nmg life insurance growth markets 2012

7/30/2019 NMG Life Insurance Growth Markets 2012

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Life Insurance Growth MarketsInsights Report2012


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Introduction

Lie insurers (with a ew exceptions) and the lieinsurance industry have emerged rom the GFC in

relatively good shape. While companies may have

been orced to tighten their belts, bolster balance

sheets and re-set short term expectations or growth

and margin (given the outlook or equity markets,

or interest rates and or consumer sentiment), they

have or the most part avoided the industry-wide

restructuring seen in banking, or the continuing

weakness impacting brokers and asset managers.

In act in our interviews with over 1,000 lie insurance

executives and unctional managers across 40countries (as part o our 2012 global lie and health

reinsurance programme cycle) it is clear that more lie

insurers are cautiously optimistic about the long-term

macro outlook, and that priorities are shiing rom cost

and capital management back to growth through the

next plan cycle.

At the same time insurers in some o the largest

lie markets (notably the UK, Japan and Canada

per Figure 1) expect urther pressure on domestic

protability, and are thereore looking or growth

outside their home markets. Whether they are starting

rom scratch, or building on an existing portolio, most

are ocused on a small number o perceived growth

markets in Asia (notably China and India) and to a

lesser extent in the Middle East and Latin America,which they believe oer more attractive growth and

margin opportunities based on developing demand

demographics, low lie insurance penetration, and

limited regulatory or competitive intensity. The broader

shi in emphasis rom cost and capital to growth is

entirely understandable in the context o the current

cycle, and we can see why large insurers in mature,

lower-growth markets are attracted by (apparently)

aster growing markets beyond their own borders.

However our analysis suggests that most o these

aspiring multinationals will ail to deliver expectedgrowth rates or margins, as a result o:

Over-estimating target market attractiveness (size,

growth and protability) relative to alternatives

(international or domestic)

Under-estimating the level o regulatory and

competitive intensity, and the extent to which new

entrant capability (as opposed to simply being in

the game) is critical to participation in growth and

margins

Under-estimating the complexity o market entry and

ongoing business management, and the longer-

term implications o entry structures or agreements

on competitiveness and perormance

Figure 1 Lie Insurer Expectations o Future Proftability (Insurer Executive Interviews)

US Western

Europe

Japan UK & I Canada

Increasing Decreasing

Direction o Future Proft Margins


3/12Lie Insurance Growth Markets - Insights Report 3

The list o lie insurers that have established a trulysuccessul and diversied international portolio is very

small, compared to the number o insurers that have

tried and ailed, or have chosen to persevere with a

jumble o non-perorming international businesses.

We do not expect that this will dissuade the next

wave o insurers rom trying the same strategies in the

same markets, even though the insurers they seek to

emulate entered 20 years ago or more, when these

territories really did conorm to the growth market

stereotype (large and ast growing populations, very

low penetration, permissive regulation and limitedcompetition) and when the development gap to

home markets was ar more pronounced. But many o

the territories most commonly cited as growth markets

no longer t that mould: they are not experiencing

the kind o rontier growth rates associated with very

low penetration (penetration levels have increased

rapidly, at least in the most economically attractive

segments and regions), they are by any standard

highly regulated (having rapidly assimilated and built

on learnings rom international markets), and they

are i anything over-contested, to the point that evenlong-established participants are struggling to achieve

their target growth and margins.

In short, we believe that insurers are ocusing too much

attention on a handul o high prole middle ground

countries that are no longer growing as ast as is

commonly perceived, and that oer limited entry and

participation opportunities. At the same time, they

are overlooking more compelling options at either

end o the development spectrum: in very large, low

growth mature markets that oer volume, scope or

innovation and (in certain cases) a broader range o

entry and participation options, and in those markets

that do oer near zero penetration, underdeveloped

regulation and limited competition albeit initially at

small scale and with a signicant level o country risk.

As a result, insurer growth portolios are increasinglyconcentrated (on ewer, bigger bets in markets with

limited exit options), but there is little or no appetite to

invest selectively in the next generation o true growth

markets: in Asia, the Middle East and Latin America as

well as in Arica, Central Asia and Eastern Europe.

