We are seeing the reverse of what happened in the 1990s when European insurers aggressively entered the U.S. market. There appear to be moves on the part of U.S. insurers to capture new premium dollars from overseas markets.
GLOBAL MARKETPLACE
Most of the focus is on the life side of
the business, but P&C could follow
By Phil Zinkewicz
|
We are seeing the reverse of what happened in the 1990s when European insurers aggressively entered the U.S. market. There appear to be moves on the part of U.S. insurers to capture new premium dollars from overseas markets. |
In the 1990s, foreign insurance companies began aggressively entering the United States insurance market. It was the best of times. The U.S. insurance arena was teeming with activity as property and casualty insurers marketed their insurance products with abandon. If they were, perhaps, giving away the store, that was all right. Investment yields were far outpacing negative underwriting results. The black ink was flowing at the bottom line, and European insurers wanted to get in on the action.
Of course, anyone who was a student of insurance industry history could have told those insurers at the time that sooner or later the bubble would have to burst. Cash flow underwriting had been tried before in the early 1980s with little long-run success. By the end of the 1990s, when the stock market began giving truth to the adage that what goes up must come down, insurers started retrenching.
But that was all right, too. Insurer retrenchment meant the beginnings of a hardening market and, historically, regulators and insurance buyers have been more receptive to rate increases during a hard market cycle. With higher rates, insurers could recoup some of the underwriting losses they had sustained during the previous soft market.
Then came September 11. The losses that insurers sustained as the result of that atrocity were severe. For the most part reinsurers paid the claims of primary insurers, but the relationship between reinsurers and U.S. primary carriers began to change for the worse. Reinsurance recoverables that primary insurers carried on their balance sheets became questionable.
Almost immediately following all this came Enron and all the other corporate scandals, causing certain lines of insurance such as directors and officers liability, fiduciary liability and errors and omissions coverages to appear more volatile than ever before. By the early part of this decade, those European insurers that had been so eager to enter the U.S. insurance market were turning back to their own home shores. They had overestimated their opportunities in the United States.
Today, however, we are seeing the reverse of what happened in the 1990s. There appear to be moves on the part of U.S. insurers to capture new premium dollars from overseas markets. In a special report by the Needham, Massachusetts-based Tower Group, a consulting and research firm, author Cynthia Saccocia, senior analyst, writes that “North American insurers are pursuing global expansion at a pace matching that of European insurers’ entry into U.S. markets in the early 1990s.”
Saccocia says that daily reports of de novo businesses, joint ventures, alliances, and acquisitions indicate that North American insurers are aggressive about their participation in the global insurance business, and she cites Swiss Re as pointing to South and East Asia, Central and Eastern Europe and Latin America as the most compelling markets.
“Favorable economic conditions, demographic trends and the gradual dissolution of institutional barriers indicate that high growth is possible,” Saccocia says. “Relatively low penetration rates for insurance in these emerging markets are another indicator of their growth potential compared to industrialized countries. For industrialized countries, the average life and non-life premium income as a portion of gross domestic product is approximately 12%, whereas in emerging markets, the same measure is only about 4%.”
So, the growth potential is there. However, it seems that, so far, U.S. insurer activities overseas appear to be taking place in the life and pension areas of the insurance industry, rather than on the property and casualty side. Saccocia gives the following examples to illustrate where North American-based insurers are making investments:
• Manulife Financial Corporation maintains a substantial Asian presence in Hong Kong, China, Taiwan, Indonesia, Singapore, the Philippines and Vietnam, and in Japan as a separate unit. The firm can attribute much of the success of its profitable Asian operations to a number of distribution alliances with banks throughout the region.
• Sun Life Financial began operating a joint venture two years ago with China Everbright Group, Ltd., in Tianjin and, since April 2004, in the capital, Beijing. Sun Life reports interest in expanding to other cities in 2005 in accordance with regulatory approval.
• Hartford Life Insurance supports distribution alliances with 45 companies throughout Japan and reports a 26.5% share of the US$28 billion Japanese variable annuity market. The Japanese unit of Hartford Financial Services Group attributes profitable operations in 2003, two years ahead of its break-even target, to the strong sales of variable annuities.
• A staunch competitor to Hartford Life in Japan is Citigroup, Inc. In a joint venture with Mitsui-Sumitomo Insurance Co., Citigroup controls approximately 50% of new variable annuity sales and expects substantial growth in the coming years.
Gregory A. Boyko, chairman and CEO of Hartford Life International, Ltd., says that he recognized the potential of the Japanese market about six years ago. “Everybody was saying that the life market in Japan was saturated, but they didn’t take into consideration the changing population there. For example, in the Japanese population, the number of those 65 years old and older is growing rapidly. That’s true of emerging nations as well. In addition, interest rates are low and people are living longer. As people get older, they want stability in their financial situations, stability that some local governments cannot give. The way we work is to form alliances with banks and securities firms, firms that are our distributors and that are solid financially and conservative in their investments. We become partners with these firms, and the products we sell complement whatever government-sponsored pension programs already exist,” says Boyko.
Saccocia also points to population shifts as a plus for U.S. insurers operating overseas. “The aging of populations around the world represents substantial opportunity for insurers,” she says. “The growing percentage of retired individuals, combined with increasing longevity, is pressuring countries with government-sponsored pension systems to seek support from the life insurance industry. Further, in all regions, the stability of many employer-sponsored pension plans is uncertain. As traditional social support structures for the retired collapse, individuals throughout the world worry about a shortfall in retirement savings, but they lack the planning advice needed to protect them and their families. For example, a recent global study sponsored by the Principal Financial Group indicates that 80% of Japanese participants received no retirement planning advice from any source. Demand for insurance-oriented products in emerging markets is imminent and will grow as individuals take on more responsibility for their own retirement security.”
However, Saccocia warns that growth in these countries is likely to be slow and that North American insurers interested in growth in these areas must “be patient and persistent.” She also cautions insurers to approach new markets with a fresh perspective on distribution, operations, technology and services. “Strategic plans must include assessment of fundamentals for the region such as market demographics, ease of entry, and distribution capability. Additionally, insurers must thoroughly evaluate the business requirements and governance model to effectively manage the infrastructure, insurance operations and regulatory demands. If the evaluation is not done well, these latter areas of planning are often where insurers will incur the greatest costs and miss their break-even point,” she says.
Sound advice, considering what European insurers experienced over here in the last few years. Neither Saccocia nor Boyko sees any significant activity on the property and casualty side of the insurance business vis a vis North American insurer expansion. “It’s difficult to build a national property and casualty network overseas,” Saccocia says.
But, if insurers on the life and pension sides are as successful as they hope to be, anything is possible. *