Emerging Markets: Opportunities and Obstacles

Emerging Markets:
Opportunities and Obstacles

Forward-thinking life insurers are leveraging the potential of low penetration rates, growing economies and appealing demographics in markets around the world.

By Jennifer Rankin

What new products and distribution channels piqued the interest of adventurous life insurers this year? In a word lots—especially in the emerging markets of China, India, Southeast Asia, Latin America, Central and Eastern Europe and the Middle East. Unit-linked life insurance, pension products, asset management, bancassurance and Islamic financial services are just a few of opportunities they are chasing. And in the face of daunting challenges, they’ve achieved tremendous success.

Let’s start with life insurance.
According to the latest Swiss Re sigma study, world insurance premium income grew 3.3 percent in real terms in 2007, reaching US$ 4.06 trillion. This growth was primarily driven by the life business in both industrialized and emerging markets.

Despite a macroeconomic environment characterized by marginally slower economic growth and rising inflation, life insurance continued to expand in 2007, with world life insurance premiums increasing by 5.4 percent to US$ 2.39 trillion. Sales of retirement and other wealth accumulation products spurred growth in the industrialized economies. Life insurance in the emerging markets was fueled by strong economic performance and catch-up potential.

A key driver of this growth in the life business is the trend toward single premium business and pension and annuities products, which continued to propel sales in countries where an aging population and reductions in state social security benefits are causing a shift from a traditional life insurance model to a pension-driven one. Another important driver is the growing economies of those emerging markets having relatively young populations and an expanding middle class, which is driving sales across all products.

Interestingly, the severe credit crisis and turbulent financial markets in 2007 did not significantly affect life insurance sales, says Swiss Re, although growth in life insurance premiums in 2008 is expected to moderate as capital and stock market turmoil dampen demand. Nonetheless, when the economic environment and capital markets stabilize, life insurance is projected to resume its strong performance both in terms of growth and profitability.

Analysts agree there is more than enough room for financial services players to grow in the near-, mid- and long-term, particularly in the emerging markets. Life insurance in emerging markets grew by 13 percent in 2007 and is expected to continue along the same trajectory. More specifically:

■ China is particularly promising. Life insurance premiums in China grew strongly in 2007 (19 percent), more than double growth in 2006 (8.7 percent), driven by solid growth in household and personal income and increasing efforts by insurers to penetrate different segments of the market. Growth could slow somewhat in 2008 if the stock market continues to underperform.

■ In India the growth of life business slowed from the exceptionally strong pace of 39.1 percent in 2006 to a more sustainable rate of 14.2 percent in 2007. Private sector companies continued to gain market share with new products and distribution channels. A new wave of start-up companies is expected to boost premium growth in 2008 and beyond.

■ In Southeast Asia, strong sales in investment-linked products boosted market growth. Premiums in Vietnam also sharply increased in 2007, its first year of WTO membership. Unfortunately, the deteriorating investment in Southeast Asia could weigh down the life market going forward, because sales of single-premium and investment-linked products have been major contributors to premiums in the past few years. The introduction of new products and channels may offset this challenge.

■ The strong economic performance and improved fundamentals in most Latin American countries boosted the life market in 2007. With premium growth of 11 percent, the region achieved a second consecutive year of double-digit growth rates. The two biggest markets of the region, Brazil and Mexico, were the main contributors to overall growth with their excellent individual life sales records. In 2008, positive growth is again expected, albeit at a slower pace.

■ Life insurance premiums in Central and Eastern Europe grew by 17 percent in 2007. Growth was broad-based across the region. Available data show that—with a few exceptions—the major markets expanded at double digit rates, mainly driven by the strong growth of unit-linked, life protection and supplementary covers. Looking ahead, the ongoing strength of the economic environment, combined with the potential for significant market expansion, should lead to further life insurance growth.

