Top 30 Asian insurers: Diverse markets

Asia

  • In Asia-Pacific, non-life insurance density goes from $18 per capita in India to more than $900 in Japan
  • 28 of the 30 largest non-life insurers in the region reported pre-tax operating profits in 2017
  • China will likely remain the region’s powerhouse of insurance growth over the medium term

AM Best’s ranking of Asia-Pacific non-life insurers remains dominated by the same companies as last year, writes director of analytics Chi-Yeung Lok, noting the market characteristics of mature and emerging markets stay as disparate as ever

 Chi-Yeung Lok
Chi-Yeung Lok, director, analytics, AM Best

The top 30 Asia-Pacific non-life insurers operate in a diverse range of insurance markets. The characteristics of these markets vary notably, partly reflecting their different stages of development, levels of insurance penetration, absolute size and degrees of competition. In addition, country specific factors such
as economic and political conditions, as well as prevailing regulatory regimes, play a role in creating divergent insurance operating landscapes in the Asia-Pacific region. These differences are apparent in the wide range of growth rates and profit margins achieved by the companies in the top 30 ranking.

At one end of the spectrum is Japan’s mature non-life market, which can be considered a heavyweight in the Asia-Pacific region. According to the Swiss Re Institute, Japan’s non-life market wrote $115bn (£88bn) of premiums in 2017. Japan also exhibits high non-life insurance density of more than $900 per capita. Conversely, India’s non-life market is viewed to be much smaller at $25bn, with low insurance density of $18 per capita and penetration of less than 1%. However, India remains a high-growth market, with premiums growing by nearly 30% in 2017. These diverse market dynamics create inherently different operating environments and market characteristics for insurers, and thus are a key driver in the varying premium growth rates.

For the mature markets of Japan, South Korea and Australia, growth rates in 2017 were far more muted than in the region’s emerging markets. AM Best expects this divergence to continue, with the mature markets – categorised by high pricing competition, overcapacity and market saturation – more likely to see low premium growth or even contractions. This contrasts with the region’s emerging markets, including China and India, where robust growth is expected to continue. Issues such as price competition are as severe in emerging markets as they are in mature markets. However positive growth momentum gives companies in emerging markets more flexibility in dealing with these challenges. China will likely remain the region’s powerhouse of insurance growth over the medium term.

A common thread among the top 30 ranking in both 2016 and 2017 is the ability of most large players to achieve overall operating profitability. In fact, during 2017, all but two of the 30 largest non-life insurers reported pre-tax operating profits. In addition, on a combined basis the insurers in the 2017 top 30 ranking generated pre-tax profits of $34.5bn, up by 21% from 2016.

Limited growth opportunities for the region’s mature markets are likely to result in customer service becoming a differentiator amid the ongoing competitive landscape, in addition to cost-efficiency programmes aimed at bolstering profitability. While expense management will be key, expenditures and investments will be pursued to help develop and integrate insurtech with the intention of creating medium-term advantages. In emerging markets, we could see insurers paying increased attention to efficiency and risk management supported by technology. While players in these markets continue to benefit from the tailwind of growth, many have seen their margins diminish as they have grown and the importance of controlling the quality of growth is becoming clearer.

Chinese companies

Eight Chinese non-life insurers returned to this year’s top 30 ranking, with PICC P&C still ranked number one. Its total gross written premium rebounded from slower prior-year growth and surged 21% in US dollar terms in 2017. This is attributed to a 14% growth denominated in Chinese yuan, coupled with a 7% appreciation of the local currency against the dollar during the year.

Against the macroeconomic backdrop of a more supportive policy environment, financial subsidies from the government and change in consumer behaviour, growth is expected to continue in non-motor lines, including accident and health, liability, agriculture and credit insurance.

The average non-life combined ratio of China’s eight ranked companies has remained below 100% over the past five years. Taking a deeper look, AM Best observed two diverging trends in the loss and expense ratios. Following three rounds of motor premium de-tariffing since 2016, the frequency of smaller-sized claims has decreased and improved the loss ratio. Notwithstanding this, the dominance of the motor line has left many small to medium-sized insurers little choice but to increase their acquisition costs in order to defend their market shares. Rising regulatory costs also have contributed to the increasing trend in overall management expenses.

Given the continued pressure on underwriting margins, coupled with a declining yield environment over the past few years, China’s insurers are faced with the challenge of boosting investment returns to support the bottom line. We observe an increasing trend in asset allocation to alternative investments, including loan-type products that are often exposed to underlying assets in the infrastructure and real estate sectors. These products are less transparent and could result in higher credit and liquidity risks.

China’s growth rate dipped to its lowest since 2016 as the looming trade war with the US adds uncertainty to the domestic and global economies. Nonetheless, business opportunities stemming from the Belt and Road Initiative, as well as other global projects engaged by Chinese state-owned enterprises, should provide abundant growth potential over the intermediate term for China’s still-low non-life insurance penetration.

Japanese companies

Five Japanese companies made this year’s top 30 ranking, with Tokio Marine, MS&AD, and Sompo positioned among the top five. Tokio Marine and MS&AD remained respectively in second and third positions, while Sompo moved up from sixth to fourth following its acquisition of Endurance Specialty.

Despite challenges in Japan’s non-life market, the major insurers sustained modest domestic market growth, supplemented by sizeable overseas acquisitions. While premium income increased in 2017, operating performance came under slight pressure, with some of the large players experiencing a decline in their return on equity. This broad-based deterioration was driven mainly by natural catastrophes in North America and some large losses in Japan.

