The rapid growth of emerging insurance markets suggests future profits lie in distant shores. Lindsey Rogerson turns her gaze to China, India and the Middle East.

Asia and the Middle East are home to a wealth of emerging economic powerhouses. On the demographics alone, no one disputes the massive potential of China and India. Add religion into the mix, namely Islam, and the possibility for growth offered by the emerging group of takaful insurers and reinsurers hones into view.

Before we drill down into the details of the individual players it is important to touch briefly on the external influences which could see demand for reinsurance companies in emerging markets increase. Firstly, the US-spawned credit crunch has seen money flood out of developed economies into emerging markets. The Financial Times reported that money is flowing into emerging market funds at the fastest rate for two years.

On top of this, many market watchers now firmly believe the emerging markets themselves are moving into a new – more mature – phase. In an effort to capture the benefits of this new phase for investors, a number of fund managers including Aberdeen Asset Management, Morley Investment Management and Lloyd George Management have launched emerging market small cap funds. Potential buyers for up and coming reinsurance companies? Possibly.

Local heroes

A quick look at the numbers certainly suggests that there is good reason to believe that the prospects for locally grown reinsurers looks good. These markets are huge: China’s population is 1.3 billon; India’s population is 1.1 billion and there are approximately 1.5 billion Muslims on the planet. And as these regions develop and become richer, so the insurance needs of the businesses and individuals become more sophisticated, creating a greater need for reinsurance.

According to a recent Swiss Re Sigma study, non-life premiums collected in emerging markets are expected to double from $123bn in 2003 to around $250bn by 2014, at constant prices. Life premiums will increase even faster from $188bn to $450bn over the same period. The sigma study identifies China and India as the most promising insurance markets (see figure 1).

“Non-life premiums collected in emerging markets are expected to double from $123bn in 2003 to around $250bn at 2014, at constant prices

Interestingly, a universal approach has not been adopted. In fact there are very different game plans in play. Last month’s announcement by General Insurance Corporation of India (GIC) that it s opening an office in London and taking a 15% stake in Nairobi-based East African Reinsurance, show it is firmly committed to luring more international business.

In contrast, Singapore-based Asia Capital Reinsurance is firmly focused on doing business in Asia. Indeed chief executive John Tan coined the tag line “In Asia, For Asia” to best espouse his company’s aim.

The route being carved out by takaful reinsurers, including Dubai-based Takaful Re, at first appears a different beast. The basic premise of takaful insurance is not to generate profit for the provider but to mutually protect all those insured, but there is no doubt about the potential of the market.

ICMIF Reinsurance Services, which acts as consultant intermediary to primary insurers looking for Shari’ah-compliant reinsurance said that takaful premiums exceeded $2bn in 2005, and are expected to reach $7.4bn by 2015. Retakaful groups which first appeared in Malaysia are now sprouting up across the Middle East. Asia Capital Re has said that a pan-Asian Malaysian-based retakaful business is part of it long-term business plan.

Such local start-ups are not the only ones to have spied the opportunities offered by takaful reinsurance. Munich Re, Swiss Re, Hannover Re and Lloyd’s of London, to name but a few, are waking up to the opportunity of insuring Muslims in a Shari’ah-compliant way. Of course, this interest means there could be ready buyers down the line should these global players be looking to boost market share.

Local monopolies

“One of the reasons for the over-subscription to these recent IPOs is the monopoly such groups have over access to local markets

This latter point highlights one of the main issues for those looking to tap into this emerging reinsurance sector. Namely access. Asia Capital Re is held in private and government hands for the time being. Although there is the possibility that 3i, which has a $200m stake in the regional reinsurer could possibly IPO its share of the company when it looks to exit its investment, down the line.

Khazanah, the investment arm of the Malaysian government also has a $200m stake in Asia Capital Re. GIC is the national reinsurer of India, and a large chunk (54.5%) of Takaful Re is owned by the Arab Insurance Group. However when insurance groups in the region have come to market they have proved to be very popular.

When three Saudi-based insurers Saudi Arabian Cooperative Insurance (SAICO), Allied Cooperative Insurance Group (ACIG) and Al-Ahlia launched IPOs recently they were all over-subscribed. China Re is also gearing up for an IPO on the Hong Kong and Shanghai stock exchanges imminently. According to reports it expects to raise as much as $2.6bn. In addition, insurers PICC and China Life listed on Hong Kong and New York exchanges in 2003 and China’s second largest life insurer Ping An went public earlier this year raising a record $2bn.

One of the reasons for the over-subscription to these recent IPOs is the monopoly such groups have over access to local markets. This is slowly changing as these markets open up under state supervision – but currently it is still very much a reality. GIC was originally gifted a 20% share of all Indian reinsurance, now reduced to 15%. Saudi Arabia has dictated that all health insurance in the Kingdom must elect to have insurance from one of 18 licensed providers. China Re still lays claim to a near monopoly on the Chinese market. Its market share has actually grown despite the disappearance of compulsory cessions and the arrival of new local competitors. Fund managers and investors may have little choice but to snap up bits and pieces where they can.

Of course, the analysts watching for buying opportunities will still expect to see good quality people manning posts at these emerging ventures. They will also be watching ratings, which will be critical to their ability to attract good quality business. Asia Capital Re’s John Tan has 30 years industry experience and has worked at HSBC Insurance Brokers, Swiss Re and Union Re. While his number two, Heini Buergi, has 26 years notched-up in the reinsurance industry, including time at both Swiss Re and Winterthur Re.

John Yakas, a director of Hiscox Far Eastern Financial Fund, said: “I think there is a lot of appetite for people to buy insurance companies, particularly among foreigners, and the smaller players are likely to be bought out. It slightly depends on the market and the thing to remember is that insurance is a new business in Asia and, as a result, you have not had a long history of creating very large insurance companies the way you have in the West.

“It is growing and it is growing quite fast,” continued Yakas. “You are starting to see a lot more IPOs, primarily form China, which has significantly raised the profile of the region.” Having just returned from a trip to Asia, he points out that Asian reinsurers typically reinsure a higher proportion of their primary books, especially in earthquake-prone regions. He added: “The underlying [premium] growth is much stronger than in Europe and then the more emerging you go, the more dramatic the premium growth really is. That is why so many foreigners are keen to buy these insurance companies.”