■ Life insurance in the Middle East, Central Asia and Turkey is estimated to have grown by 7.4 percent in 2007, which is slightly below the long-term trend. The pace of development varied within the region. While the countries of the Gulf Cooperation Council (GCC) and Lebanon experienced very healthy double-digit growth rates, this could not offset disappointing performance in Turkey (-5.9 percent). Takaful products—that is, Islamic insurance based on cooperation and mutuality—will benefit growth in the region.

As you can see, the emerging markets continue to offer great promise for life insurance companies, both foreign and domestic. As these companies search for growth overseas and in their own back yards, what opportunities and obstacles will they encounter along the way?

China continues to be a particularly bright spot for life insurers. Insurance has grown at a compound annual growth rate of more than 20 percent in the past 10 years and analysts expect double-digit annual growth to continue. In addition, the country has double-digit GDP growth and a very low insurance penetration rate.

Last month, PricewaterhouseCoopers published Foreign Insurance Companies in China, an outstanding assessment of prospects in the market. Executives from 19 of the two dozen Sino-foreign joint venture life companies participated in the study. Most project annual premium growth in the 30 to 50 percent range. Several companies hope to double in size this year and again in 2011.

Vibrant Mix

A vibrant mix of foreign powerhouses and rapidly maturing and cash-rich domestic companies dominates the sector. Life insurance in China consists of individual life insurance savings (unit-linked) products; individual life insurance protection products; and group life insurance products. Insurers say it is still difficult to sell protection insurance to Chinese consumers.

Between January 1, 2004 and December 31, 2007, the China Insurance Regulatory Commission (CIRC) approved the launch of 28 domestic life insurance companies (see China: Domestic Life Insurers).

Since then, China Cinda AMC has launched Xingfu Life (January 2008), the first insurance company to be launched by a state-owned asset manager. The new insurer is based in Beijing and has registered capital of 1.16 billion yuan.

Shortly thereafter, the CIRC gave Taiwan Life permission to pursue a life insurance joint venture on the mainland. In June, the company announced it will launch a 50-50 JV life insurer with with Xiamen C&D, a diversified trading company. The partners will invest US$ 33 million in the new company.

Domestic players are not only growing in sophistication and capital. They also are beginning to participate in the global equity market by going public and buying stakes in foreign financial services companies.

China Life was the first to list with a US$ 3.5 billion IPO in 2003. Ping An was next with its 2004 US$ 1.8 billion IPO. In February 2007, Ping An’s US$ 5 billion A-share IPO was the largest equity offering ever by an insurer; the year ended with China Pacific’s US$ 4.1 billion IPO in December.

Domestic insurers also are flexing their new-found wealth by buying stakes in foreign financial services companies.

The biggest newsmaker last year was Ping An, which paid US$ 2.7 billion for a 4.18 percent stake in Fortis in November, making Ping An the single largest shareholder in the Belgo-Dutch group. This was the first time a Chinese insurance company took a stake in an overseas insurer.

Ping An and its competitors are only allowed to invest up to five percent of their total assets in overseas portfolio investments at present. But the company received a special dispensation from the CIRC and State Administration of Foreign Exchange to make the Fortis purchase on top of the roughly US$ 3 billion overseas quota it currently has.

This year, Ping An and Fortis extended their relationship when Ping An raised its initial stake in Fortis to 4.99 percent and purchased 50 percent of Fortis Investments, its global asset management arm, for US$ 3.36 billion.

The newsmaker this year was China Life. When Visa went public in March with a US$20 billion IPO, China Life purchased US$ 300 million worth of shares. Ping An, Industrial & Commercial Bank of China (ICBC) and China Construction Bank (CCB) also bought shares, as did China Investment Corporation (CIC), the mainland’s new sovereign wealth fund, which invested US$ 100 million from its US$ 200 billion wallet.

