Download Life insurance penetration

The Third Middle East Insurance Forum
The Opening up of International
Insurance Markets: Trends and Consequences
Thomas Hess
Swiss Re
Chief Economist
Head of Economic Research & Consulting
Bahrain, 20 March 2006
Agenda
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 2

Opening up markets: What does it mean?

Global economic and capital market trends and the
Middle East

Insurance in the Middle East

Market opening in the Middle East and its impact

Prospects and conclusions
Opening markets: What is it about?
The four characteristics of open markets are
 Free trade of goods and services ... has been one of the
major forces behind the increase of global wealth
 Free movement of capital … very important for capital
markets in emerging markets to work smoothly and
develop
 Freedom of establishment ... critical for services
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 3
 Free movement of labour ... important only in special
cases
What are the drivers behind
opening
Technology advanced
 shipping, railways, cars, airplanes, telephone, internet
 allowed for cheap international transport, travelling and
communication
Companies are exploiting these developments
 use world markets to sell goods and services
 buy cheap intermediate products
 make use of foreign direct investments to produce as cheap as
possible
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 4
Institutions have been created to facilitate and organise international
interaction and trade
 IMF, OECD, WTO , local, regional organisations and other
multilateral institutions organising international relationships
Opening markets: What are the
concerns?
Rich countries
 Job losses due to import competition
 Fear of dependencies on foreign goods, fear of immigration
 State monopolies threatened, subsidised agriculture under pressure
 Intellectual capital threatened (Pharma)
Developing countries
 Cultural issues, lack of preparedness for major changes
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 5
 Fear of losing control of local financial markets, fear of financial
instability and capital outflow
 State monopolies under pressure, fear of losing control of local
service industries, as strong foreign players penetrate the markets
What are the advantages of open
markets
The welfare advantage of open markets
 You can buy everything everywhere
 International division of labour increases productivity
 Opening markets is the most efficient way to increase competition
The results
 Cheaper products and more choice, higher purchasing power, more
wealth, less poverty, less migration
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 6
 More stable economy because of broader and deeper financial
markets due to opening
 More peaceful world? Peace was an important argument for
creation of the European common market
Agenda
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 7

Opening up markets: What does it mean?

Global economic and capital market trends and the
Middle East

Insurance in the Middle East

Market opening in insurance and its impact

Prospects and conclusions
The economy
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 8

The world economy is entering a mature phase of the
business cycle

Growth in 2006 and 2007 will remain solid and inflation
is not a major threat

Risk of a recession is remote but rising; oil price
increases, US consumption and housing prices are major
risks

The ECB and the Bank of Japan will follow the US-Fed
tightening; the Bank of England has moved to a neutral
stance and is on hold for now
Solid growth, higher interest rates
Real GDP growth, US, Euro zone, UK and Japan, %
5
5
Robust growth
4
Inflation, US, Euro zone, UK and Japan, %
3
3
2
2
1
1
0
0
-1
-1
-2
-2
95 96 97 98 99 00 01 02 03 04 05 06 07 08
US
Eurozone
UK
95 96 97 98 99 00 01 02 03 04 05 06 07 08
Japan
US
3 months interest rates, US, Euro zone, UK and
Japan, year-end, %
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
8
7
6
5
4
3
2
1
0
Policy rates increase
95 96 97 98 99 00 01 02 03 04 05 06 07 08
Slide 9
US
Eurozone
UK
Inflation under control
4
Japan
Sources: Datastream; Swiss Re Economic Research & Consulting
Eurozone
UK
Japan
10 y interest rates, US, Euro zone, UK and
Japan, year-end, %
8
7
6
5
4
3
2
1
0
Capital market rates go up
95 96 97 98 99 00 01 02 03 04 05 06 07 08
US
Eurozone
UK
Japan
Stock markets rebound
Stock markets: USA, Europe, UK and Japan
Jan.1995=100
500
400
300
200
100
0
95 96 97 98 99 00 01 02 03 04 05 06 07 08
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 10
US S&P 500
UK FTSE 100
Sources: Datastream, Swiss Re Economic Research & Consulting
DJ EURO STOXX 50
JP TOPIX
The Middle East gets richer
GDP in USD 2004 and 2005 in the Middle East
Lebanon
Jordan
Syria
Levant (Total)
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 11
United Arab Emirates
Oman
Qatar
Saudi Arabia
Kuw ait
Bahrain
Yemen
Gulf States (Total)
Iran
2004
20.47
10.74
22.91
54.13
2005
21.11
11.94
24.51
57.55
103.134
23.426
28.451
250.892
55.718
11.168
13.640
486.430
121.971
25.564
32.982
308.150
62.358
13.036
15.848
579.908
161.53
200.79
Regional stock markets have been
booming….. until recently
Change in stock market capitalisation (Dec- Dec, USD bn)
600
7000
500
6000
400
5000
300
4000
200
3000
100
2000
0
1000
-100
0
00
SC UAE
SC Palastine
SC Kuwait
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 12
01
Source: ShuaaCapital
02
03
04
SC Saudi Arabia
SC Oman
SC Bahrain
05
28.Feb.06
SC Qatar
SC Lebanon
SC GCC Index (rhs)
Growth in the Middle East
countries in the last 15 years…
Average real GDP growth 1990-2005 (%)
Kuwait
3.3
Saudi Arabia
3.5
Qatar
4.5
Jordan
4.6
Oman
4.7
Syria
4.7
Iran
4.9
Yemen
5.2
Bahrain
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
5.6
UAE
6.6
6.8
Lebanon
0
1
Slide 13
Source: Oxford Economic Forecasting
2
3
4
5
6
7
..will continue, it is needed
for coping with population growth
Average real GDP growth 2006-2014 (%)
2.4
2.0
2.3
Kuwait
Saudi Arabia
2.7
1.0
Lebanon
2.8
Yemen
UAE
3.1
2.3
Syria
3.8
2.2
Oman
3.6
3.2
1.6
Bahrain
3.9
2.0
Jordan
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
4.0
2.8
Iran
1.4
Qatar
1.4
0
1
4.3
4.4
5.3
2
3
4
5
Average Populat ion grow t h (2006-2014)
Average real GDP grow t h 2006-2016 (%)
Slide 14
Source: Oxford Economic Forecasting
6
7
Middle East: pros and cons
Middle East a winner of the next decade?
 High population growth
 Oil will remain expensive and support growth in the regions
Structural issues
 High dependency on oil and tourism
 Huge differences in wealth within and between countries
Economic and political reforms pending
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 15
 Still underdeveloped public and social infrastructure in the region
 Political tensions
Agenda
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 16

