The Benfield Greig Asia team surveys developments in some of Asia's major markets, from the perspective of a reinsurance broker.

With the largest population of any country in the world, and insurance premium spend per capita standing at just $12, the potential of the Chinese market needs no introduction. Although the total premium income of the country in 1999 amounted to $16.98bn, making China the 16th largest insurance market in the world, there is no doubt that the market has a long way to go before it reaches full maturity.

Since 1988, the market has been gradually opening to commercial operations. The People's Insurance Company of China (PICC) has been divested of its institutional status. However, market competition has yet to be established, and the PICC retains a non-life market share of around 70% to 80%. Currently only the state-owned reinsurer, China Re, operates within the domestic market, and benefits from a compulsory cession of 20% of all ceded reinsurance business. This will be reduced by 5% starting at the end of this year.

Reforms are being made, however, particularly with regard to the licensing of foreign companies in both the primary and reinsurance sectors, as a direct consequence of China's accession to the World Trade Organisation in November 2001. This entry was conditional on liberalisation of many sectors of the Chinese economy, insurance included. A strict timeline is in place to ensure that within five years wholly-owned foreign companies will be allowed to operate in both the life and non-life sectors, and be permitted to write business on an equal standing with their domestic counterparts. Meanwhile, Munich Re and Swiss Re have become the first two foreign reinsurers to be invited to do business in China and more appear to be in the pipeline.

State reliance pervades, but it is in personal lines insurance that stellar growth is expected over the next few years, as state social provision erodes and as more property enters private ownership. The relaxing of regulatory restrictions is therefore timed to foster the necessary market conditions for this upsurge in demand.

India is in the process of opening up its insurance sector after the removal of the state monopoly in 1999, but so far progress has been very measured, with the government retaining a high degree of control. However, the sector has clearly achieved success in terms of the objectives set for it by that government: the former state monopoly, the General Insurance Corp (GIC), has retained more than 90% of general insurance premiums generated within the country, and has delivered profitable results for the national treasury.

Although the monolithic structure of the sector is frustrating for the new commercial operations (not least those with foreign shareholdings), the Indian market remains the great `sleeping giant' of Asia. Its potential cannot be denied, with a population of over one billion, which is currently underinsured. The average insurance premium spend per capita in India in 1998 was $7.86, which compares to $931 in South Korea and $132 in Malaysia.

Although reform is promised, the pace of change is very slow, and there remains a strong drive towards national retention. Within the primary market, foreign shareholding is limited to 26%, and the companies licensed after 1999 currently account for less than 5% of the market. Furthermore, the sheer size of the country makes it difficult for new entrants to build the necessary infrastructure to compete with the incumbent former state monopoly. Recently, moves have been made to introduce brokers into the market in order to stimulate greater competition, but the development of the broker market is, likewise, expected to take time.

A lack of capacity within the Indian market is a major concern for all parties. A compulsory cession to GIC still applies, as well as a condition that as much reinsurance as possible should be placed within India. At present no other reinsurers are licensed in the market, seriously limiting capacity and stunting the development of a professional reinsurance broking market. This is of special concern considering India's susceptibility to natural catastrophes. For example, the Gujarat earthquake in January 2001 resulted in 35,000 fatalities and US$1.3bn in direct economic losses, according to government estimates, and highlighted the need for catastrophe cover and greater risk analysis. Progress has been made since then, although an obvious need for improvement remains.

As for so many sectors worldwide, fiscal 2001 was a turbulent year for Japanese non-life insurance companies. Domestic insurers have been hit with under-performing investment portfolios as a result of a local economy dogged by deflation and declining overall premium revenues over the last couple of years. The World Trade Center (WTC) event had a big impact on the Japanese market, with a number of companies having to face significant insurance and reinsurance losses. Lacking resources to meet resulting claims payments, Taisei Fire and Marine filed for bankruptcy, becoming only the second Japanese non-life company to fail since World War II (following Dai-ichi Mutual in May 2000).

Profits for all companies plunged sharply during fiscal 2001 as result of falling stock prices and increased claims payments in respect of WTC losses. The situation has prompted the market to take various corrective measures. Premium increases were witnessed throughout 2001 in certain specialist lines of business such as earthquake insurance. Market monitors report that such increases are now spreading to other classes, for example corporate fire and motor business, concluding the initial period of post-deregulation pricing competition.

Japan's flurry of non-life sector merger activity will end in 2002, after dramatically reshaping the industry over the last two years. Mitsui and Sumitomo merged at 1 October this year to form Mitsui Sumitomo Insurance Co, while Taiyo Fire and Marine merged into Nipponkoa at 1 April, the first day of the fiscal year. On the same day Tokio Marine and Fire and Nichido Fire and Marine launched Millea Holdings Inc, the holding company which will eventually encompass the entire Millea Group membership, although the two non-life companies continue to trade under their own names as wholly-owned subsidiaries. Meanwhile, Kyoei Mutual Fire and Marine, which was scheduled to come under the auspices of the holding company by 2004, has announced an alliance with Zenkyoren.

