Thursday, December 1, 2011

What Types Of Insurance Are There - Product Mix For Needs of Asian Consumers

What Types Of Insurance Are There

With the growing penetration of life insurance and the increasing wealth levels in Asia, it is natural that life products have been evolving. As one would expect, the product trends vary according to the maturity of the markets. While 10 years ago most insurers were selling basic protection and long-term savings products, the rapid wealth accumulation and increasing sophistication of consumers and booming equity markets have led to massive demand for investment-linked products in recent years (also known as unit-linked products). 

As such, insurers have been quite successful in penetrating the wealth-management market, which is probably the single largest market opportunity across Asia. For even more mature markets, such as Japan, with aging populations, retirement and health are likely to emerge as significant growth segments. Finally, niche areas such as Islamic insurance (takaful) are relevant for pockets of consumers whose needs are not met by the traditional insurance offerings.
The increasing diversity of products and consumer needs is forcing insurers to stay on top of these developments. To succeed in these new areas means proficiency in product development and marketing, as well as further training of those working in the distribution channels. These trends have also enabled latecomers in the market to gain share. For example, the overall growth of investment-linked products has provided an unprecedented opportunity for multinational insurers to grab market share from local incumbents across many countries. Most of them have grown disproportionately through training a younger and more sophisticated sales force targeted at selling these more sophisticated products.

Investment-Linked Products 

The rapid growth of investment-linked products has blurred the divide between life insurance and investment products. While most of the investment-linked products have some form of protection element built into the product, the bulk of the policyholder premiums are invested in various local and international asset classes. In fact, many of the sales agents are marketing these policies as investments and asset allocation instruments, capturing the investment appetite of the Asian investor.
Why have investment-linked policies experienced such considerable growth in Asia? First, deregulation provided the environment for investment-linked policies to be created, giving insurers the opportunity to participate in the market. Second, investment-linked policies form part of the general rise in wealth-management products, as Asian customers turn from "savers" into "investors." 

This trend has been further accelerated by the boom in Asian equity markets during 2002-07. The demand for such products has pushed life insurers to adapt quickly and compete with asset management products such as mutual funds for a share of this market. Last, in some jurisdictions, there are also tax advantages for investors in investment-linked products that give them an unique selling point over traditional asset management products.
Life insurers started selling investment-linked products in most Asian countries in the late 1990s and early 2000s. In 2001, investment-linked sales in Asia were only around US$12 billion, and were marginal relative to the sales of other products. However, by 2007, the figure surged to US$100 billion, accounting for around 65 percent of absolute gross premium growth in the region. 

In Hong Kong, Taiwan, India, Malaysia, Singapore, Indonesia, and the Philippines, investment-linked sales accounted for 30 percent of gross premiums. This gave rise to two interesting phenomena: first, investment-linked has become the key growth component in overall sales and second, foreign players have tended to dominate this market. What Types Of Insurance Are There

Investment-linked sales, plus bancassurance, are the biggest drivers behind life insurance premium growth across Asia. In Japan, for example, sales of variable annuities grew annually by 44 percent between 2002 and 2006. This is a staggering growth number considering that Japan is a mature market with shrinking total premiums. Similarly, in South Korea, the sale of variable products skyrocketed by 87 percent between 2002 and 2007, while sales of endowment policies shrunk to 60 percent of their 2002 figures.
The characteristic of investment-linked products presents a double edged sword for the insurers in the region. On the one hand, insurers find the product attractive because it carries lower risk. Since the investment portions of the funds are passed through to mutual fund houses, insurers are not carrying the guaranteed liabilities on their balance sheets. In most of the Asian markets, where there is a lack of long term assets to match long-term liabilities, the asset-liability mismatch often carries substantial risks. Therefore, investment-linked products lessen the already-substantial burden of these insurers to underwrite these investment risks. 