While Chinese insurers reach out to the global market, foreign insurers are extending their reach within the country (see China: Foreign Life Insurers). More than two dozen foreign life insurers have staked a claim in China and Resource discussed them at length last year (see “Room to Grow” October 2007). These companies are establishing joint venture life companies with domestic partners as well as buying ownership stakes in domestic companies. They also are establishing new branch offices throughout the country, which requires a new operating license from the CIRC for each new city.

In 2008, two additional foreign players entered the fray by applying to the CIRC for permission to launch life insurance companies.

Japan’s Dai-ichi Mutual Life and Baosteel Group, China’s largest steel manufacturer, want to form a joint venture to sell life insurance to Chinese companies and Japanese firms operating in the country.

In addition, HSBC, Europe’s biggest bank, is seeking approval from the CIRC to launch a Beijing-based life insurance joint venture in which it hopes to take a 50 percent stake; no word yet on who the domestic partner will be. HSBC also is hoping for a nationwide license, which would allow it to sell life insurance through the branch networks of HSBC and its local partner Bank of Communications (BoCom), in which HSBC holds a 19 percent stake. In August, HSBC did get regulatory permission to set up a 20-80 pension joint venture with BoCom).

The established Sino-foreign joint venture life companies continue to seek—and get—CIRC approval to open branches offices throughout China. Among the developments since October 2007:

■ Allianz China Life. A JV between Allianz (Germany) and CITIC Trust and Investment, Allianz China Life now has three major distribution channels, with the addition of group sales to its existing bancassurance and tied-agent channels. According to the company, China’s corporate insurance market has experienced an annual average growth rate of 30 percent since 2005 and it is Allianz China Life’s next target market.

■ Aviva-Cofco. A 50-50 JV between Aviva (U.K.) and China National Cereals, Oils & Foodstuffs Import & Expert Corp., a state-owned company, received permission to open a branch in Nanjing in Jiangsu province. Launched in Guangzhou in 2003, Aviva-Cofco now operates in 25 major Chinese cities and eight provinces and municipalities, including Beijing. In September, Aviva-Cofco announced it will begin to focus on selling pensions in China to capitalize on the expectation that investment products perform poorly in a bear market. The premise? People will still save for retirement even when the market’s down. And, according to World Bank estimates, private pension plans in China may swell to US$ 1.8 trillion by 2030. To that end, Aviva hopes to have a new pension company, also a JV with Cofco, up and running by the end of 2009. The insurer is waiting for government approval for its application, submitted last year.

■ Haier New York Life. A JV between New York Life (U.S.) and Haier Group (China), Haier New York Life opened a branch in Wuhan, the capital of Hubei province. Launched in Shanghai in late 2002, the company now operates in 14 cities: Shanghai, Chengdu, Qingdao, Nanjing, Deyang, Yantai, Suzhou, Wuxi, Changzhou, Jimo, Zhongjiang, Guanghan, Yangzhou and Wuhan.

■ Heng An Standard Life. A 50-50 JV between Standard Life (U.K.) and TEDA Investment Holding Co. (China), received permission to open a branch in Sichuan province. Launched in Tianjin in 2003, Heng An Standard Life now operates in Beijing and the provinces of Shandong, Jiangsu, Liaoing and Sichuan.

■ Sino-U.S. MetLife and United MetLife. In August, MetLife, the largest life insurer in the U.S., applied to regulators for permission to integrate its ventures in China. Beijing-based Sino-U.S. MetLife is a 50-50 JV with Beijing Capital International Airports Corp. Shanghai-based United MetLife, originally a proposed JV between Citigroup and Shanghai Alliance Investments Limited, was set up in 2005 when MetLife acquired Citigroup’s insurance division for US$ 11.5 billion.

■ Skandia-BSAM Life. A 50-50 JV between Skandia (Sweden) and state-owned Beijing Asset Management Corp., Skandia-BSAM Life received permission to open a branch in Guangdong province.
It now operates in Beijing, Shanghai and Guangdong province.

