Top 30 Asia insurers: Asia remains in a stable condition

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  • As expected, Chinese and Japanese companies rank high
  • China, Japan and Korea's homogeneous market structures give larger companies a clear advantage on expense ratios due to economies of scale
  • Australia's insurers appear to be attractive targets for some foreign insurance groups

There has been little change in the rankings of the top 30 Asia insurers since 2014, with China still dominating the rankings, despite a decreasing growth rate

The top 30 ranking of Asia-Pacific non-life insurance companies for 2015 was relatively unchanged compared with the previous year.

As expected by AM Best, Chinese and Japanese companies ranked high. The largest Korean company was ranked seventh, and the largest Australian company followed at eighth. While the ranking included companies from New Zealand, India and Singapore, most companies in the list were from China, Japan, Korea and Australia.

A common key feature of the non-life industry in these four countries is the oligopolistic nature of each insurance market. Premium market share of the three largest companies in each of the four countries exceeds 55%.

From a local currency perspective, Chinese and Indian companies continued to show the highest growth rates among the companies listed in the ranking, which was in line with AM Best’s expectations. Currency fluctuations in China have negatively affected the growth rate of insurers there by approximately 5%, while in Japan, currency fluctuations have had a positive impact on insurers, by approximately 6%.

For Korean and Australian insurers, currency fluctuations have impacted the growth rates negatively by approximately 7%. For Australian companies, the impact on the growth rate of each company differs as the financial year-end is not the same for all companies.

Despite a decreasing growth rate for Chinese insurers compared with previous years, the absolute growth rate still will remain high. As China’s government is keen to increase insurance penetration, and with a relatively higher gross domestic product growth rate, the number of China companies is likely to continue to increase and, as a result, hold more spots in the top 30 ranking.

The growth rate of profitability was higher than that of revenue for companies in China, Japan and Korea in 2015. This did not hold true in Australia, where there was an increased number of large insured loss events during the year. While all four markets have oligopolistic structures, China, Japan and Korea have homogeneous market structures, which give the larger companies a clear advantage on expense ratios due to economies of scale. This in turn results in better profitability, and eventually leads to stronger capitalisation for the larger companies.

From a rating perspective, the four Asian markets show stable environments although each face different opportunities and challenges.

Chinese companies
Eight Chinese companies are listed in the top 30 non-life insurer ranking, which is one more than last year. China is the second largest non-life market in the world, and the sheer premium size of the largest company in China, PICC, exceeds the non-life insurance market size of most Asian countries. PICC’s premium size would be smaller than just the non-life market sizes of Japan and Korea, but it likely will surpass Korea’s non-life market size in the next five years, and Japan’s non-life market size in the next 10 years, if the historical growth rate is used. While the growth rate is expected to slow down, the influence of Chinese insurers in the global insurance arena is sure to increase as companies there expand overseas.

High growth accompanies two other present burdens on Chinese companies: capital demand and risk accumulation. In terms of capital, Chinese companies generally have done well in supporting their growth, and the regulator in turn has supported the industry by implementing measures to limit volatility  – lower volatility implies a lower risk capital requirement. However, risk accumulation is putting pressure on the companies. Larger companies are better positioned as they have wider geographical diversification relative to smaller companies. However, peak risk accumulations in major cities are getting costlier to manage from a risk management perspective.

As a result, it is not surprising to observe that the large companies conduct other businesses such as life, health and asset management in China. It also won’t be long before we observe them venturing overseas in large scale, with the primary objective of reaping the benefits of diversification.

Although it was noted that the growth of the companies was supported by adequate capital, the capitalisation level from an international standard still is relatively weak. This may cause some delays in overseas expansion plans for Chinese companies.

Due to the likelihood of overseas expansion and potential high volatility due to risk accumulation, pressure for stronger capitalisation exists in the market.

This can be observed in the ranking in that the profit level is quite high for the Chinese companies and the increases of profit compared with the previous year are higher than those of revenue increases, notwithstanding the industry losses from the Tianjin explosions in 2015.

Japanese companies
Six Japanese groups are listed in the top 30 non-life insurer ranking, which is the same compared with last year. The companies listed in the ranking represent the vast majority of Japan’s non-life market, with more than 90% of market premium. The series of mergers that has been observed in Japan’s insurance industry during the last 15 years has resulted in three mega-size insurance groups, and has alleviated some of the pressures, such as high expense ratios and excessive competition.

When talking about challenges for Japanese companies, sluggish growth and low rate environment are most commonly quoted. From a risk perspective, Japanese companies have a peak exposure to domestic catastrophe risks and high investment risk stemming from their equity exposure. They all have a very long corporate history and were able to accumulate earnings over a long period, making them each financially strong with large levels of absolute capitalisation. However, on a risk-adjusted basis, the peak risks weigh heavily.