We believe that insurers need to undamentally

re-think their approach to developing international

strategy, addressing the common ailings cited above.

Specically they need to adopt a model or decision-

making based on:

A bottom-up, act-based approach to

determining whether and where to expand,

based on holistic market size and growth

Prior consideration odomestic market

alternatives and implications including the

organisational issues arising rom separation o

international and domestic accountabilities

A realistic assessment o market development

paths and implications or participation

Market prioritisation driven by competitive

advantage and market entry model rather

than primarily by abstract market metrics


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Why have so many lie insurers pinned their internationalgrowth strategy on a ew large, high prole (highly

contested, dicult to enter) markets? We would

suggest that too many make the decision to pursue an

international growth agenda top-down, based on views

rom members o the Board or senior executive (or pressure

rom investors) and without an holistic analysis o global

markets, an explicit business case or consideration against

domestic alternatives or implications. By the time they

commence any meaningul bottom-up analysis there is

already a strong target market hypothesis, and the ocus

and scope has oen moved to how rather than whether

or where to grow. Even where this is not the case, insurers

tend to rely on data sources that will only conrm the

attractiveness o the usual suspects, notably:

Macroeconomic indicators it is surprisingly common or

insurers to rely on growth in demographics or national

economic indicators (notably GDP) to evidence the

growth prospects o the lie insurance market

Historical trends we will see that many insurers assume

that lie insurance market development plays out slowly

and predictably, such that any positive growth and

margin readings rom last 5-years can be reasonablyextrapolated orward

Best practice reerence points there is an

understandable tendency to extrapolate rom

the investor presentations o the ew established

multinationals and domestic champions with long-

standing ranchises (who can hardly be blamed

or accentuating the positives arising out o their

incumbent positions)

Third-parties nally, insurers turn to reinsurers andconsultants or inormation, even though both groups

have an implicit interest in promoting relatively high prole

markets (where they have expertise, or at least experience)

rather than nascent markets (where they do not)

There is no question that good data is hard to come by,

despite the best eorts o regulators and insurer associations

in many markets. But these are major decisions that are

not easily reversed, and it does not seem unreasonable

to suggest that insurers should take the trouble to start

with an holistic view o potential markets rather than

a pre-determined short list, and to build meaninguldatasets (insurance takeup/penetration, new business

sales volumes, real volume growth and realised product

margins) rather than relying on what is readily available

(such as meaningless insurance density statistics expressing

premium over GDP, nominal growth rates or target margins).

In our experience, hypothesising target markets too early

and anchoring to available data will tend to obscure the

attractiveness o alternatives to the path most trodden.

For example, Figure 2 shows that while North America, the

UK and Europe may not oer double digit nominal growth

rates, they may still be attractive based on new business

volume and potential share gains, given the scope or

innovation or niche specialist participation strategies as

well as alternative entry models. Germany is a case in

point: a low-growth, mature market by any denition, with

~100 domestic lie insurers ocused on traditional insurance

products and intense competition on pricing o guarantees

impacting mainstream margins, in which a handul o UK-

based international insurers have been able to establish

very protable, growing cross-border businesses selling

investment-linked business via the broker channel.

Holistic Life Market Size and Growth

Figure 2 Global Lie Insurance Market Size (NB) and Growth by Region

10% 3% 5% 5% 3% 6% 4% 15% 18% High15% High

New Business APE Annual Growth Forecast

Global LieMarket

NorthAmerica

UK & I WesternEurope

NorthAsia

Japan India South EastAsia

LatinAmerica

MiddleEast

Arica EasternEurope

New Business APE (USD)

$200b

Account or >77% o global lienew business



Insurers aiming to expand internationally mustpresumably believe that their home market oers

limited opportunities or growth at target margins, and

that either their domestic capabilities are suciently

portable, relevant and dicult to replicate as to orm a

basis or competitive advantage internationally, or that

target international markets are so under-developed

that any capability at all is a basis or advantage. But

we can think o only a handul o insurers that could

be justiably condent that they have a basis or real

competitive advantage in their own home markets, let

alone internationally. And we have already identied

the lack o appetite to invest in truly under-developed

markets, not least given the very real regulatory,

operational and political risks.

