Growth opportunities abound for insurers looking to enter or expand in the emerging markets of South and Southeast Asia. Seizing them demands long-term commitment, prudent risk management, and agile execution. If insurers get the balance right, the prospects are promising.

S&P Global Ratings believes insurers that can adapt their products, pricing, and distribution strategies in the face of emerging risks and developing trends are more likely to remain relevant and ensure sustainable profitability.

We focus on five of the largest emerging markets in South and Southeast Asia: India, Indonesia, Malaysia, Philippines, and Thailand. These countries combined comprise more than 70% of the region's GDP.

The Protection Gap: A Big Opportunity For Growth

In emerging South and Southeast Asia, the protection gap between insured and economic losses remains wide. This is indicative of the massive growth opportunities within the region (see chart 1). Personal losses and natural disasters are a cost to society and a threat to economic well-being. Respective governments have increasingly sought to narrow the protection gap through various schemes and regulations.

Most markets in the region, for instance, have mandatory third-party motor coverage. India has proposed regulatory growth targets for all life and property and casualty (P&C) insurers. Malaysia has the mySalam scheme under which the government and industry collaborate to provide simple products targeted at the bottom 40% of income group. And in the Philippines, a catastrophe insurance marketplace is taking shape gradually to address the nation's increasing vulnerability to natural disasters.

Chart 1

Growth in premiums across both the life and P&C sectors is likely to be resilient over the next two years. In emerging South and Southeast Asia, both sectors avoided the full brunt of the economic slowdown but remained affected during the pandemic. Increasing risk awareness, improving financial literacy, and evolving regulations underpin the prospects for growth in the region (see chart 2). This is despite macroeconomic uncertainties.

Chart 2

Changes in demography are fueling growth of life insurers.  The pandemic underscored the importance of health insurance and financial planning and revealed more opportunities. In addition, improving health awareness and developments in medical science are increasing life expectancy.

This in turn is generating the need for higher coverage and demand for insurance that corresponds to changing financial responsibilities across life stages--from education to the retirement phase.

At the same time, a higher ratio of working-age adults will likely equate to greater demand for savings and protection insurance. This trend is occurring in India, Indonesia, and the Philippines (see chart 3). A notable exception is Thailand. The country's ageing population is encouraging insurers to explore retirement and annuity products.

Chart 3

Catastrophe protection gap and government initiatives to boost demand for P&C insurance.  Within the emerging markets of South and Southeast Asia, governments are pushing for more public-private partnerships as part of efforts to narrow catastrophe protection gaps. This reflects losses from natural disasters being underinsured relative to global levels (see table 1).

Examples of such partnerships include the Southeast Asia Disaster Risk Insurance Facility (SEARDIF), a partnership between ASEAN and the World Bank. Members include Cambodia, Indonesia, Laos, Myanmar, Philippines, Singapore, Japan, and Vietnam. Other examples include Thailand's National Catastrophe Insurance Fund, and the Philippine Catastrophe Insurance Facility.

Another efficient alternative to narrowing the protection gap is parametric insurance. Under this coverage, claims are triggered by pre-defined event parameters (e.g., a category 5 typhoon), rather than based on actual losses. This differs from conventional insurance, which requires time-consuming loss assessment.

India was one of the first few markets to adopt parametric insurance for agriculture-related risks (e.g. failure of crop from extreme weather events). When Typhoon Rai struck the Philippines in December 2021, parametric insurance helped to provide rapid liquidity, albeit modest compared to incurred losses.

Table 1

Another growth area for P&C insurers is insurance products for infrastructure protection. Over the years, governments in emerging South and Southeast Asia have focused on the interplay between infrastructure development and an influx of foreign funds. This continues to boost demand for multiple business lines such as property, engineering, and worker's compensation insurance. Projects such as Indonesia's State Asset Insurance Program and Thailand's Eastern Economic Corridor highlight these benefits.

Lessons Learnt: A Retake On Risk

Risks continue to evolve, and new risks emerge at a faster pace. As such, insurers will need to be nimble to navigate changing business conditions.

Given macroeconomic challenges and sustained inflationary pressures, insurers face higher operational costs and loss payouts. This is despite the region not being new to managing high inflation levels. We also expect reinsurance rates to continue to increase in 2023, along with constrained reinsurance supply as observed in recent January renewals. These factors could further compress margins for primary insurers within the region, particularly in markets where underwriting performance is weak.

The ability of insurers to raise premium rates, however, is limited. Before they can revise prices, they must consider several factors, including competition, the budget constraints of their consumers, and regulatory tariffs, where applicable (i.e. in markets such as India, Indonesia, and Malaysia).

To alleviate inflation, insurers are increasing their efforts to trim expenses. For instance, they are fast-tracking digitization to streamline back-end process automation and minimize the use of physical documents to reduce servicing costs. Motor insurers are leveraging telematics to gather data on driver behavior, thereby encouraging safe driving and reducing legal disputes as well as claims-related costs. Insurers are also using data analytics to identify exposure to rising costs within networks of repair workshops and doctor panels, which in turn provide feedback on pricing and improve the oversight of claims.