On the other hand, insurers find these products to be less profitable on an actuarial basis compared with traditional products. It is not uncommon to hear Asian actuaries complaining about the low profitability of investment-linked products. However, it is much less clear whether these actuaries are considering them from a risk-adjusted basis, given that it is almost impossible to hedge the long term investment risks.
In general, foreign players are more active and aggressive in capitalizing on the demand for investment-linked products. This is probably because foreign multinationals know these products better than their local competitors, who have only recently been allowed to engage in this business as a result of demgulation. Therefore, from a product design and structuring perspective, the multinationals have a substantial advantage over the locals - in most of the markets the products from the multinationals tend to be more innovative.
Moreover, the advantage of foreign players in investment-linked products is not only limited to product design. Investment-linked policies are essentially investment products, and thus require a lot more explanation of the risks and benefits to customers. Many of the local insurers, who built their sales forces over the past decades, have agents who are often less-educated, older, and part-time. 

Compared to the locals, the foreign insurers' agents can be more easily trained to sell these policies to customers due to the higher quality of their recruits. They also come across as more credible and professional. Indeed some multinational insurers focus almost exclusively on investment-linked products, offering aggressive equity products with high risk/return profiles.
While investment-linked products have been a big growth story for Asian insurers, they have their downsides. The unique strengths of life insurance companies, with their strong balance sheets, cannot be brought to bear here. Life insurers are distinctive from other asset managers in their ability to provide long-term guarantees and smooth, stable returns; however, in the investment-linked market, this advantage is not utilized and they find themselves in direct competition with mutual fund companies and their distributors, which are primarily retail banks. Furthermore, life insurers are relying on a very high-cost channel, tied agents, to compete against banks in selling these investment products. What Types Of Insurance Are There
Investment-linked products will surely continue to grow in the long term as the investment needs for Asian consumers can only increase. In the short term there will be volatility, depending on the performance of the equity markets. At times of equity market downturns the sales of investment-linked products tend to suffer. In particular, Asian investors' investment horizons are much more short-term than those in more developed markets - this is partially due to the fact that the Asian equity markets are much more volatile than those in the West. At the low end, Chinese investors hold mutual funds for seven months, whereas at the other end of the spectrum, US investors hold mutual funds for an average of five years.
Across Asia, we believe that the sensitivity of investment-linked products to swings in the equity markets will differ according to the maturity of the sales force and the customer base. In the more mature Asian markets (such as Hong Kong and Singapore) where the long-term growth trend is positive and policyholders are more mature and equipped with a long-term mindset, investment-linked sales are more likely to flatten out rather than significantly slow down, even in times of equity market downturns. In other Asian markets where the long-term growth trend is steep but investors are less sophisticated and more speculation-minded, investment-linked sales are likely to fluctuate more with equity market booms and busts.
Over the past few years, investment-linked products have given life insurers a big boost in growing the overall size of the market. This has undeniably been aided by a benign economic environment and very high returns in the local equity markets. Starting in 2008, the economic environment has shifted into an extremely bearish mode with significant volatility in the equity markets. This volatility will again remind investors of the risks in the equity markets, and the benefits of long-term savings and stable returns. In these markets it would not be surprising to see some shift from investment-linked products back to more traditional products.
One last caveat on investment-linked products: History shows that over aggressive "mis-selling" by insurers can have substantial negative effects on the market as a whole. This first happened in Japan where a series of misselling incidents turned the Japanese consumer away from these products.
In the late 1980s, Insurance agents pushed investment-linked products to unsuspecting customers without fully disclosing the risk of such offerings. In addition, the agents made alliances with banks to allow customers to take out large loans for the purchase of these products, thus further increasing the customers' risk exposure. When the Japanese stock market crashed in the early 1990s many saw their savings disappear.
From 1994, customers filed lawsuits against insurance companies and banks alleging a lack of sufficient explanation of the risks entailed in variable insurance. The impact on reputation was lethal. Sales subsequently stagnated for over 10 years. What Types Of Insurance Are There


