Growing Asian middle class to drive life insurance sales

By Alain Thériault | August 19 2011 03:36PM

Economically, China is expected to outrank the United States in 2020. India and several other Asian countries will also move up the ranks. Insurers intend to profit from the burgeoning middle class that will result from this growth.
Asia will take up its natural role in the economy, commented Donald Guloien, Manulife Financial’s CEO during his presentation to the the 47th annual seminar of the International Insurance Society (IIS) held in Toronto from June 19 to 22. The Insurance and Investment Journal was there, as were 500 executives and specialists representing insurance companies from over 45 countries.

Mr. Guloien believes that Asia will count for 50% of the world’s gross domestic product (GDP) within a decade. The GDP measures the size of an economy.

From the fall of the Roman empire to the industrial revolution, Mr. Guloien pointed out that China and India accounted for more than half of the global economy. Afterwards, their power declined (See table p.31).

In a presentation at the same event, Norman Sorensen from the IIS considered data from the International Monetary Fund (IMF) that shows the Chinese economy will take the lead over the United States by 2020. According to the IMF’s information, the Chinese economy will grow to $24.6 trillion dollars in nine years, while that of the United States will reach $23.3 trillion (See table below).

Mr. Sorensen says that the gap will increase further by 2030. The Chinese economy will reach $73.5 trillion while the United States will only be $38.2 trillion. The results from 2010, when the American economy reached $14.6 trillion and China’s was $5.9 trillion, will be just a faint memory.

Canadian insurers believe that they are well positioned to profit from these changes. Manulife, for example, drew a third of its operating profits from Asia, a total of $719 million. The two other thirds came from Canada and the United States.

New growth area

Like the other participants in the global leadership discussion panel, Donald Guloien believes that the expanding middle class in Asia will result in increased life insurance sales. A new growth area is taking shape for insurers who have been accustomed to a mature western market that is focused on wealth management.

Asian countries like Indonesia, Singapore, Malaysia, Vietnam, and Thailand will also see significant economic and demographic growth, says Mr. Guloien, noting that India, Vietnam and Indonesia alone have 1.5 billion inhabitants. “With a large population and low insurance penetration in emerging territories, Asia will be a growth engine for the 21st century,” he adds. Mr. Guloien believes that these countries have strong economies and rapidly expanding middle classes. The Asian life insurance business will grow at a rate of about 10% a year.

When the head of Manulife thinks about Asia, he is thinking of China in particular. Mr. Guloien also shared some thoughts about India’s potential. “India is experiencing quick growth, but insurance and mutual fund regulation has been extremely volatile,” he says. He believes that India will be more appealing once stability has returned.

Another panelist, Madhuswamy Ramadoss, is the CEO of the New India Assurance Company, a property and casualty insurer founded in 1919. If India is trailing China, he says it is because it began its economic and regulatory reforms after its main neighbor (in 1991 rather than in 1978).

The head of New India points out that his country will lead the “BRIC” in terms of GDP growth, the BRIC being an acronym representing the emerging nations of Brazil, Russia, India and China. He believes that India currently ranks 8th in the world in terms of GDP. In 2015, it will be fourth, he suggests. The country’s GDP has grown by 7% to 9% annually for the last five years.

Mr. Ramadoss thinks that his nation’s economy is well positioned to profit from growth in both life and general insurance. In fact, he says that India’s economy is more heavily based on services than China’s.

Canadian insurers upset by new accounting standards

The CEOs of two of Canada’s largest insurers did not mince words about the new International Financial Reporting Standards (IFRS) that could soon apply to insurance contracts. “I think some of these things could kill our industry, frankly,” said Manulife Financial CEO Donald Guloien. “It is disconnected from the business fundamentals,” added Great-West Lifeco’s CEO Allen Loney.

In their current form, the new rules will break the link that exists between the passive and the active method in the Canadian method of reserve valuation. As a result, insurers will have to evaluate their future liabilities based on current market values. The advocates of the second phase of the IFRS claim that insurance companies’ financial results lack transparency, making it difficult for an analyst or investor to compare them.

Allen Loney rejects this argument, addressing it in a leadership panel that took place at the International Insurance Society (IIS) conference. In his opinion, the Canadian General Accepted Accounting Principals did a good job in terms of being transparent, he said adding that “the black box was open.” Now, he suggests that the new IFRS rules threaten to turn this black box into a black hole.

According to Mr. Loney, the second phase of IFRS will create meaningless and significant volatility in results each quarter. However, Mr. Loney is not opposed to all of the new rules. For example, the way that IFRS calculates acquisition costs for an insurance contract seems appropriate to him.
Evaluating the situation
However, the industry may still have to wait awhile before its fate is determined. The International Accounting Standards Board (IASB) and its American counterpart, the Financial Accounting Standards Board (FASB) were evaluating the situation in discussions that took place between the 13th and 15th of June.

In a risk model that includes the notion of residual margin, should the latter be locked-in at the moment when the insurance contract is issued? Or should it be adjusted according to new estimates that measure favourable and unfavourable changes in potential future cash flows? The majority is in favour of the new estimates, by a margin of 8 to 7. The IASB has not yet made a decision as to whether or not changes in the discount rate should be part of these adjustments.

Rulemakers are almost unanimous in their decision about how acquisition costs should be treated. Acquisition costs for a portfolio of insurance business should be limited to direct costs. They will therefore exclude indirect costs such as software, administration, recruitment and sales force training, marketing, the maintenance of equipment, and the impairment of assets.

Mr. Ramadoss also believes that the property and casualty industry will grow alongside the middle class. “P&C premiums will grow five or six times by 2020. It will be large volume but low ticket size. We expect the number of claims to rise,” he comments.

Insurance has come a long way in India, according to figures from the Indian Regulatory and Development Authority. In general insurance, the number of players has increased from just four in 2000 to 22 in 2010. As for premium revenue in this sector, it has gone from $2 billion to $8 billion during the same period. The increase is even more marked in life insurance, where during this period the number of companies increased from one to 23 and premiums increased from $6.2 billion to $57.8 billion. Madhuswamy Ramadoss estimates that the property and casualty business will see growth ranging between 17% and 19% over the next ten years. He believes, however, that insurers should improve their profitability.

Insurers may have come through the crisis weakened and glimmers of uncertainty remain, but Norman Sorensen believes that they have emerged from the crisis stronger. “After the crisis, insurance is now a larger part of the global financial sector. Insurance has 14% of this; it was 12% only two years ago,” comments Mr. Sorensen.

Insurers hold $16 trillion of the $114 trillion world capital markets. The banks hold $80 trillion. The global investment market totals $178 trillion, of which $61 trillion is banking deposits. As for the private debt market, it accounts for $51 trillion, while the equity market accounts for $34 trillion.

“Insurance is a major player in the global private debt and equity sectors. We are the true long-term lenders,” comments Mr. Sorenson. The private debt market is growing annually by 4% to 6%, while the private equity market is growing at a rate of 6% to 8% (See figure above).