Behind the excitement created by the leading emerging markets (EMs) such as Brazil, India or China, there is a group of so-called “frontier markets” which have a promising outlook for economic growth and offer attractive long-term potential for insurers, reports Swiss Re.
In its latest sigma report, the reinsurer identifies 21 frontier markets in four regions – Sub Saharan Africa, Latin America, the Commonwealth of Independent States (CIS) and Asia – with the right mix of conditions for insurance growth.
The report includes an outlook for premium growth and an overview of the economic fundamentals which Swiss Re will lead to increased demand for insurance in countries such as Nigeria, Ecuador, Vietnam and Azerbaijan. It reviews the individual features of each market, influences such as impending regulatory changes and the influence of external factors such as regional trade agreements.
Swiss Re defines frontier markets as typically those emerging countries with smaller-sized economies, lower income levels and insurance sectors in the early stages of development. Across these markets, annual real gross domestic product (GDP) growth is forecast to be strong (5% to 10%) in the near term, and total insurance penetration rates are less than 1.5%, pointing to significant catch-up potential.
Most of the markets are in Sub-Saharan Africa (SSA), although the report also assesses frontier markets in the Commonwealth of Independent States (CIS), Latin America and Southeast Asia.
“Capturing the potential in frontier markets will require a long-term strategy says Swiss Re chief economist Kurt Karl. “Nonetheless, this work shows that there is a real ‘early-mover’ advantage to be gained for insurers who understand how to access and develop these markets.
“The benefits will come once these markets reach the critical middle-income threshold when consumers and businesses start buying more insurance.”
Opportunities and challenges for insurers
The report identifies a typical growth pattern for insurance within frontier markets. In the initial years, growth will likely favour non-life and commercial business over life and personal lines. Later, as incomes rise, premiums for life products, with their emphasis on savings, could grow more rapidly.
However, there is no ‘one-size-fits-all’ approach to increasing insurance penetration or doing business in the frontier markets. To be successful, insurers will need to understand how to navigate the different macroeconomic conditions, socio-economic factors, regulatory regimes and cultural characteristics of various markets.
The report examines how insurers can access each market, with an analysis of the advantages and disadvantages of joint ventures between international and local insurers. It also highlights the opportunities in markets which already have tech-savvy consumers, such as how to leverage digital distribution and the role of simple, easy-to-understand products.
A major consideration is how the deployment of technologies can disrupt the established growth path for insurance and allow some markets to leap-frog to a higher stage of development.
Frontier market analysis
Sub Saharan Africa (SSA):
SSA is a diverse region consisting of 48 independent states. Despite overall solid growth since the turn of the century, GDP per capita remains low across SSA. Since 2000, real premium growth in the SSA frontier markets has been lower than real GDP growth, dampened by years of political instability and civil war, which affected the insurance sector more than economic growth.
The sigma report focuses on seven of the top frontier economies in the region but notes that all SSA countries, with the exception of South Africa, can be considered frontier markets. Insurance penetration is generally low as the markets are mostly in the early stages of development and insurance for commercial risks (including construction, mining, oil and gas) dominate. Motor insurance is gaining importance due to increasing enforcement of compulsory motor third-party liability (MTPL) cover in many countries.
Regulatory frameworks and supervision have been improving, but are often still weak. On the other hand, SSA is leading the EMs in terms of mobile-phone distributed (micro) insurance. With the large low income population, micro-insurance and mobile-based insurance products will be key to increasing the reach and penetration of insurance. Other growth areas are in the agriculture field and insurance for large infrastructure projects.
Commonwealth of Independent States (CIS):
In CIS countries, the insurance sector remains underdeveloped. To some extent, this reflects the prevailing mindset of relying on state or family support in the time of need: many in the CIS countries regard insurance as a luxury. However, insurance growth has also been impacted by volatile economic developments in recent years. Most notably, the collapse in commodity prices highlighted the lack of diversification in these economies.
Nevertheless, the long-term economic and insurance sector outlooks are positive. CIS markets share several common growth drivers, including the introduction of new categories of compulsory insurance, such as mandatory health and compulsory MTPL insurance in Azerbaijan and Georgia, respectively. Another is the opening of CIS economies. For example, World Trade Organisation (WTO) membership should ultimately help Kazakhstan further open its real economy and financial sector.
Another important factor is regulation. For instance, Kazakhstan has a robust regulatory framework and in Azerbaijan, a new unified system for damage assessment in motor cover should build consumer trust in the insurance sector. On the flipside, an unexpected decision in Georgia to reverse liberalisation in healthcare led to a slump in medical premiums in 2014, showing how regulation can also hinder insurance sector growth.
The report singles out the quartet of Bolivia, Colombia, Ecuador and Peru as forming Latin America’s largest block of frontier markets. The insurance and sectors in Peru and Colombia are further developed than those in Bolivia and Ecuador, mainly due to structural and institutional reforms carried out in the 1990s and early 2000s.
The regulatory and operating environments in these markets have improved considerably, and have encouraged foreign insurer participation, increasing their market share in Colombia from 34% in 2003 to 41% in 2014. In contrast, foreign participation in the Bolivian market has practically disappeared, and the business environment in Ecuador has grown more challenging with the worsening economic climate and steady encroachment of the state into the local re/insurance markets.
In Southeast Asia four of the smaller markets – Cambodia, Laos, Myanmar and Vietnam (CLMV) – have experienced significant development in recent years. The CLMV economies have benefited from more stable domestic socio-political environments and further integration into the global economy.
The insurance industry in CLMV is at an early stage of development and is driven by the non-life sector. Vietnam is the region’s most developed market and has the highest insurance penetration. The CLMV markets are revising insurance and related regulations to enable faster sector growth. For example, a new insurance law in Cambodia took effect from February 2015.
In Myanmar, where the insurance market has been in state hands since 1963, 12 private companies were granted conditional approval to provide insurance services in 2013. Two other developments that will potentially act as growth drivers for insurance in CLMV, alongside stronger GDP growth, are the ASEAN Economic Community and China’s ‘One Belt, One Road’ policy, both explored by the report.
The report cautions that all frontier markets require a long-term commitment from aspiring participants; however there is a significant first-mover advantage for insurers who understand the markets and can position themselves for growth.