Annuities have traditionally been a small segment of the insurance market in Asia, despite their unique product characteristics. Annuity policies are the only products that protect one against longevity risk the risk of outliving one's expectations. Although there are various flavors of annuities, typically these products provide a stable stream of income that is guaranteed for as long as the policyholder is alive.
The one country in which annuities have a large share of the market is Japan where, in 2006, the annuities business accounted for about 40 percent of annualized premium for new individual policies. In fact, annuities, as a segment, have been growing since the 1980s. The Japanese enthusiasm for annuities policies can be explained by the maturity of the market, a large aging population and the presence of many wealthy pensioners.
Other than Japan, the annuities business elsewhere in Asia has been minimal. For example, in Singapore it accounted for only 2.2 percent of gross-premium income in 2007 and 5.3 percent in Taiwan in 2006. A likely reason for this low level of business is cultural attitude. In most Asian cultures, old people traditionally rely on bank savings, real-estate profits, and their children for post-retirement income, thus diminishing the need for a product to provide a stable source of retirement funding. 

In addition, Asians tend to be less interested in annuities policies because those with wealth are keen to pass it on to their children rather than use up their accumulated wealth in their twilight years. Moreover, in certain countries, such as China, wealth resides with a much younger age group, who are not yet at the age where they are considering retirement expenses.
There have been pockets of growth though. In South Korea, the annuities business grew from US$9 billion in premium income in 2002 to over US$14.5 billion in 2007, representing a 10 percent annum growth rate. This growth is attributable to the decline of pension benefits relative to rising living standards, less enduring family structures that make pensioners leas reliant on their children for income, and a growing retirement population. 

For example, South Korea has been worried about its public pension system going bankrupt for years; various organizations' estimates put the year when the national pension fund would dry up as somewhere between 2020 and 2060. We suspect that as parts of Asia age quickly over the next decade, the potential growth of annuities as a product segment will likely increase. What Types Of Insurance Are There

Accident and Health
With its huge population Asia should have a substantial market for accident and health products. However, this market is deceptively small. For eight of the markets - China, India, Hong Kong, South Korea, Singapore, Taiwan, Indonesia, and Malaysia - the aggregate accident and health market was worth a mere US$25 billion in 2007, or less than 10 percent of their total life gross written premium (GWP). The compound annual growth rate (CAGR) from 2002 to 2007 was 15 percent.
There are many reasons for this relatively small market size. First, strong government presence and the dominance of public payor systems limit the growth potential of these markets. Second, as maturing markets, the median income levels still render private health insurance a luxury for many. Third, underdeveloped healthcare infrastructure hinders insurers with such problems as nonstandardized treatment protocols, lack of case management, and fraud. 

Therefore, the market remains underpenetrated, although there are pockets of growth within specific segments. For example, the affluent segment, generally, is willing to pay for better healthcare than that which the State might offer. Especially in the more mature markets, such as Japan, health insurance will emerge as a key growth driver in the mid term.
Healthcare is a large topic both in Asia and the rest of the world.

Islamic Insurance

Islamic insurance, or takaful, is a nascent, underdeveloped market segment within the global life insurance market, but its market potential is substantial given the worldwide Muslim population of almost 1.5 billion. In Indonesia, India, China, and Malaysia alone, there are an estimated 350 million Muslims. Indonesia has the largest Muslim population in the world, with an estimated 200 million believers.
However, insurance penetration in these countries has traditionally been low - in part because some aspects of life insurance policies are in violation of Islamic Law or Sharia, which forbids the earning and charging of interest. Takaful was developed as a means of complying with Islamic requirements.
Due to its large untapped potential, many life insurers are now seeking to open this market, including international names such as Allianz and Prudential (UK). The market is still very small - takaful life insurance premiums amounted to US$600 million in Malaysia in 2007 and US$31 million in Indonesia in 2006 (8 percent and 1.1 percent of the overall market respectively). 

However, the growth of the takaful market has outperformed the overall market and the product has yet to reach a large proportion of Asian Muslims. For example, takaful life premiums grew 34 percent annually in Indonesia from 2001 to 2006, while the overall market grew 24 percent. With opportunities still available in China and India, both homes to large Muslim communities, it seems reasonable to assume that the takaful market has plenty of scope for growth. To find out more, you can check out What Types Of Insurance Are There.

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