As you can see, domestic company maturation and foreign company expansion are major market forces in China’s life sector. Another very important force is the country’s rapidly developing and increasingly liberalized fund management sector, which Resource described in depth last year (again, see “Room to Grow” October 2007).

Foreign Assets

China is not the only emerging market to pique the interest of global financial services companies that see asset management as a huge opportunity for growth.

Take Aviva, for instance. In a preemptive strike, the top U.K. insurer and global savings, investments and insurance powerhouse just combined its far-flung asset management businesses into a single, globally integrated asset manager dubbed Aviva Investors. The new business has an initial US$ 623 billion in assets under management and significant potential for future growth. It also has more than 1,300 employees in 15 countries across Europe, North America and Asia.

Prudential Financial, the second-largest U.S. life insurer, just purchased a 40 percent stake in Brazil’s GAP Asset Management, seeking a piece of the country’s booming fund management and pension business. A Rio de Janeiro-based firm, GAP has US$ 2.88 billion in assets under management and an annual growth rate of 25 percent. Prudential has been in Brazil since 1998, offering life insurance. The company expanded into the real estate business in 2000 with its Prudential Real Estate Investors unit, which has invested in industrial and commercial properties.

And earlier this year, Prudential Financial set up a 61-39 asset management JV with DLF, India’s most valuable real estate company. DLF Pramerica Asset Managers Pvt. Ltd., which is expected to start operating by year-end, will offer local and global mutual funds to Indian customers. Some US$ 140 billion of assets are under management in India, a figure that is expected to grow significantly.

Dutch financial services powerhouse AEGON sees potential in Central and Eastern Europe. In June, AEGON Hungary purchased 100 percent of UNIQA Asset Management Company and Heller-Saldo 2000 Pension Fund Management Company, both Hungarian entities, from UNIQA Insurance Company. The deal raises the company’s assets under management in the country to US$ 2 billion and positions AEGON Hungary as the country’s No. 2 mandatory pension fund player and No. 3 voluntary pension fund player.

In July, AEGON received approval from regulatory authorities in Poland to merge its pension fund management company PTE AEGON with BRE Bank’s PTE Skarbiec-Emerytura. As part of the merger agreement, AEGON will acquire BRE Bank’s shareholding in the newly combined pension fund. The process should be complete by year end.

These transactions are in line with AEGON’s growth strategy to strengthen its position in the developing pension and asset management markets in Central and Eastern Europe. The company also is active in the Czech Republic, Slovakia and Romania, where it signed an agreement last year with the country’s fourth-largest commercial bank to form a joint pension fund management company.

Other companies are targeting South Korea. Goldman Sachs, Credit Suisse and ING are already there. In August, AXA, Europe’s second-largest insurer, joined them in the asset management space. AXA bought a 50 percent stake in Kyobo Investment Trust Management, a South Korean asset management company owned by Kyobo Life, the country’s No. 2 life insurer. And the South Korean Financial Services Commission just gave AIG and Alliance Bernstein—and four local money managers—permission to start asset management companies. According to Reuters, the country’s asset management sector has been growing at a double digit rate, helped by retail money inflows to stock funds and by looser regulations. The country’s new mandatory corporate pension scheme also has been behind global asset managers’ rush into the market.

Now back to China.

The country’s rapidly developing and increasingly liberalized fund management sector presents a huge opportunity for international financial services groups.

On June 30, 2007, 58 FMCs were registered with the China Securities Regulatory Commission (CSRC), 26 of which were Sino-foreign firms. The early foreign entrants have made significant inroads; in fact, Sino-foreign FMCs now manage more than one-third of the total assets under management. Among these early birds are the world’s leading fund companies, banks and insurers.