At the same time, our experience working with

incumbent insurers is that most i not all have growth

options at home: in new customer segments, or

channels, or product categories, or to drive earnings

growth through optimising risk management and

costs. We think insurers over-emphasise the challenges

associated with these domestic options relative to

international alternatives (perhaps anchoring on the

acts that they know too well, over the glamorous

unknown). And as stated above too ew insurers

explicitly compare international and domestic options

side-by-side (at inception, and on an ongoing basis)

to identiy which is more compelling on a risk/return

basis. Finally, ew i any consider the potential negative

implications o international expansion in terms o

domestic ocus and investment driving business

perormance, despite the act that our analysis

suggests that these are material (per Figure 3).

Far rom trying to mitigate this disconnect betweendomestic and international opportunities, we would

observe that insurers actively entrench it. Having decided

to pursue an international growth strategy, common

practice is to sequester a project team and steering

committee with a remit to nalise target markets,

develop the detail around how to execute and build

the investment case. Once this case is accepted,

organisational responsibility or the international business

is typically separated, with distinct international roles,

decision processes and metrics rom inception. O course

separation o domestic and international unctions at

some point is inevitable, but we would argue that i

considerations o domestic capability are central to

market selection and entry strategy, then separating

too early merely inhibits decision-making, organisational

buy-in and eectiveness. We know this is a cause o

considerable rustration or the executives running the

domestic businesses: they may eel they could do better

with the capital committed to the international arm, and

ear that they will bear the costs o building transerable

capability (not to mention carrying the load i the

international businesses do not perorm). At the same time

the international executives may eel that their needsare not appropriately understood and prioritised, and

believe there is a lack o appreciation rom investors and

management o the realistic time horizons to build an

international business. O course execution is complex, but

we eel some degree o complexity could be avoided by

ensuring that domestic alternatives and implications are

considered rom the outset, by recognising the need or

organisational alignment rather than segregation early on,

and by ensuring an ongoing basis or comparison between

domestic and international portolios.

Domestic Market Alternatives and Implications

Figure 3 Impact o International Operations on Domestic Perormance

Lie Insurer Forecast Growth Rates (2011/12)

US Canada UK Western Europe

Lie insurers with domestic operations only Life insurers with domestic and international operations


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Having settled (all too easily) on the imperative togrow beyond their home market, insurers tend to

underestimate the extent to which capability (as

opposed to simply being in the game in markets they

regard as undamentally attractive) will be critical to

participation in growth and margins, and the relevance

and portability o their own sources o competitive

advantage. They also underestimate the complexity

o entry, and the longer-term implications o licensing,

joint venture or partnership structures required to

enter, on their subsequent ability to compete. Our

interviews show these misjudgements are linked to awidely held assumption that growth markets ollow a

linear development path similar to that o the insurers

home market, including an inevitable move away rom

joint venture structures, rom investment-linked to risk

products and (at least in the case o UK insurers) rom

tied to broker/IFA distribution.

We understand why insurers look or predictable

development patterns, but the subjective belie

that market evolution will enhance a new entrants

participation and competitive position entrenches the

ocus on macro market dynamics and being in the

game, and compromises appetite and capacity toadapt to (or infuence) alternative evolutionary paths

down the track. We eel there is a need to develop a

more objective ramework based on market maturity

(dened in terms o insurance takeup or penetration

the proportion o the economically active population

holding an insurance product which we consider to

be a key driver o demand dynamics and competitive

outcomes) rather than subjective concepts o

development relative to the norms o any specic market.

