaller emerging market markets such as Turkey and Egypt are estimated to have US$1 trillion middle class spending markets by 2020.

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.

The growth of insurance in emerging markets is already well under way. Between 2000 and 2017 China went from 1% of global life insurance premiums to 10%.1

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)

Middle Class Consumption

https://www.brookings.edu/wp-content/uploads/2017/02/global_20170228_global-middle-class.pdf
Source: The Unprecedented Expansion of the Global Middle Class – an update. Homi Kharas. Global Economy & Development Working Paper 100. February 2017. Brookings.

Figure 3. Life and non-life premium growth vs GDP growth in real terms

Life and non-life premium growth vs GDP growth (real)

https://www.swissre.com/dam/jcr:b8010432-3697-4a97-ad8b-6cb6c0aece33/sigma3_2019_en.pdf
Source: World insurance the great pivot east continues. Swiss Re Institute. 2019.

Financial Inclusion Driving Demand

Many emerging market countries have taken significant steps in recent years to increase financial inclusion. Most notably, India implemented the world’s largest biometric database, ‘Aadhaar’ which has been linked to over 300 million new low-cost bank accounts using the Aadhaar IDs. Likewise, the Chinese government has enabled more effective financial service provision in unbanked segments and regions and allows government transfer payments and subsidies through bank accounts.

Insurance is explicitly mentioned in one of the UN’s SDGs (goal number eight) and shrinking the emerging market protection gap can also be directly mapped to many of the 17 goals. This is especially the case when we look beyond the raw protection gap issue and consider the insurance industry’s role in risk mitigation, economic stabilisation around specific events and finally its role in funnelling savings into long-term assets.

As such, 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.

Technology builds consumer trust

Any forecast of insurance demand needs to look at factors beyond affordability. In emerging markets there is an additional challenge which is to articulate to consumers the true value of the insurance product. This means tackling behavioural issues such as a lack of trust or loss aversion, which are natural, especially if a consumer is making a first-time purchase.

These behavioural challenges don’t stop on the purchase of insurance, as another clear challenge is to retain the customer. Markets such as India have seen stop/start phases in insurance growth. Surges in demand have been followed by surges in surrenders where consumers did not feel inclined to ‘stay the course’ with their newly acquired insurance protection.

Technology can play a key role in tackling these behavioural factors. Smarter digital processes enhance the consumer experience, build trust and provide valuable links to other aspects of emerging market 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 also drives operational efficiency

Technology, specifically through the use of artificial intelligence (AI), is also a major factor in enabling improved operational efficiency.

Ping An’s dominant insurance distribution channel is its agency force – over 1.2 million agents, spanning the entire country. The logistics behind training or re-training such a huge number of individuals when new products are launched or are tweaked therefore represents a huge challenge, but one which the company effectively meets through its use of technology and AI.

Managing recruitment and retention of agents efficiently is another key process made much easier by core technologies like AI. Ping An has been using AI in areas such as sales interviews for over three years with 100% of its agents having now been interviewed by AI.

There are also many other examples of speed and efficiency across ecosystems, prompted by AI. 95% of 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 alone2. In fact, the adoption of core technologies across its other business verticals such as healthcare, auto service and smart-city ecosystems now spans much further than the company’s conventional insurance services.

The life insurance technology segment in particular relies very heavily on AI expertise, starting with the critical sales process; a fact underlined by leading emerging market financials such as AIA and ICICI which recognise that it is quality, long-term sales that count and build their incentives accordingly.

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.

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.


Important information

This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.

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