Eastern promise

Asia continues to outstrip the rest of the world in terms of economic growth. While China is seen as the engine room powering the charge, the region's vast population and low operating costs have led global economists to predict that Asia is set to become the dominant force in the 21st century.

Not one to miss out on golden opportunities, the insurance industry has been steadily expanding its footprint in the region. Lloyd's has already doubled its premium income from the region in the past five years to more than $2bn.

But there is plenty more to be made in a region which, quite clearly, is still in its infancy when it comes to business development potential.

And Lloyd's can capitalise on the region's economic growth and its fast-developing insurance market.

Lloyd's opened an office in China last November and is planning to set up an operation in India by the end of the year.

Lloyd's already has a significant underwriting and reinsurance presence in the region through Lloyd's Asia, based in Singapore, and in Japan, through coverholder firms.

Tony Egerton, president of Lloyd's Asia Pacific operation, says the organisation is investing in the long-term development of its operations in that part of the world due to increasing demand for insurance.

The region is prone to natural disaster, has shown frenetic industrial development and is receiving massive amounts of foreign capital. It is no surprise then, that the need for insurance has not only increased, but also become more sophisticated.

According to a recent report published by Lloyd's, New Openings: quantifying opportunities in Asia, which focused on nine territories (Singapore, Hong Kong, South Korea, Taiwan, Malaysia, Indonesia, Thailand, the Philippines and Vietnam), the region presents healthy growth opportunities for specialist classes of business such as marine cargo, product liability, directors' and officers' (D &0) and professional indemnity (PI).

By 2007, the marine cargo premium is expected to break the $1bn barrier.

In the same period, the product liability market will grow by 27%, with premium of over $250m. Premium from D&O and PI is expected to reach almost $400m.

Apart from the usual well-matured and developed markets such as Japan, Singapore and Hong Kong, there are other promising emerging markets such as Pakistan, Vietnam, China and India, which have been attracting insurers' attention.

China is one of the world's fastest growing economies and its economic output is predicted to be the world's largest by the 2030s. Earlier this year, it became the world's fourth largest economy and its GDP is set to exceed the German GDP by the end of this year.

International focus

The Chinese insurance industry is becoming a major focus of international activity for the world's largest insurers, which have come to claim their share of a growing market.

In the past decade non-life premiums have grown by the tune of 300% with overall premiums growing by 17%.

The market opened to foreign investors on a rolling basis in 2002. For the first three years, foreign companies were not allowed to own more than 50% of any joint venture with a Chinese-owned entity.

After three years (2005), foreign companies were able to own up to 51%, and from 2007 the state is not allowed to interfere in ownership proceedings, allowing a foreign company to own 100% of a China-based company.

India is another focal country for the industry. With an annual growth rate of 15% to 20% and the largest number of life insurance policies in force, the potential of the Indian insurance industry is huge.

Total value of the Indian insurance market (2004-2005) is estimated at 450bn rupees ($10bn). According to government sources, the insurance and banking services' contribution to the country's GDP is 7%, of which the gross premium collection forms a significant part.

In 1999, the government monopoly over the insurance industry ended and the market was opened to foreign investments. Since then, 21 private companies have been granted licences. There are 12 general insurance companies, four public sector companies and eight private insurers.

With so much untapped potential, Lloyd's strategy is to reach these markets, help develop their potential and create insurance solutions to fulfil their needs.

"Airline companies, for example, all have access to international markets, but there are clearly a number of niche requirements within this area which we need to be able to develop and underwrite. And having a local underwriting platform will allow our members to do that in a cost-effective manner," Egerton says.

Offshore reinsurer

Lloyd's has been in China for many years as an offshore reinsurer writing business in aviation, property, liability, casualty, marine, energy and nuclear risks.

"But we wanted to develop our position onshore," explains Egerton. "With economic development, there will be increasing demand for catastrophic protection, property, aviation, and marine cargo insurance."

Economic and industrial development in China is playing a key role in how the insurance industry grows to accommodate changing and more demanding needs. Large infrastructure projects and industrial development have created more sophisticated insurance needs.

And, as an international manufacturing centre, Chinese businesses also have a growing need for product liability and business interruption products.

Bernie Fung, chairman and chief executive of Aon Asia Pacific, says: "China is developing rapidly with a growing range of sophisticated products purchased by corporates and individuals."

He points out that foreign investors are pouring more than $50bn into the country a year and that such capital needs to be protected.

Governance standards

Chinese companies which decide to raise capital overseas - and are listed in Hong Kong, New York or Singapore - also need to comply with international standards of governance and therefore tend to recognise liability issues which may be different from those they face at home.

"Major domestic Chinese corporations have started to compete at a world scale and many are operating in the US," says Fung.

"As they expand overseas they recognise the importance of risk management and insurance to maintain their businesses' cost-effectiveness and competitiveness."

China's potential has undoubtedly captured insurers' imagination, but they also recognise that there are hurdles to overcome.

Egerton says the market needs to address some issues such as consolidation and reinsurance. "We don't see any challenges in China necessarily, but there are some wider issues that need to be addressed in the whole region," he explains.

"First, consolidation. There are too many small insurers in some markets chasing too little business, so many of them are not as capitalised as they might be. Some buy too little reinsurance and, if they were to experience a catastrophe, it would damage the wider insurance reputation."

Local insurers are also grappling with the concept that if things go wrong in the world of reinsurance, no matter how far away from China, they will somehow end up footing the bill.

"Our view is that this is a global marketplace and, while at the moment they are asked to help pay some of the losses sustained elsewhere, it is clear that in good years they will also be part of a healthy global marketplace."

Insurers and brokers willing to tap into the Chinese market will also face challenges such as a different legal system, recruitment issues and the market's natural resistance to accept the role of brokers.

Simon Lee, chief executive, international businesses, Royal & SunAlliance (R&SA) - which is focusing on China and India as its two primary markets for medium to long-term growth in Asia - explains that when it comes to insurance and liability, the legal system in China has not yet been tested for robustness.

Another sticky point is that traditionally, commercial business has been written directly, with the role of the broker deemed unnecessary.

But Lee believes major international brokers establishing their businesses in the country will help local businesses to recognise the value of broking, especially in addressing risk management issues and assessing the right level of cover.

In India, insurers are fighting a different battle - they want to be able to hold on to a larger chunk of their business.

Existing rules state that a foreign partner can only hold 26% equity in an insurance company, but a proposal to increase this limit to 49% has already been put forward.

"The fact there is an equity cap can be a little frustrating as we cannot reflect the actual growth we are experiencing on our consolidated results," explains Lee.

Tailor made

It seems the insurance industry is seizing the golden opportunities and, according to Bengt Johnsen, chief executive of the United Insurance Brokers in Asia, they are now able to deliver tailor-made solutions.

"About 15 to 20 years ago, people came to Asia because they needed to be here," he says. "Now they are able to develop a more tailored service.
International companies are starting to provide products that address the needs of different territories in Asia."

Understanding and catering for these specific needs is what Lloyd's is trying to achieve in the long run.

"We want to look at opportunities which are profitable and sustainable in the long term," says Johnsen.