Furthermore, since the beginning of 2018, Japan has already experienced a number of natural catastrophes events, including earthquakes in Osaka and Hokkaido, summer floods, and typhoons Jebi and Trami.

We don’t expect the Osaka and Hokkaido earthquakes to have a major impact on the private insurance companies. In Japan, the losses related to household earthquake insurance are mostly borne by the national earthquake insurance system. While private companies are also responsible for a small percentage of the gross exposure, their liabilities are limited by the contingency reserves on their balance sheets, which are not very large at the moment.

Unlike the earthquakes, we do expect the floods that occurred from late June through mid-July to impact the incurred loss ratios for Japan’s non-life insurers. However, given the size of the estimated losses, the impact on operating profits should not be significant. The more significant events would be Typhoon Jebi and Typhoon Trami. While the reinsurers are expected to bear a big portion of these gross insured losses, the cumulative net losses incurred by the major insurers to date might have exhausted their annual domestic catastrophe loss budgets.

Indian companies

Three Indian insurers are among this year’s top 30 ranking, compared with just one company making the list two years ago. This illustrates the growth of the India market over recent years, which is expected to continue over the medium term.

India’s non-life sector has experienced a five-year average growth rate of more than 15%, driven by increases in personal lines business and the governmental crop insurance scheme. AM Best expects that India’s significant growth potential will persist and that penetration rates will continue to trend upwards.

However, India’s companies on aggregate have generated underwriting losses for many years. For 2017, the industry’s combined ratio was the highest in the Asia Pacific region, at approximately 113%, driven by poor performance from major business lines like health and motor.

The health segment is among the fastest growing at a rate of over 20%, but continued to have a high claims ratio. A big contributor to the poor performance was government health business and corporate group health, where the loss ratio was well above 100%.

Motor business, consisting of own damage and third-party liability, is another headache for Indian companies. In particular, the loss ratio of motor own-damage worsened from 57% in 2013 to 73% in 2017. Severe competition and increasing bargaining power of original equipment manufacturers and dealers have all contributed to the poor claims experience. The motor third-party liability has been a loss-making portfolio for decades. Uncapped liability, the absence of time limits for filing claims and a tariff that tends to lag behind inflation, makes managing this business very difficult. Indeed, this line has contributed to significant losses among large Indian companies in recent years.

The recent regulatory developments are worth watching. The much awaited Motor Vehicles (Amendment) Bill sets a time limit to file claims, among other measures aimed at improving road safety. Though market participants are hopeful, they are also concerned about the effectiveness of the enforcement.

South Korean companies

The eight South Korean companies in this year’s top 30 ranking accounted for more than 90% of the country’s non-life insurance premium in 2017. The top three companies maintained last year’s positions, while smaller players experienced marginal movement.

Strong premium growth for these companies was mainly due to the strengthening of the Korean won in 2017. When setting aside the effect of exchange rate movement, overall market growth has slowed in the past two years. While most lines of business showed slow but still positive growth in 2017, there was a sharp drop in motor insurance premiums, South Korea’s second largest non-life business line. A decline in new vehicles and premium cuts by large insurers vying for market share played key roles.

On the other hand, profit growth was strong even in local currency terms, thanks to the improvement in both underwriting and investment performance. Although expansion of the general agency channel posed an increasing expense burden on all non-life insurers in South Korea, overall underwriting performance showed a slight improvement in 2017. With regard to non-technical operations, many companies have expanded their appetite to include new asset types such as overseas or alternative investments, with hope of higher returns, albeit with moderate levels of associated risk.

The business environment in the South Korean non-life market remains challenging, especially with the upcoming implementation of International Financial Reporting Standard 17 and the strengthening of the solvency regime, both scheduled in 2021. Amid the top-line pressure and increasing expenses, companies are now striving to secure profitability through a combination of optimising operational processes, tightening of underwriting and developing niche products with higher expected profitability.

AM Best considers it unlikely that non-life insurers will seek to expand significantly in the near future given the limited capital buffer many have ahead of the implementation of IFRS 17 and the new solvency regime. Strategic priorities for South Korean insurers are expected to remain in capital management, securing overall profitability and risk control to prepare themselves for potential challenges under a new regulatory era.

Australian companies

Four Australian-domiciled insurers returned to this year’s top 30 ranking, all of which were also featured last year. These insurers were QBE, IAG, Suncorp, and Allianz Australia. In 2017, three of these companies reported a profit of similar magnitude to the previous year, while one company with significant international operations saw its 2017 result adversely impacted by a series of North American and European catastrophe events.

As a result of a continued benign catastrophe environment in Australia, the domestic general insurance operations of the top four insurers reported favourable loss ratios in 2017. The large insurers also continue to have a strong focus on expense management and controlling their expense ratios, albeit expenditure on insurtech has been a common theme over recent years aimed at futureproofing their businesses.

All four insurance groups exhibited investment returns in 2017 that were similar to 2016, reflecting the stable but low interest rate environment seen in recent years. Investments are typically low-risk in nature, comprising cash and high-quality bonds. In general, investment operations are not a significant driver of overall earnings for these companies.

The personal insurance market in Australia has, to date, been dominated by two large players – IAG and Suncorp. The market’s GWP for personal lines in 2017 grew but to a lesser extent than prior years. Part of the reason for this is premium rate reductions arising from the New South Wales motor compulsory third party reform. The commercial sector represents approximately 30% of the total GWP in Australia. In 2017, GWP for this sector increased by approximately 5%, mainly driven by rate increases.

AM Best associate director of analytics Jason Shum, senior financial analyst Chanyoung Lee, senior financial analyst James Chan, financial analyst Trung Tran and financial analyst Yi Ding also made contributions to this article

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