Opening up markets: What does it mean?

Global economic and capital market trends and the
Middle East

Insurance in the Middle East

Market opening in the Middle East and its impact

Prospects and conclusions
How does the Middle East compare
to other parts of the world?
2004
Population, m
% of
World
GDP,
USD bn
% of
World
Non-life
premiums,
USD bn
% of
World
Life
premiums,
USD bn
% of
World
Industr. countries
948.61
14.9
31364
76.4
1251.1
89.5
1634.3
87.9
South & East Asia
3368.11
52.9
4517
11.0
64.1
4.6
165.3
8.9
Latin America
516.86
8.1
1974
4.8
28.0
2.0
19.0
1.0
Eastern Europe
331.46
5.2
1419
3.5
31.4
2.2
11.1
0.6
153.19
2.4
690
1.7
6.2
0.4
0.8
0.04
Thomas Hess, Swiss Re
Chief Economist
Middle East
MEIF Conference, Bahrain
20 March 2006
Slide 17
Middle East: Bahrain, Iran, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi Arabia, Syria, United Arab Emirates, Yemen
Size of insurance business in the
region (2004 figures)
Total USD bn
7.0
Non-life USD bn 6.2
Life USD bn
0.8
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 18
Source: Swiss Re Economic Research & Consulting
Insurance is still underdeveloped
Premiums as percentage of GDP, 2003
0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5%
Jordan
Accident/ Health
Motor Vehicle
General Liability
Fire/ Property
Lebanon
Bahrain
UAE
M.A.T.
Qatar
Other
Oman
Kuwait
Syria
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Saudi Arabia
Yemen
Western Europe
Slide 19
Strong growth in non-life insurance
…
Average annual non-life premium growth, inflation-adjusted, 2000-2004
Premium volume 2004 in squared brackets
Lebanon [399mn USD]
Saudi Arabia (2000-03) [1130mn USD]
Syria (2000-03) [117mn USD]
Yemen [33mn USD]
Bahrain [190mn USD]
Oman [227mn USD]
Jordan [240mn USD]
UAE [1291mn USD]
Kuwait [356mn USD]
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Qatar (2000-03) [296mn USD]
Iran [1862mn USD]
-5%
Slide 20
Source: Swiss Re Economic Research & Consulting
0%
5%
10% 15% 20% 25% 30%
… as well as in life insurance
Average annual life premium growth, inflation-adjusted, 2000-2004
Premium volume 2004 in squared brackets
Saudi Arabia (2000-03) [14mn USD]
Syria (2000-03) [1mn USD]
Oman [41mn USD]
Jordan [30mn USD]
Yemen [3mn USD]
Qatar [16mn USD]
Bahrain [50mn USD]
UAE [284mn USD]
Iran [122mn USD]
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Lebanon [181mn USD]
Kuwait [85mn USD]
-5%
Slide 21
Source: Swiss Re Economic Research & Consulting
0%
5%
10%
15%
20%
The S-Curve indicates proves that
the Middle East non-life insurance
is underdeveloped…
Non-life insurance penetration
Premiums in % of GDP
5%
Above average
4% insurance
penetration
3%
Jordan
Lebanon
2%
UA E
Iran
1%
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 22
Oman
Qat ar
Kuw ait
Saudi A rabia
0%
100
1000
Middle East
10000
100000
GDP per capit a, USD
Rest of World
.. and life insurance even more
Life insurance penetration
Premiums in % of GDP
5%
All countries below
levels which could
be expected from a
country with
comparable per
capita income
4%
3%
2%
Lebanon
1%
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 23
0%
100
UA E
Oman Kuw ait
Qat ar
Saudi A rabia
Jordan
Iran
1 000
10 000
100 000
GDP per capit a, USD
Middle East
Rest of World
What statistics tell us: 30% more
non-life insurance possible …
• All Gulf States with
far below-average
insurance
penetration
• Only Lebanon and
Jordan record
above average
insurance
expenditures
below / above S-Curve
2004 premiums as % of GDP
Yemen
Saudi Arabia
Syria
Kuwait
Oman
Iran
Qatar
UAE
Bahrain
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 24
Lebanon
Jordan
0
0.5
1
1.5
2
2.5
-2
-1.5
-1
-0.5
0
0.5
1
.. and life insurance can easily
double
2004 premiums as % of GDP
below / above S-Curve
Syria
Saudi Arabia
Yemen
Qatar
Iran
Kuwait
Oman
UAE
Jordan
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Bahrain
Lebanon
0
Slide 25
0.2
0.4
0.6
0.8
1
-6
-4
-2
0
Quick win compulsory insurance
The introduction of new compulsory insurance speeds up
market growth
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 26