Since then, five new Sino-foreign FMCs have been launched. Royal Bank of Canada has launched a fund management company with Minsheng Bank and Three Gorges Financial; Credit Agricole has launched one with Agricultural Bank of China and Aluminum Corporation of China (ABC-CA FMC); AXA Financial has launched one with Shanghai Pudong Development Bank and Shanghai Dragon Investment Company (AXA SPDB Investment Managers); AEGON has launched one with Industrial Securities (AEGON Industrial FMC); Franklin Templeton Investments has launched one with China Life (China Life Franklin AMC).

At press time, regulators had given Singapore’s United Overseas Bank (UOB) permission to establish an FMC with Ping An and Manulife-Sinochem was in negotiations with an unnamed partner to launch an FMC.

Despite the many opportunities China offers foreign life insurance companies, there are challenges.

Domestic companies are maturing quickly and wielding their new expertise to improve everything from product development and sales to back office administration. Two of the most admired are Ping An and Taikang Life, which are seen as real innovators.

Foreign companies also are hampered by restrictions governing joint venture structures, branch locations and product offerings. For starters, the compulsory JV structure limits foreign ownership to 49 percent. In addition, Sino-foreign life insurers, unlike their domestic counterparts, can only apply for one branch at a time and approval can take six months or longer. And a local partner is often unwilling to inject fresh capital, further hindering expansion plans.

Recruiting and training competent back office and frontline sales staff are huge challenges. The
PricewaterhouseCoopers survey participants ranked them as their No. 1 and No. 2 most pressing issues. On top of that, wage inflation is running at close to 20 percent and turnover is as high as 24 percent.

The 50 percent stock market decline since October 2007 has dealt Sino-foreign life insurers a double whammy. On the investment side, they can not invest outside of China, which makes it much more difficult to limit the downside. On the product side, unit-linked life products are taking a beating.

The most pressing challenge, however, is the increasing power of Chinese banks—a challenge that affects both domestic and foreign life companies—which have just been given permission to acquire stakes in insurers and are rolling out their own bancassurance products.

In January, the China Banking Regulatory Commission (CBRC) signed a memorandum of understanding with the CIRC to allow banks to invest in insurance firms and to allow insurers to buy into banks. The latter merely formalized the existing state of affairs, as China Life and Ping An already had purchased stakes in Guangdong Development Bank and Shenzhen Commercial Bank, respectively.

In August, the State Council gave four domestic banks —Industrial and Commercial Bank of China, China Construction Bank, Bank of Communications and Bank of Beijing—permission to invest in the insurance sector, six months after regulators approved a trial program allowing banks to do so.

Industrial and Commercial Bank plans to form a joint venture with China Insurance Group and the Dutch-Belgian financial services group Fortis, according to Xinhua. The venture is expected to acquire Taiping Life, Taiping Insurance, Taiping Pension and Taiping Asset Management Co.

China Construction Bank was approved to take a 51 percent stake in Beijing-based Happy Life Insurance Co. The insurer is now 52.2 percent owned by China Cinda Asset Management Corp., one of four state-owned firms set up to clear bad loans off the books of Chinese banks.

Bank of Communications is expected to take the 51 percent stake in China Life CMG Insurance Co. now held by China Life Insurance Co., The other 49 percent is owned by Commonwealth Bank of Australia.

Bank of Beijing was approved to acquire a 50 percent stake in Pacific Antai Insurance Co., now held by China Pacific Insurance Co.

Why is this important? Bancassurance has been growing as a major distribution channel for many insurers. Nineteen percent of insurance sold in the first nine months of 2007, for example, was through banks, according to the CBRC. Those products came from life insurance companies, which are now worried about the future of their current bancassurance agreements. When the banks directly enter the life business through their own subsidiaries, what will happen to them?

India Beckons

Another country to which financial services players are flocking is India. The allure? Life insurance, asset management and banking opportunities.

In fiscal year 2007, the total (individual and group) premium income of life insurance companies in India (the Life Insurance Corporation of India plus 17 private players) grew 47.38 percent, according to Mumbai-based Business Standard. The total (individual and group) premium income of the private life insurance companies grew 87 percent.