Our analysis shows that markets with very low lie

insurance penetration do initially develop in a more

or less linear ashion (albeit with signicant variation in

pace) driven by the evolution o consumer demand

and leading to airly predictable channel, product

and competitive outcomes as the level o penetration,

amiliarity and sophistication increase. However at

some point (at insurance penetration between 15

25%) the pace o evolution accelerates and outcomes

ragment, based on the impact o regulatory settings

or economic shocks which become the primary driver

o subsequent evolution.

Market Development Paths

Figure 4 NMG Market Development Framework

Penetration 0 - 5% 5 - 25% > 25%

Maturity Low High

Passive

Active

Tied advice models (DSF and bank) dominate

Traditional lie (savings) product, undedcommissions

Product/risk/capital ocus given product structures

Tied and broker advisory models pluscorporate/EB

Linked and traditional savings products,unded commission

Sales/share ocus given uncertain businesseconomics

Broker advice, corporate and direct salesmodels

Permanent insurance and pure protection,unded commission

Scale and eciency ocus given revenuemargin pressure

Phase 1 Phase 2 Phase 3b

Phase 3b

Near-zero penetration; little product/pricecompetition

Minimal awareness necessitates active selling

Limited/permissive regulation

Semi-proessional direct sales channels (agents)

Distribution build ocus

Increasing insurance penetration, competitionand substitution

Increasing supply-side regulatory intensity (aroundproduct, capital and corporate/joint venture structures)

Proessional tied advisory channels (agency and bank)

Distribution productivity ocus

High penetration, large stock increases exposureto demand volatility

Increasing demand-side (advice, incentives)regulation

Outcomes ragment based on regulation as wellas market/risk shocks

Retirementand adviceregulation

Phase 3a



Generalisations are always dangerous, and this modelis ar rom perect. The boundaries between the

three phases are not denitive (so that a number o

markets are best described as being in transition) and

categorisation at country level is not always satisactory

(in South Arica the HNW segment is in Phase 3 and the

mass market exhibits characteristics closer to Phase

1, while in India or China the state o the market in

the major metro cities will be quite dierent to that in

regional and rural areas). And we should be clear that

we are not saying that there is no scope or subsequent

development beyond what we have described as

Phase 3, though the scope or insurance penetration

rates to grow clearly diminishes, such that vertical

oscillation between Phase 3 states seems more likely

than urther progression.

A summary o analysis rom over 40 markets (Figure 5)

shows that Phase 1 markets exhibit the characteristics

expected o growth markets. Participants report very

high target new business margins (and with more than

85% o insurers indicating that they are perorming in

line with or better than assumptions), high percentage

growth rates (albeit initially rom a low base), limited

entry barriers and signicant (potentially diversiable)

country risk. At the other end o the spectrum,

incumbent participants in Phase 3 markets are targeting

and achieving lower margins and lower growth rates,

though with signicant volumes and lower entry barrierspresenting opportunities or innovative new entrants.

On average, participants in Phase 2 markets expect

realised margins and growth rates that are somewhere

in between. But averages are misleading: the

polarisation between top tier participants and the rest is

most pronounced in Phase 2 markets, and i we exclude

the outliers (top-3 and bottom-3) rom our analysis

we end up with realised margins that are in line with

outcomes in Phase 3, and expected growth rates that

are only marginally better. And the observed squeeze

is most pronounced in the most popular Phase 2

markets: in India or example, penetration is up in the

most economically attractive segments in major metro

cities, market growth is expected to be in the single

digits (ollowing a decline o new business premium by

9% in 2011-12), but competitive intensity and regulatory

risk continues to impact product mix and margin. So at

either extreme, insurers have a reasonable expectation

o higher margins and higher growth in smaller and

higher risk markets, or lower margins and lower growth in

very large, lower risk markets. But as we asserted at the

beginning o this report, many lie insurers are ocused

on a small number o Phase 2 markets - China, India,Malaysia and the UAE - that occupy a sub-optimal

middle ground oering lower margins, higher growth,

higher entry barriers and higher risks (at least or new

entrants and second-tier participants).