Bahrain: compulsory health insurance for expatriates since 2001

Saudi Arabia: compulsory health insurance for expatriates since
June 2002 which may be extended to national citizens, compulsory
motor insurance introduced in November 2003

UAE: compulsory health insurance for expatriates to be introduced in
2004

Compulsory professional insurance for several professions had been
introduced or is planned in many countries of the region
Agenda
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 27

Opening up markets: What does it mean?

Global economic and capital market trends and the
Middle East

Insurance in the Middle East

Market opening in insurance and its impact

Prospects and conclusions
The opening up of insurance is a
global trend ….
Situation before opening
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 28

Insurance traditionally was a local business close to the
government, often organised as a cartel, with state monopolies and
strict regulations like product and tariff control and investment
restrictions

At the same time reinsurance and commercial lines businesses
often had already liberal regulation from its beginnings like free
cross border trade, free to set prices  origins in the big town fires
and shipping, which could not be financed nationally;

Foundation of German reinsurers, Swiss Re and the London market
goes back 150 years; there are some primary companies with long
tradition in operating internationally; UK, Swiss companies are
examples
… which intensified since the 90s
Trends since the nineties
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 29

Insurance became a part of the market economy
 in Europe a step was taken 1994 ; similar steps in Japan, other
Asia, Latin America and Central and Eastern Europe and also in the
Middle East

The extent of liberalisation still differs a lot
 state monopolies
 privileges for local insurers prevailed
 free border trade in personal lines is still difficult

WTO
 has done a good job as a market opener also in insurance;
 current round may produce again some progress

Supervision
 opening has to be accompanied by strengthening supervision
 reinforcement of supervision is missing in many countries
The liberalisation trend is also
visible in the Middle East
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 30

Saudi Arabia: NCCI privatisation, WTO access, foreign
ownership is limited to 60%

Lebanon, Bahrain, Jordan: foreign ownership or market
entrance not restricted

Iran: foreigners are allowed to hold up to 49% of share
capital in a local insurer, private domestic insurers
allowed since 2001. Privatisation of the four stateowned insurers still pending.

