Health insurers look to foreign markets

Industry seeks greater profit margins

By Phil Zinkewicz

A still very troubled economy, uncertainty about the newly enacted health care legislation, and severely squeezed profit margins in general have all led American health insurers to look to foreign markets for growth opportunities. China, for example, is being targeted as ripe for penetration. Europe and Asia are looking attractive to some health insurers as well.

Recently Aetna announced that it has opened a “representative office” in Shanghai. Other insurers, including United Health Group and WellPoint, have established such offices in China, and CIGNA has struck a deal with a Chinese company to sell supplemental health insurance there. Most U.S. health insurers already sell coverage to American expatriates in China and other foreign markets, but now they are focusing on the citizenry of those countries.

Conning Research & Consulting recently issued a report that concludes health insurers must zero in on overseas expansion opportunities if they seek continued high rates of growth and profitability. The report was issued prior to the enactment of national health care legislation in the U.S.

“U.S. health insurers have been successful focusing almost exclusively on the U.S. market until now,” according to Sherry Manetta, an analyst at Conning. “However, the U.S. now accounts for 80% of the global health insurance market, while representing just 4.6% of the world’s population. Looking forward, both profit pressures at home and higher growth rates overseas will drive increased multinational expansion interest among U.S. health insurers.”

The Conning report, titled “Global Opportunities for U.S. Health Insurers,” notes that the world spends more than $5 trillion annually on health care. The United States alone accounts for 40% of that amount. In 2007, global private health insurance expenditures, or health benefits paid by commercial (private) insurers, were nearly $1 trillion, or 20% of the world’s total health care expenditures. Eighty percent of that private health insurance market is in the United States. Every 1% growth in U.S. private health insurance represents approximately $8 billion of additional premium, far more than the total private health insurance market in all but a handful of countries today.

Changing U.S. profit picture

The report goes on to say that the profitability of the American market is changing. The U.S. health insurance market is forecast to grow approxi­mately 7% annually from 2009 through 2011. However, operating margins, which declined to 3.1% in 2008, will continue to be under pressure as proposed health care reform solutions are implemented and health care cost increases continue to outpace general inflation, the report says.

“The insurance industry may be able to respond effectively, over time, to sustain or grow margins,” says Manetta. “However, economic growth and other factors elsewhere in the world are driving growth in private health insurance. Other countries provide opportunities for U.S. insurers to diversify geographically and to leverage the considerable investments already made in health insurance and managed care systems and processes.”

The report notes that, in some countries and regions, particularly emerging markets in Europe and Asia that experienced significant economic growth in the past decade, growth in private health insurance has outpaced growth in total health care expenditures and/or GDP. Private health insurance is poised for continued growth as health care infrastructure becomes more fully developed and government funding of public health care systems becomes more constrained.

Public health insurance systems in other countries are of three types, according to the report. There are national health systems as in the United Kingdom, social security systems as in Germany and mandatory private systems as in The Netherlands and Switzerland. National health systems for the most part are funded by general tax revenues. The other two systems are funded primarily by contributions from individuals and/or their employers, with subsidies for groups like retirees and low-income persons funded by general tax revenues.

U.S. health insurers, including multiline carriers with health insurance operations, already operate in other countries. Several of these businesses go back decades, such as Aflac and Alico, which have operated cancer insurance businesses in Japan since the 1970s. Some other early entrants withdrew from some countries but have recently started to re-enter, the report notes.

Overseas expansion

“U.S. health insurers have been entering new markets, or expanding existing businesses, primarily in three areas,” says Manetta. “The first is expatriate business, driven by a more mobile work force, U.S. health insurers’ large corporate customer base and regulations in many countries that mandate that expatriates be insured. Second, supplemental insurance markets are being pursued, primarily by multiline insurers such as MetLife and CIGNA. Third, companies are entering India and China in consulting and administrative businesses as well as insurance joint ventures, attracted by the sheer size of the potential markets and recent favorable health insurance regulations.”

Manetta advises health insurers that want to branch out into overseas markets to plan their strategies very carefully. “Barriers to entry or expansion in a particular country or region can include political risks, cultural barriers, the need to build or acquire a distribution system, and geographic distance,” she says.

The first step in developing a global health insurance strategy is an assessment of the legal and regulatory climate in the target country or region, as well as market demographics and needs. Insurers also must assess their own core competencies in determining whether a market represents a viable opportunity for growth and profitability.

The assessment focuses on infrastructure characteristics, demand for private health insurance, regulation, economic factors, private health insurance fit with market needs, and culture and politics.

“By analyzing a market using these criteria, understanding the market risks, and matching the criteria with an insurer’s core competencies, an insurer can identify opportunities to capitalize on the growth of private health insurance in both industrialized and emerging markets,” says Manetta. “It then remains for the insurer to develop effective strategies to exploit these opportunities.”

The Conning report goes on to analyze the potential for health insurers in Western European markets, in Central and Eastern markets, and in the Commonwealth of Independent States, Asia and the Pacific.