Figure 5 Lie Insurer Growth and Proft Experience by Phase

Phase 1 Markets Phase 2 Markets Phase 3 Markets

New Business Growth (%)

Individual Group Individual Group Individual Group

New Business Margins >50 % 25 50 %


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So why do new entrants prioritise market entry orinvestment in the most heavily contested Phase 2

markets, when even the established top-tier participants

are less than optimistic on growth and margins? And

why are they so reluctant to look selectively at next

generation growth markets in Phase 1 (or example

Kenya, Egypt, Cambodia or Ukraine) and in transition

rom Phase 1 to 2 (we would suggest Sri Lanka, Vietnam,

Indonesia or Turkey)? We have already identied

contributors in the way insurers approach international

strategy development; these are compounded by

market selection processes that emphasise marketattributes (population, penetration and historical

growth) then considerations o accessibility (ability

to enter and restrictions on participation) over

competitiveness (capability, relevance and portability)

as a basis or market selection.

The majority o market entry initiatives we have seen inAsia (or in the Middle East, or in Eastern Europe) have

been premised on a traditional market-back approach:

the selection o a set o markets perceived to oer high

levels o growth and low levels o sophistication, entry

by any means possible in the hope that over time a

rising tide will foat their boat, or alternatively that a basis

or dierentiation will emerge as the market matures.

Our view is that insurers need to consider reversing

this approach: starting with what they have to oer

(internal attributes providing a basis or competitive

advantage) and how they can oer it (market entryand business model) and then seeking to identiy

markets aligned to these elements. This approach may

seem counterintuitive, but we are not advocating

that insurers ignore external market and demand

dynamics, just that they change the emphasis and

order o consideration. Figure 6 outlines three examples

o strategies premised on organisational attributes, and

illustrates the parameters or market entry model and or

market selection arising rom these.

Market Entry Model

Figure 6 Illustrative Strategy Models

Target Market/Entry Models Organisational Attributes Examples

Model A(Appetite-Based)

Focus on Phase 1 markets

Composite or bank-aligned insurer

Organic entry and growth

Ad hoc business structures

Capital supporting business build

Appetite or risk and timerames

Organisational fexibility andcapacity to build

Diversication across many small,long-term bets

Tokio Marine

MAPFRE

Hollard

Model B(Capability-Based)

Focus on Phase 2 markets(including markets in transition)

Integrated lie insurer

Consolidation/entry via M&A

Prescriptive (traditional) structures

Regional capability supportingproductivity and growth

Business management andunctional (distribution) capability

Organisational structure and scaledriving eciency

Financial capacity anddiversication against existingbusiness portolio

Prudential

AIAMetLie

Model C(Innovation-Based)

Focus on Phase 3 markets

Segment or unctional specialist

Organic or partnership market entry

Flexible (non-traditional) structures

Expertise or innovation drivingcompetitiveness

Demonstrated unctional expertiseor innovation

Organisational model supportingtranser o competitive advantage

Flexible entry and participationparameters

ReMark

Discovery

Lombard



These three models are not intended as an exhaustivelist, but do illustrate the dynamics and dierences o

approach required under each:

Model A is relatively more dependent on appetite

than on capability, with fexibility in strategy, structure

and timerame being key success actors

Model B turns on the existence o an existing

international ootprint (commonly built out rom

earlier Phase 1 oundations), international or regional

management inrastructure and transerability o

people and processes expediting execution (oenvia acquisition o an established second-tier player or

bank distribution partner)

Model C rests on the existence o some portable

basis or competitive dierentiation, oen based on

innovation outside the core insurance manuacturing

model (in customer engagement, or distribution,

rather than risk assessment) and with scope to

execute outside a traditional corporate structure

O course these models will not work or every insurer.

We know that appetite to invest in Phase 1 marketsis in short supply, and we also know that only a very

small number o insurers can boast an established

oundation and organisational model providing a

basis or dierentiation in execution. And innovation

is useul only i it is both relevant and portable: being

the leading manuacturer o VAs or impaired annuities

in one market does not provide a platorm or growth

i these products do not t with demand dynamics or

regulation in markets that are otherwise attractive (as

a number o the US providers have ound in the UK) or i

entry or regulatory constraints impact the portability othe manuacturing model.