Following the massive insurance losses from the Tohoku earthquake and Thailand flooding in 2011, companies faced immense pressure to improve profitability and strengthen risk management. As a result, rates hardened somewhat, and companies continued to reduce exposure to domestic equity markets, along with domestic catastrophe exposures. With good earnings over the past few years, and with continuous sale of domestic equity, companies have quickly built the wherewithal to expand their businesses.

All three insurance groups made sizable overseas acquisitions recently. In 2015, Tokio Marine Holdings bought HCC Insurance Holdings, Mitsui Sumitomo Insurance Company bought Amlin. Sompo Holdings recently announced a deal to buy Endurance.

The deal sizes were all in excess of $5bn (£4bn). The core benefit from each of the acquisitions is that they enable the combined companies to expand in size and geographically diversify without increasing any peak risks (on the insurance and investment sides). Despite that benefit, the long-term success of the large-scale acquisitions remains to be seen.

Korean companies
Eight companies from Korea are listed in the top 30 non-life insurer ranking, which is the same number as last year. Similar to Japan, the companies listed in the ranking represent the vast majority of Korea’s non-life market, with more than 90% of market premium. The larger companies in Korea clearly have a better profit level compared with smaller companies, as shown in the ranking. In Japan, there was incentive for larger companies to acquire smaller, less profitable companies due to the strong loyalty of customers, but this is less evident in Korea’s market. Smaller companies compete mostly on price and larger companies have little incentive to acquire the smaller companies in Korea.

Challenges in Korea’s insurance market are not materially different from that of Japan, although the magnitude is not as severe. Growth rates in most business lines have slowed down, and the country’s investment market is not favourable. Although they don’t have peak risks on their books, they also don’t have a large capital amount to make sizable acquisitions like the Japan companies  – with Samsung Fire & Marine Insurance as perhaps the lone exception. However, the companies have sizable investment assets as they sell long-term products with maturity-refund characteristics. But as the assets have to be matched to liabilities for these types of products, the investments mostly will be in fixed-income assets, even if they opt to invest more overseas.

As the growth momentum for personal lines business has come down, companies are putting emphasis on growing the commercial side, including the retention of more business. However, the market is very soft with excessive competition, and historically, companies have had small appetites for retaining sizable risks on their books. The profitability outlook for the large companies is not bad, and the capitalisation of the large companies is stable, but the long-term outlook on growth is negative.

Australian companies
Four companies from Australia are listed in the top 30 non-life insurer ranking, which is the same number as last year. According to insurance statistics from the Australian Prudential Regulation Authority, gross written premium for Australia’s general insurance market – direct and reinsurance – amounted to nearly A$44bn (£27bn) in 2015. There were a total of 108 licensed general insurers in the market, of which 98 were direct general insurers and 10 were reinsurers.

The leading insurance groups in this market are QBE, IAG, Suncorp and Allianz. In general, IAG and Suncorp dominate the personal insurance market, whereas QBE is weighted more toward commercial insurance.

In Australia, the personal insurance market represented almost 60% of the industry’s GWP. Overall, this segment continues to be profitable, which supports the performance of market leaders such as IAG and Suncorp. On the other hand, the premium environment in the commercial space – which represented roughly 32% of the industry’s GWP  – continues to be very tough, especially in some short-tail classes such as fire, industry specialty risks, marine and aviation.

The industry reported growth in number of risks written, but a reduction in average premiums. Clearly, this has resulted in some pressure on the margins of the commercial market leaders.

Although Australia’s insurance industry continues to be dominated by these insurance groups, all of them face increasing pressures from a number of rivals in their key markets. Given the industry’s market structure, premium size and profitability, Australia’s insurers appear to be attractive targets for some foreign insurance groups.

Some of these competitors have identified opportunities in certain market niches that larger companies may not find attractive.

In the personal insurance market, challengers such as Auto & General, Hollard, Progressive and Youi have focused on creating competitive advantages in short-tail property classes such as home and motor insurance. In the commercial space, new entrants such as Berkshire Hathaway Specialty Insurance have added to the competition in a very soft market. Although these challengers are still modest in premium size in Australia’s market, they have the potential to seize profitable businesses from the major insurance groups by retaining their particular focus and competitive advantages.

While the leading insurance groups in Australia are facing some revenue and margin pressures under the soft market conditions, their performance outlooks remain stable. As defenders of market shares, their focus will continue to be remediation of problem portfolios and possible cost reductions. Relative to the challengers, many of these major insurance groups still have the benefit of scale, which allows them to take a broad range of actions to improve underlying margins without endangering their long-term market position.

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