As much as the Asian crisis has affected insurers around the region, liberalization will ultimately have a greater impact. Insurers in emerging Asia have come through the crisis in a weak state after making significant write-downs of their asset portfolios and experiencing a decline in their market size. Nevertheless, the effects of liberalization will reach even further, by permanently dampening profitability, heightening competition from foreign players and facilitating mergers and consolidation.

Among non-life insurers in Asia, Standard & Poor's expects there to be a number of downgrades over the coming year. Non-life insurers are under extremely strong underwriting pressure, while their markets, which were already overcrowded, have contracted because of the crisis. Deregulation will only raise the stresses by introducing a higher level of competition.

The life insurance sector has also experienced a slowdown in performance. However, the fundamentals for this sector remain strong - namely low levels of insurance and a growing middle class in Asia - and the sector's performance has improved sharply in 1999 and 2000. Population dynamics are particularly favorable for pension and superannuation products. In the wake of the crisis, life insurers have restructured asset portfolios to lower the level of risk assets relative to capital, which should also reduce volatility in investment returns. Still, life insurers, like their non-life counterparts, face the challenge of new entrants looking to introduce new distribution channels and products.

By contrast, the outlook for reinsurers is clouded. Asian insurers have traditionally relied heavily on reinsurance, as was demonstrated by the limited impact on direct insurers of the Taiwan earthquake in September 1999. In the near term, the business outlook for reinsurance is favorable, as insurers weakened by the crisis will need to reduce their levels of risk. However, liberalization will eliminate mandatory cessions to national reinsurers in many markets, testing the strength of their businesses. Competition will also increase in this sector, and global reinsurers are already actively expanding their presence. In addition, as Asian insurers gain more technical expertise and balance sheet strength, they are likely to take on more risk themselves, reducing their previously very high use of reinsurance. The current environment is beneficial for reinsurers, but there are a number of forces pointing to a decreased reliance longer term.

One market expected to benefit significantly from liberalisation is the health insurance sector. Health is currently an underinsured market in Asia and there is a great need for this product. As health insurance is positioned further down the insurance product line, it is in a good position to benefit from Asia's ageing demographics. This sector is expected to provide growth for the insurance industry in coming years, but it is also likely to attract foreign entry.

Asian insurers are going into the era of liberalisation armed with a number of lessons from the crisis. We have seen a shift to reduce the risk profiles of investment assets and improve asset-liability management. In addition, some insurers are displaying a heightened emphasis on capital. While many companies are obviously looking for ways to raise capital, there are others that are overcapitalized and responding to pressure to boost capital efficiency.

The crisis was also a wake-up call for many policyholders in Asia. Losses and failures among Asian insurers essentially shattered the trust policyholders had with their insurers. What policyholders discovered during the crisis was that financial strength was not only a key factor from the viewpoint of security, but also for all other aspects of an insurer's performance, including levels of returns, benefits and service.

Ian Thompson is Managing Director, Asia Pacific Financial Services Ratings, Standard & Poor's, Melbourne, Australia.