10/1210

We suspect there is little in this report that will interestthe lucky ew insurers that have an existing, diversied

and successul international strategy (whether premised

on much earlier entry into todays Phase 2 markets

or else selective participation at either end o the

development spectrum). They have existing growth

portolios and the capability, structure and capacity

to grow them (organically, or through consolidation as

second-tier players exit). In many cases they will have

devolved decision-making down to regions, such that

the domestic versus international dynamics cited above

will no longer be a bone o contention. And they havea level o portolio diversication, such that they can

aord to selectively exit or scale back in less attractive

markets. While some themes may still ring true (in respect

o specic countries/businesses, and the commentary

and expectations o investors and brokers) existing

capability and management structures should provide

a basis or continuing growth.

There is more here or insurers with an existing but sub-

scale portolio o international businesses, particularly

where the international division has ailed to deliver

promised growth or margin relative to their domestic

business. Our experience is that these companies tend

to explain past non-perormance by reerence to

short-term market actors or management execution

(with predictable results or management) without

addressing the strategic issues which are the root cause.

Worse, the ailure to deliver across the international

portolio (notably in Asia) typically leads to growth

targets being passed down to the ew perorming

country units, driving unsustainable behaviours and

ultimately jeopardising perormance in the very markets

that should be careully nutured. Lamenting past

decisions is pointless, but these companies need toask whether the basis or their initial decision to enter

remains valid, whether their current portolio can

reasonably be expected to deliver growth and margin

relative to the broad range o alternatives, and what

alternatives exist to continuing to build out the current

portolio. In the months leading up to our publication

o this report, we are encouraged to see a number

o instances o lie insurers apparently deciding to exit

non-perorming international markets, or to curtail their

activities in specic Phase 2 markets (notably in India,

albeit on a temporary basis). At the same time, with anunprecedented number o international portolios up or

sale (ormally or inormally) we ear that insurers in this

category may be tempted to try to bulk up through

acquisition, even though this is unlikely to address their

undamental strategic issues.

The primary intended audience or this report are those

lie insurers embarking on (or considering embarking on)

an international growth path or the rst time. We aim to

encourage at least a ew to re-consider their domestic

prospects, and to ask whether they really have the

appetite, structure and capability to succeed. For those

that decide that they do, we have sought to propagate

a dierent approach to determining how and then

where to participate, starting with capability rather

than market dynamics. Finally we hope that we can

convince more insurers intent on participating outside

their home market, to seriously consider investing in the

next generation o lie insurance growth markets, with

an eye to building a growing, protable and diversied

international portolio over the long-term.

Epilogue Implications for Insurers



Sydney

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www.NMG-Group.com

NMG Consulting is a specialist multinational consultancy ocused on the insurance, reinsurance and investmentsindustries. We provide strategy consulting, actuarial, marketing and research services to nancial institutions

including banks, insurers, reinsurers and und managers. NMG Consulting is part o the NMG Group, a global

nancial services business with operations across employee benets, pensions administration and advisory,

underwriting services, product origination and strategic equity.

NMGs Strategic Insights programmes use interviews with key clients and intermediaries as a basis to analyse

industry trends, competitive positioning and capability. Established programmes exist in wealth management, lie

insurance and reinsurance across North America, the UK and Continental Europe, Asia-Pacic, South Arica and

the Middle East.

Insights reports draw on NMGs research and consulting experience to advance a perspective on topical, macro

industry issues, relevant to product providers, distributors and clients and with a view to driving long-term change.

About NMG

Ashwin Field

Partner Strategy Consulting

[email protected]

Paul Ernest

Manager Strategic Insights

[email protected]

Tom Dunbar

Principal Strategy Consulting

[email protected]

Jane Cheng

Senior Consultant Strategy Consulting

[email protected]

Hamish Worsley

Director Strategic Insights

[email protected]

Roshan Perera

Manager Actuarial Consulting

[email protected]


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nmg life insurance growth markets 2012

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