Report Conclusions

Summary

-  ■■ The events of September 11, 2001 in the United States, followed by the global recession has had a significant impact on the global insurance industry, which will inevitably continue for years to come.

-  ■■ At the moment insurers are trying to abandon markets with weak growth and invest in locations where they can recover their losses.

-  ■■ China, once a country almost impossible for a foreign insurer to enter has been a member of the World Trade Organisation since 2001 and become a Promised Land to many global insurers.

-  ■■ China is an emerging market and is now growing rapidly. Also low insurance product penetration means that there is great potential for insurers to grow. According to analysts, the key for foreign insurers entering the Chinese market is finding a distribution channel, either through a partnership or acquisition of a local partner.

The following section outlines the major issues that the global insurance industry faces at the moment, including its road to recovery, problems with stagnation of the insurance industry in Japan, potential for growth in the Chinese market, tougher regulations and bancassurance.

Global insurance industry recovers

The events of September 11, 2001 in the United States, followed by the global recession have had a significant impact on the global insurance industry, which will inevitably continue for years to come. Global insurers have been coping well with the losses incurred due to the declines in premium income and falls in value of equity across the globe. However, it should be noted that the losses incurred by the global insurance industry have now been estimated at $40 billion to $50 billion.

Insurers have announced that in spite of the losses, they would be able to recover and most insurers, as indicated in the profiles analysed in this report, are gradually achieving this aim. All of this, however, is happening at a cost. The losses incurred by the insurance industry had to be recovered somehow and a surge in premiums was one of the answers. This in turn means that many businesses around the world are forced to pay more for less protection; even before 2001 non-life insurance rates were forecasted to increase. The declines in global stock markets mean that insurers, now faced with negative returns from their investments, had yet another argument for increasing the premiums.

Currently, insurers are trying to abandon markets with weak growth and invest in locations where they can recover their losses. One of the problems is that some insurers with stronger financial records have been able to become more competitive, since it is mainly the struggling businesses that had to significantly increase their premiums. The stronger companies are able to innovate their product offering according to customers’ demands and cutting costs is not their priority.

Japanese stagnation

In the past, the Japanese life insurance industry was all about door-to-door sales of policies by agents. Nowadays, however, the market is overloaded with life insurance policies, with many households owning multiple policies. According to analysts at Moody’s Investors Service, Japan is an over-insured market, which means that consumers are getting increasingly more demanding and product innovation is crucial. One of the major problems Japan has faced in recent times was the difference between investment returns and yields promised to policyholders.

Another problem is the fact that consumers have started to limit their spending on policies as a result of the recession and unemployment, and the industry has witnessed a significant number of cancellations and a decline in new business. This in turn means that insurers have been faced with lower premium income and therefore decline in profitability. Three of the top 10 insurers, Mitsui Life, Sumitomo Life, and Asahi Life, have been marked with non-investment grade ratings. Such problems have initiated consolidation, cost cutting and partnerships and some insurers have looked at the options to demutualise, transforming a mutually owned company into a joint stock company. Because of depolarisation, life insurers and non-life insurers have been able to cross-sell their products and expand distribution channels. Dai-ichi Life, for example, formed a comprehensive alliance with Sompo Japan, a non-life group formed by the merger in July of Yasuda Fire and Marine and Nissan Fire and Marine.

China, the land of potential

China, once a country almost impossible for a foreign insurer to enter is now a member of the World Trade Organisation since 2001 and has become a Promised Land to many global insurers. It is difficult to find a global insurer that is not investing or planning to expand in China - the potential for growth there is enormous.

China opened its insurance market to foreign companies on a limited experimental basis in 1992 and by the year 2000 there were only 17 foreign insurers in China. However, by entering the WTO, the opportunities are much wider and gradually all restrictions on the type of products that non-domestic insurance companies could offer are being eliminated.

It is forecasted by the Financial Times World Insurance that by 2005 the total business volume will reach $33.82 billion.

China is an emerging market and is now growing rapidly. Also low insurance product penetration means that there is great potential for insurers to grow. According to analysts, the key for foreign insurers entering the Chinese market is finding a distribution channel, either through a partnership or acquisition of a local partner. AIG is an example of a company that managed to establish itself in China already in 1919 in Shanghai and in 1992. AIG was the first foreign insurer allowed back as China opened the market to foreign competitors. Other insurers are now following AIG’s steps and as the profiles analysed in this report show, almost all of the global insurers are trying to find their way to the Chinese market and win the share of this precious, fast growing market.

Stricter regulations

UK insurers are facing tighter regulations in view of the collapse of Independent Insurance few years ago, the commercial insurer, and the problems at Equitable Life, the world's oldest mutual life assurer.

The FSA is expanding its monitoring of the insurance industry. Rules are being designed to increase transparency for customers and to strengthen company's reserves.

Bancassurance

Bancassurance, which means selling insurance products through a bank branch network, is still a key strategy for many insurers. An example of the importance of bancassurance can be seen in Germany with its pension reform. The takeover of troubled Dresdner Bank by Alliaz marked Allianz’s attempt to enter bancassurance, however the results of this deal have been small. The acquisition took place when Dresdner faced serious financial problems and Allianz, so far, has been acting more like a rescuer, trying to cut costs at Dresdner.

Other bancassurance deals include Munich Re, the world's biggest insurer and Germany's second largest primary insurer, which formed ties with HVB Group, Germany’s second biggest bank. Also, Assicurazioni Generali set up an exclusive distribution agreement with Commerzbank, German third biggest listed bank.

At the moment, after the lesson learned by the Allianz and Dresdner deal, bancassurance players prefer strong partnerships rather than full-scale mergers. Munich Re claims that its partnership with HVB, although difficult to manage, is cheaper and less risky than the Allianz-Dresdner model.