Download Title sentence case 18-pt Arial bold, line spacing 22 points (three

Successful Business Strategies for Insurers Entering and Growing
in Emerging Markets
Amman, Jordan
June 2009
Emerging Market Opportunity
The importance of emerging markets is increasing. While insurance growth rates in mature markets, such as the U.S.,
UK, and Japan have fallen flat, insurance sector growth rates in emerging markets are rising rapidly.
Insurance premium growth (%)
Key Observations

CAGR
India 31.7%
Insurance industry is experiencing higher growth in
emerging markets compared with the developed economies
‒
Brazil 27.7%
China 22.9%
USA
Japan
Over the past five years, insurance premiums of emerging
economies such as India, China, Brazil have grown at CAGR
of over 20% whereas those of mature markets such as US
and Japan are below 5%

Gross domestic products in emerging markets are growing
at a higher rate compared with the developed economies
and are poised for higher growth in future

Emerging markets are underpenetrated providing huge
potential for growth
3.8%
0.8%
‒
In 2007, insurance penetration in India, Mexico, Brazil, and
China was 3.8%, 1.9%, 1.3%, and 2.5% respectively
Note: Growth indexed to base year 2002
With limited organic growth opportunities existing in their mature home markets, insurers have now started
looking seriously at the opportunity provided by emerging markets
Source: EIU, BMI Industry Reports, Datamonitor, IRDA
-2-
Insurers are responding to opportunity with significant investments
Insurers are investing significant capital into emerging markets to tap growth opportunities, as illustrated by the recent
dynamics of the Indian insurance industry.
Indian Nonlife Market Share Change ($BN)
Indian Life Market Share Change ($BN)
$7.5 BN
$14.6 BN
$51.1 BN
$2.2 BN
$3.6 BN
$7.1 BN
Key Observations

Prior to 1999, the Indian Insurance sector was comprised of only public insurers – LIC in the Life segment and United India, New India,
Oriental & National Insurance company in the Nonlife segment

In 2007, out of 21 life insurers ,18 are joint ventures with foreign players and out of 18 non life insurers, 13 are joint ventures with foreign
players

In the joint ventures, foreign insurers can hold a maximum 26% ownership stake
Source: IRDA, Deloitte Analysis
-3-
Unique challenges in emerging markets
Success in emerging markets requires more than simply transferring existing business models to new geographies.
Insurers must adapt to the challenges of very different operating environments.
 Insurance in emerging economies is in nascent stage with limited data available for assessing market
performance
Immature markets
 Very limited access to experienced insurance talent
 High administrative and procurement costs associated with targeting underinsured and rural markets
 Lack of infrastructure to support insurance processes
 Insurance is “sold not bought”
Cultural differences
Challenging regulatory
environments
Huge investment costs
‒ Consumers do not typically actively pursue insurance coverage
‒ Requires agents to actively find and convince consumers to purchase
 Average buyers are less sophisticated and may not understand complex insurance products, therefore
requiring a greater emphasis and reliance on consultative sales
 Insurance industry in emerging markets is evolving and with regulations changing as the markets
evolve. Insurers will need to change their business model to adapt to changing regulations
 In many emerging markets, foreign companies cannot register for operating an insurance business
independently (e.g., foreign players need to partner with a domestic company to enter Indian market)
 In order to be successful in emerging markets, companies need to place huge investments as the
infrastructure for selling insurance is underdeveloped
‒ Distribution channels in emerging countries are not well established
‒ Existing products may not work well in emerging economies, so investments may be required to launch
new products in order to attract consumer. This also increases risk tremendously
 In emerging markets, unlike developed markets, insurance companies sometimes have to compete
with government/ quasi government firms
‒ In India, LIC (a government firm) holds 75% of life insurance as of 2007
-4-
Risks to emerging market entry
In addition to the unique challenges posed by emerging markets, there are inherent business risks for entry to emerging
markets. For insurance executives, “getting it right” amid the numerous challenges continues to be a major concern.
Risks to emerging market entry
Risk
Description
• Currency devaluation, volatility and instability necessitates financial sophistication in matching revenues
to expenses in foreign currency and/or use of hedging instruments
Economic and
Financial Risks
• Optimal financial leverage is often difficult to determine in new markets
• Limits on remittance, currency transfer restrictions and inconvertibility to domestic currency disrupt the
stream of revenue back to home country
Operational
Risks
Reputational
Risks
Regulatory
Risks
• Lack of established infrastructure affects underwriting, sales, service and claims
• Distribution channels are unlikely to be mature and require development
• Entry and exit can damage a company’s reputation in the emerging market and potential future markets
• Increased incidence of corruption can expose a company with loose governance to penalties at home
and abroad
• Patchy legal and regulatory regimes tend to favor incumbents
• Ineffective regulatory institutions unable to ensure fair market practices
• Expropriation or nationalization of company capital and assets resulting in total loss of investment
Political Risks
• Negative government actions against foreign companies – taxation, discrimination, etc
• Contract repudiation such as payment default or unilateral termination
• War or civil strife affecting physical operations, employees, and supply chain function
Talent Risks
• Labor markets can be restrictive, limiting access to necessary talent and resources
• Use of expats can be expensive with fewer candidates possessing emerging market experience
-5-
Strategies for success in emerging markets
In their paper entitled, “Successful Business Strategies for Insurers Entering and Growing in Emerging Markets,”
authors Berry-Stölzle, Hoyt, and Wende provide valuable, data-driven insights for insurers that can help to inform an
emerging market strategy. The author’s framework and analysis can be replicated by company leadership to survey an
array of emerging market opportunities, determine the risk adjusted rate of return, and make smarter decisions on
emerging market entry.
Elements of Successful Strategies
Successful business strategies for entering emerging markets have the following elements in common:
High growth rates, increased size, and an emphasis on life insurance
When adjusted for country risk an additional two components are discovered:
Lower financial leverage and mutual organization structure
Success Strategies
In addition to strategic characteristics, the authors isolated specific strategies for success that are positively correlated with certain
characteristics found in emerging markets.
Market/Country Characteristics
Strategy for Success
• High Corruption Ratings
• Low Market Competition
• Low Trade Openness
Diversification
• High Per Capita GDP
• Low Insurance Penetration
• Low Trade Openness
•
•
•
•
•
•
Growth
High Per Capita GDP
Strong Market Competition
Low Insurance Penetration
Low Stock Market Turnover
Low Trade Openness
High Corruption Ratings
Business Focus on Life
Insurance
-6-