Clear trend towards strengthening insurance supervision
An open international insurance
makes sense and works ..
Claims from Katrina, Wilma and Rita in USDm (LHS) and in
% of shareholder equity (RHS)
in USD m.
90%
5000
75%
4000
60%
3000
45%
2000
30%
1000
15%
0
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Lloyd's
Allstate
Berkshire H.
Swiss Re
Munich Re
XL Capital
AIG
St. Paul
Montpelier Re
Zurich FS
Everest Re
Liberty Mutual
Axis Capital
Allianz
ACE Limited
RenaissanceRe
Partner Re
Hannover Re
Endurance
Chubb
IPC Holdings
Aspen
Platinum
GE Ins. Solutions
Wellington
Transatlantic Re
PXRE
CNA
Odyssey Re
Catlin
White Mountains
FM Global
6000
Current net loss estimate (before tax)
Slide 31
Source: Swiss Re Corporate Development
Net loss in %of equity (RHS)
0%
… and it is a contribution to
economic development
Economic development / increasing income
Young population
New start-ups
Emergence of a
middle-income
class
Reform of old (stateowned) companies
Increasing home/car
ownership
Rapid industrialisation
FDI/capital
inflow
Vietnam
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 32
Large conglomerates
FDI/capital
outflow
United States
Increasing role
of services Singapore
Poland
Brazil
Ageing population
Corporate (re)insurance
Growth of personal lines
China
Credit & Surety
Motor/property takes off
Increasing liability business
Protection of start-ups
Focus on commercial lines
Protection products
Savings products
(with capital guarantee)
Insurance market development / increasing penetration
Wealth management
Opening also means acquisitions ….
Akquirierte
Lebenprämien,
in USD
bn
Acquired
life premiums
in life
insurance
USD bn)
100
1600
80
1400
60
1200
40
1000
20
800
0
600
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 33
Rest
Welt
Rest der
of world
North America
Nordamerika
Europe
Europa
MCSI World Index,(MSCI
rhs World Index), rechte Skala
Weltaktienindex
Quelle:
Morgan
Stanley
Capital
International
Inc. (MSCI),
Swiss
Re Economic
& Consulting
Source:
Morgan
Stanley
Capital
International
Inc. (MSCI),
Swiss Re
Economic
ResearchResearch
& Consulting
As insurance is back the appetite
for …
Slide 34
120
100
80
60
40
20
Eurotop Insurance index
Dow Jones Euro Stoxx 50
Source: Bloomberg
Jan 05
Jan 04
Jan 03
Jan 02
Jan 01
Jan 00
Jan 99
0
Jan 98
Chief Economist
MEIF Conference, Bahrain
20 March 2006
140
Jan 97
P&C underwriting
situation remains
favourable; prices will
rise substantially in
catastrophe related
business lines; life
industry remains on the
recovery
path
Thomas
Hess, Swiss Re

Index: Year-end 1999 = 100
Jan 96
Capital situation in P&C
continued to improve
vigorously in 2005 until
Katrina hit the industry –
Life balance sheets have
also further improved
Jan 95

… acquisitions of big international
companies has increased
The worldwide market share of globals in life insurance
increased from 19.8% in 1998 to 28.2% in 2004
28.2%
Zurich
Prudential (US)
30%
Prudential (UK)
25%
Manulife
19.8%
Aviva
20%
Aegon
Generali
15%
ING
10%
Allianz
AXA
5%
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 35
Metropolitan Life
AIG
0%
1998
Quelle: Swiss Re Economic Research & Consulting
2004
Also the Middle East is affected

AIG (Alico): Bahrain, Jordan, Kuwait, Lebanon, Oman, Qatar, Saudi
Arabiam United Arab Emirates

AXA: Bahrain, Lebanon, Saudi Arabia

Royal & Sun Alliance: Bahrain, Oman, Saudi Arabia, United Arab
Emirates

Allianz: Lebanon, United Arab Emirates
Market shares still low:
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 36

Lebanon: 16% (AXA, Allianz, AIG) non-life, over 50% in life insurance

Bahrain: some 20% (AIG, Royal & SunAlliance, AXA minor share)
Agenda
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 37

Opening up markets: What does it mean?

Global economic and capital market trends and the
Middle East

Insurance in the Middle East

Market opening in insurance and its impact

Prospects and conclusions
Expected changes in the
corporate landscape
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 38

State owned companies will lose importance; foreign
companies will gain in importance; less small companies

The Allianzes, AIGs, Generalis will play a bigger role alos
in the Middle East

Opening also allows the emergence of strong regional
player
Consumers will be the winners
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 39

There will be choice between attractive strong
international players in addition to local players

More competition, pressure on premium rates and costs

Higher efficiency, more professionalism; the whole
market will profit from improved know-how

Will we see a boom in life products of whatever form?
Conclusions
Thomas Hess, Swiss Re
Chief Economist
MEIF Conference, Bahrain
20 March 2006
Slide 40

Insurance in the Middle East is in a phase of change
characterised by the introduction of tighter supervision,
new compulsory insurance, liberalisation and a market
opening

As a result we expect consolidation to speed up and foreign
companies to gain market share

The Middle East has a huge insurance gap, which is
expected to narrow over time

There is a good chance that the insurance growth in the
region will be substantially above international growth over
a longer time period