India’s ratio of life insurance premiums to its gross domestic product (GDP) is about four percent, much less than the six to nine percent in the developed world. McKinsey, among others, expects that ratio to exceed six percent by 2012. That means the country’s total premiums could rise from the present US$ 40 billion to as much as US$ 100 billion.

The driver of this anticipated growth is a mix of attractive demographics and the recent opening of the market to foreign entrants.

As elsewhere in Asia, economic growth and rising levels of personal wealth are leading to a surge in demand in India for life insurance, pensions and other long-term savings and investment products. Analysts expect household income in India to continue to rise about five percent a year for the foreseeable future, a higher rate of increase than in almost any other market, with the exception of China. In addition, only 20 percent of India’s total insurable population has life insurance coverage.

Deregulation is another big business driver in India. Since it was opened up to competition in 1999, India’s insurance sector has been growing 25 percent a year. Today, some two dozen privately-held Indo-foreign life insurance joint ventures operate in the market (see India: Joint Ventures). They—and their domestic counterparts—sell a mix of term life, whole life, endowment, unit-linked and pension products to both individual and group customers.

The most recent entrants are:

■ IDBI Fortis Life. A 26-48-26 joint venture anong Fortis, Industrial Development Bank of India (IDBI), India’s premier development and commercial bank, and Federal Bank, one of the country’s leading private sector banks, IDBI Fortis opened for business in March. To date, IDBI Fortis has recruited and trained about 400 employees, who will serve 490 IDBI bank branches and 550 Federal Bank branches. Together, the banks have about five million customers, including some 800,000 non-resident Indian (NRI) account holders. The company will primarily focus its bancassurance activities on cross-selling across top-tier client segments. IDBI Fortis also is setting up a tied agency force, having rolled out some 30 agency branches across the country. By March 2009, the company intends to have established 100 agency branches. This agency network will be able to serve more than 15,000 agents. Its first products are unit-linked life insurance and mortgage insurance.

■ Canara HSBC OBC Life. A joint venture among HSBC Insurance and Canara Bank and Oriental Bank of Commerce, two of India’s largest nationalized banks, Canara HSBC OBC Life opened for business in June. In its first full month of business, the company wrote more than Rs 12 crore of annualized premiums, the most successful launch of any private player to date. The company operates a pure bancassurance distribution model, selling to the customers of Canara Bank, Oriental Bank of Commerce and HSBC Bank in India through their bank branches. It is progressively increasing its coverage of bank branches from 410 currently to over 900 in the coming weeks and extending its product range from two to eight products.

■ AEGON Religare Life. A 26-44-30 joint venture among AEGON, Religare, one of India’s leading financial services companies, and Bennett & Coleman, a private investor, AEGON Religare Life opened for business in August. AEGON Religare Life will begin with 38 branches in 32 cities across India, rising to 51 branches over the next 12 months. In addition, the joint venture will take on some 6,000 agents and use Religare’s own 600 outlets to help sell its range of life insurance products across the country.

■ DLF Pramerica Life. A 26-74 joint venture between Prudential Financial and DLF, India’s biggest property developer, DLF Pramerica Life opened for business last month.

■ Star Union Dai-ichi Life. At press time, the proposed 26-51-23 joint venture among Japan’s Dai-ichi Life, Bank of India and Union Bank of India, Star Union Dai-ichi Life is awaiting an IRDA license.

Established Indo-foreign players continued to penetrate the life sector this year.

Max New York Life opened a branch in Shimla. The company has now established a countrywide network of 190 offices and representatives across 129 cities in India. The company offers both individual and group life insurance and its 29,000+ agent advisors have sold more than 1.86 million policies.

Standard Like increased its stake in HDFC Standard Life, its Indian life insurance JV with the Housing Development Finance Corporation (HDFC), to 26 percent. HDFC Standard Life has grown strongly since it started business seven years ago and now has more than 12,000 employees, 100,000 agents and 270 branches throughout India.