The creation of Sompo Japan in July 2002 by Yasuda and Nissan was the last of the originally planned mergers announced two years ago. Millea, Sompo Japan and Mitsui Sumitomo now have a combined share of approximately 60% of the non-life market, and nearly 90% of non-life market premium is now controlled by just five companies.

Malaysia has struggled to get back on its feet since its economy was rocked by currency and stock market turbulence in the late 1990s. Following years of stellar growth, when all sectors of the economy including insurance-burgeoned, conditions since 1997 have tested the strength of underlying economic structures. Despite the 1996 Insurance Act, which saved the insurance sector from the worst ravages of market turbulence with its stipulation of higher capital requirements to provide a market buffer, a number of flaws have been exposed in the insurance sector. These mainly relate to operating inefficiencies due to companies' high expense ratios and market overcrowding, preventing economies of scale.

Consolidation is a major theme, with the minimum paid-up capital of M$100m ($26.3m) having been imposed with effect from September 2001. There have been 30 companies involved in mergers or acquisitions in the past three years. The national premium retention locally in 2000 (based on a Bank Negara report) was 89.3% (1999: 87.8%).

A major challenge has been to enhance professional training in the sector, to better adapt to strained economic conditions. Insurance companies are now required to spend 4.5% of gross salaries on training and development of staff, while brokers are required to spend 2%. However, this is part of a wider effort to educate society at large about the importance of insurance in a country where market penetration remains low. Large sections of the business community and households are still uninsured or underinsured, despite the overcrowding in the direct market, with 46 direct non-life insurers operating, and government efforts to encourage private insurance through tax benefits.

If the domestic insurers are having a tough time at the moment, the situation is worse for foreign operators. The authorities are unlikely to issue foreign licenses at a time when the priority is to reduce the number of insurers in the market. Meanwhile, foreign shareholdings are now limited to 51%. However, foreign involvement in the reinsurance sector is being positively encouraged in accordance with the government's drive to increase retention. Nine foreign reinsurers now operate in the market, and retention currently stands at over 90% or more.

Singapore continues to act as a regional financial powerhouse, with the ubiquity of spoken English and a regulatory environment that is conducive to foreign investment continuing to draw financial capital to the island. This has seen large amounts of capital enter the local insurance market, with the result that approximately 75% of direct insurers, and all but one reinsurer, are foreign-owned. However, a corollary of this is overcrowding and high capacity, producing soft market conditions. Some 47 direct insurance companies, 44 reinsurers and 49 captives currently operate in a market with a population of 3.3 million, causing premium rates to remain below economic levels. However, this is beginning to change, with the hardening of motor and workers' compensation rates since the start of 2001 due to a string of bad underwriting years. In addition, an acceleration in the number of company mergers (as witnessed already in Malaysia) is gathering pace.

A period of consolidation is now expected to bring the market in line with international competitive levels, not least due to the sharp retraction of capital post-WTC. As the region's leading reinsurance centre, the effects of the WTC losses have been particularly acute. Although there is little direct exposure to WTC claims, the impact on the local reinsurers' parent organisations and major shareholders has had a significant impact on their future strategy in the Asian region. This includes, in some cases, consolidation or withdrawal.

The regional economic downturn has been compounded in Taiwan by continued political uncertainty in its relations with mainland China. However, its insurance sector continues on a steady course of deregulation, and the restructuring of Central Reinsurance Corp, which remains the only company with majority state ownership, is due for completion by the end of this year. A stake of 23% of Central Reinsurance Corp is owned by shipping group, Evergreen.

Meanwhile, fixed tariffs are due to be phased out once the market is deemed to be financially stable enough to allow open competition. To this end, increased capital requirements and regulatory reforms in areas such as corporate governance and financial reporting are being introduced.

In this newly competitive market, a number of the former state-owned insurers are struggling to adjust and are losing ground to their foreign-invested competitors. While this will not undermine the dominance of the leading domestic insurers in the near-term (Fubon, the market leader, currently represents 19.5% of the market), it is noticeable that their market share is being steadily eroded.

Meanwhile, foreign involvement in Taiwan's reinsurance sector is under review, due to adverse operating conditions. The market has traditionally ceded a high proportion of reinsurance to foreign reinsurers (amounting to 38% of ceded business in 2000), despite the fact that none of these reinsurers has ever made a profit in Taiwan.

This is mainly due to heavy catastrophe losses in recent years, to which the estimated $868.5m losses resulting from typhoon Nari in 2001 must be added. As a result, ten reinsurers have already left the market, and others are expected to follow until profitable levels of competition and pricing develop.

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