Life insurers face a strategy rethink.  To remain competitive, a re-think of product strategy is warranted. After a decade of low interest rates, the current pace of interest rate hikes coupled with increased cost of living have set new challenges for insurers' product strategies. And with higher fixed deposit rates offered by banks, insurers may struggle to entice customers given the longer lock-in periods of insurance contracts.

To limit direct competition with banks, insurers may seek to shift their focus from investment-type products to more affordable protection policies, with lower premium sizes but typically higher profit margins.

Cost-conscious consumers are testing the elasticity of insurance. Amid current times, whereby every penny counts, customers may prefer insurance products with affordable premiums or bite-sized policies. As they seek to rein in their discretionary spending and focus on preserving their wealth, customers may also reassess their appetite for investment-type products.

Disciplined underwriting is key to maintaining margins for P&C insurers.  Underwriting remains relatively profitable in most emerging markets in South and Southeast Asia (see chart 4). However, pain points persist in India, Thailand, and Indonesia where pricing could be improved. For most of India's P&C insurers, inadequate pricing because of intense competition continues to weigh on underwriting results. Combined ratios typically exceed 110%. These losses are partially negated by relatively high investment yield.

In Thailand, the massive sales of lump-sum, low-cost COVID-19 insurance products have caused mounting losses for several P&C players over the past two years. Indonesia's credit insurance line has seen the claims ratio rise significantly in recent months, owing to aggressive underwriting and pricing inadequacies.

This underscores the need for insurers to periodically assess their risk exposures against risk appetite and enhance their risk management framework, where necessary. This could involve, for instance, engaging reinsurers for more support when underwriting novel risks or volatile exposures.

Chart 4

It's increasingly important to improve reinsurance coverage and adaptability of catastrophe models to incorporate up-to-date exposures and developments. This stems from the higher frequency and severity of weather-related losses in the region, while catastrophe insurance coverage exposures remain marginal compared with global markets. However, an increase in demand to protect against catastrophe-related financial losses means insurers must improve their capabilities to manage natural catastrophe risks.

Investing In Distribution And Technology

For insurers, the pandemic accelerated the use of technology to ensure the survival of traditional distribution channels (which includes agents, brokers, and bancassurance). The evolution of such technology may enhance the productivity and servicing capability of these channels. Insurers are increasingly harnessing technology for recruitment and training purposes to grow while maintaining the quality of distribution.

Traditional distribution modes remain a key part of a multi-channel strategy.  Conventional forms of distribution will nevertheless maintain their importance in the region at least over the next decade. The quality of distribution personnel is crucial. Insurers may need to put adequate controls in place to limit mis-selling risk.

An imbalance in levels of financial literacy across the region will call for more human interaction, especially when it involves the purchase of complicated or high-value financial products such as insurance. To this end, sales personnel are also key to enhancing customer experience. Sales personnel can provide targeted advice, claims servicing, and contract negotiation expertise for some business lines.

Countrywide reach including remote locations and high footfall at bank branches within emerging South and Southeast Asian markets have been the primary reasons for driving substantial bancassurance partnership prices. With banks reviewing their brick-and-mortar networks, this bancassurance model will evolve. The accelerated adoption of online banking for most of the day-to-day transactions will require insurers to keep pace with digital developments.

It's a slow burn for next-generation channels.  Key developments to watch over the next few years will be the emergence of proprietary online channels, digital banks, and super-apps. These next-generation channels are unlikely to displace the incumbent mediums in the short term, but they could help insurers enhance diversification and better future-proof their distribution network.

Over the past decade, many insurers have gained traction in selling simple products online, including travel, term, and motor insurance. Successfully applying this method to a wider range of products will depend on whether insurers can further leverage on data while aligning with changing consumer behavior and the tactical approach of the regulators.

Taking An Agile Approach To Risk

The watchword for insurers is agility. The pandemic reiterated the importance of swiftly but prudently adapting to changing risks. Ongoing macroeconomic snags and growing climate risks underscore the urgency.

Insurers who can demonstrate tenacity and agility while prudently managing their business will be able to steer through the economic upheavals. The reward for those that do, will be sustained growth and profitability over coming decades. The opportunities are solid.

Writer: Lex Hall

Related Research

• Economic Research: Economic Outlook Q2: China Rebound Supports Growth, March 27, 2023
• Asia-Pacific Reinsurance Sector Update: Volatility Ahead For Risks And Returns, Oct. 27, 2022
• Asia-Pacific Reinsurers And Governments Fortify Natural Disaster Defenses, Sept. 13, 2022
• P&C Insurers In Emerging Markets: Risks Remain As The Economic Recovery Slows, Aug. 2, 2022