Aviva Life opened two new branches in the city of Pune in the state of Maharastra, where it will open another two branches by year end. The move is part of the insurer’s strategy to significantly increase its presence in the western India market, where it also plans to launch new branches in the cities of Indore, Gwalior and Barwani in the state of Madhya Pradesh; the city Jhansi in the state of Uttar Pradesh; and the cities of Bardoli, Rajkot, Jamnagar and Surat in the state of Gujarat. Presently ranked eighth in India’s life insurance market, Aviva Life plans to double the number of employees over the next two years. According to Business Standard, Aviva Life has a presence in 3,000 locations across India, 39 bank partners, more than 37,000 employees, and a 3.5 percent share of the country’s life insurance market. All of its insurance products are unit-linked.

The agency system is the dominant sales channel in India, but the new Indo-foreign JV insurers have introduced multi-channel distribution to the market. Bancassurance, in particular, has made phenomenal inroads, with several Indo-foreign companies deriving more than half of their premium income from the channel. That success, in large part, has driven the increase in the proportion of the insurance market held by privately-owned companies.

Like all markets, this one has challenges. The biggest is ownership restrictions. IRDA prohibits 100 percent foreign equity in insurance. It requires an Indian company to invest either wholly in an insurance venture or team up with a foreign insurer, with a 26 percent cap on a foreign partner’s equity. The Indian company may offer equity to the Indian public, via a public offering of shares, only after 10 years, at which time the equity structure may consist of equal participation between the Indian and foreign partner, each of which may take a 26 percent stake.

To date, Prime Minister Singh has not been able to convince the four communist parties in his United Progressive Alliance party, now in its fifth year, to support his bill to raise the cap to 49 percent.

India’s asset management sector also is heating up, though it trails asset management developments in China.

India’s mutual fund industry was launched with the formation of the Unit Trust of India (UTI) in 1963. For the next 30 years, only State-owned companies were allowed.

Private players entered the arena in 1993. Since then, the fund sector has experienced very rapid growth and a significant increase in the market share of private fund managers, especially after the government gave mutual funds a tax break in 1999. Today, there are close to three dozen players in the mutual fund sector.

Among the leading players, which include a number of privately-held Indo-foreign JVs, are Reliance Capital Asset Management, Prudential ICICI Asset Management, UTI Asset Management, HDFC Asset Management, and Franklin Templeton Asset Management (India). Among the foreign life insurers that have entered the asset management arena are AIG, Sun Life, Prudential (U.K.), ING, and Principal Financial.

With assets under management in India only accounting for around 12 percent of bank deposits, the potential for growth is evident.

Takaful Entrants

A third market that’s attracting lots of attention from life insurers is Islamic financial services.

Islamic financial products are Sharia-compliant—that is, they avoid violating key principles of Sharia law, which is derived from several sources, among them the Qur’an (Muslim holy book), the Hadith (sayings and conduct of the prophet Mohammed), and fatwas (the rulings of Islamic scholars). Sharia governs all aspects of a Muslim’s life.

Islamic insurance products are called Takaful (joint guarantee) and they respect that Sharia prohibits traditional insurance, which Sharia regards as a bet. With Takaful, a community of insured parties pays into a fund, which then aids each member in case of a loss. The insurance company only receives a set fee for managing the risk pool and a share of the money invested according to the rules of the Qur’an. The framework resembles the mutual form of corporate ownership in non-Islamic countries, minus the religious component.

There are two main lines of Islamic insurance—general (non-life) and family (life). The Takaful industry has been successful in distributing products through agents, direct channels, e-commerce and, to a limited extend, banks (bancatakaful).

The Gulf Cooperative Countries (GCC) are the heart of the global Takaful market, with over 50 percent of the value of global contributions of US$ 2 billion in 2006, according to Ernst & Young’s World Takaful Report 2008, which was published in June. Of the 133 Takaful operators worldwide, 59 are within the GCC countries of Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates.

Ernst & Young forecasts a global Takaful market of US$ 15 billion by 2018. The drivers of Takaful demand include high economic growth and increase in per capital GDP, a youthful demography, increasing consumer awareness, a greater desire for Sharia-compliant offerings and increasing Sharia-compliant financing.

Nonetheless, critical factors must be addressed to maintain this expansion. Among the key challenges are a fragmented and undercapitalized landscape, limited reTakaful capacity, problematic asset management and lack of local solution offerings and local distribution channels.

It is clear that there are significant growth opportunities for the Takaful industry, especially when the estimated global insurance premiums are as high as US$ 3.7 trillion. Most Organisation of Islamic Conference (OIC) countries have underdeveloped insurance sectors. Premiums in the Middle East are at one percent of nominal GDP compared to eight percent in North America. In addition, high levels of market liquidity and rising income levels in the region should contribute to a future rise in the global Takaful industry.

Principal Financial is one company that intends to be a part of that future.

Last month, the company launched CIMB-Principal Islamic Asset Management Sdn Bhd—a global Islamic asset management company that will operate from the Malaysia International Islamic Financial Center—with CIMB Group. CIMB-Principal Islamic will manage and distribute Islamic institutional mandates and unit trust funds in Asia, Europe, the Americas and the Middle East. “The Sharia-compliant market shows tremendous growth possibilities,” says Larry Zimpleman, president and CEO, Principal Financial. “With the emergence of a rising middle class in developing markets and subsequent need for retirement planning, we believe our partnership with CIMB Group will enable us to address key markets for both conventional and Shariah-compliant products and services, particularly in Southeast Asia and the Middle East.”

Principal Financial is just the latest insurer to signal its interest in Islamic financial services.

Germany’s Allianz was one of the earliest entrants. The multinational started selling Sharia insurance in Indonesia in June 2006. Within nine months, Allianz Life Indonesia had sold more than 2,200 life insurance policies, collecting close to US$ 2 million in premiums, tripling expectations. The company now has more than 2,100 Sharia-certified agents. Allianz Life Indonesia is developing a Sharia individual health plan as well as a Sharia unit-linked product to distribute through its Indonesian bank partners. Allianz Utama is developing a Sharia personal accident insurance product, among others.

Allianz also has launched Allianz Takaful (Bahrain), a wholly-owned subsidiary that will serve as the company’s global hub for Islamic insurance operations and will sell Takaful life insurance, investment-linked insurance, health and medical insurance. And in Egypt, Allianz offers products with Sharia-compliant funds and is considering the introduction of fully-fledged Takaful insurance.

Another early entrant is Aviva, the No. 1 U.K. life insurer and the world’s fifth-largest insurance group. Last year, the company announced it will use Malaysia as the center of its Takaful business worldwide and as a springboard from which to enter new Takaful markets. The company also bought a 49 percent stake in CIMB Group subsidiaries Commerce Takaful Bhd and Commerce Life Assurance Bhd. It resulted in Aviva holding its first Takaful unit—CIMB Aviva Takaful Bhd—along with a life unit, CIMB Aviva Assurance Bhd.

In addition, AIG’s Enaya unit launched Takaful coverage for Gulf Arab customers and AXA signaled its intent to enter the Middle East’s Islamic finance sector in 2008 with Takaful life products, though no specifics have been released to date. And Prudential (U.K.) signed a deal with Bank Aljazira, a Saudi bank, to set up an Islamic life insurance venture. Prudential already offers Sharia-compliant mutual funds in the UAE.

Emerging markets, then, present both opportunities and challenges. Despite regulatory restrictions, intensifying competition, wage inflation and high staff turnover, these markets have a low penetration rate, growing economies and appealing demographics—that is, enormous potential. As always, Resource will keep you informed of who is leveraging that potential.

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