Boosting insurance and reinsurance penetration in emerging markets is seen as key to building global disaster resilience and creating opportunities for re/insurers. But there’s also scope for companies to seriously look at expanding coverage in frontier markets, according to reinsurance giant Swiss Re.
Frontier markets are typically smaller, less well-developed markets when compared to emerging markets such as China, India, and Brazil, and include countries within Sub-Saharan Africa, the Commonwealth of Independent States, the Middle East, and Southeast Asia.
Discussions among world leaders and insurance and reinsurance industry executives and experts surrounding the need for greater disaster resilience in both developed and developing countries, has seen the global protection gap (disparity between economic and insured losses following an event) consistently come under review and scrutiny.
While much of the noise surrounding the need for insurers, reinsurers, and insurance-linked securities (ILS) players to innovate and create solutions that will help to bridge the gap has focused on emerging economies, such as China, Russia, Brazil, and India, Swiss Re has highlighted the opportunity with frontier markets also.
“Frontier markets are typically those emerging countries with smaller-sized economies, lower income levels and insurance sectors in the early stage of development,” says Swiss Re.
In the near term, annual real gross domestic product (GDP) growth is expected to be relatively strong, at between 5% to 10%, however, total insurance penetration rates across frontier markets is less than 1.5%, so there’s clearly a fair amount of opportunity and challenges for risk transfer entities to increase penetration.
Swiss Re Chief Economist Kurl Kart, said; “Capturing the potential in frontier markets will require a long-term strategy. Nonetheless, this work shows that there is a real “early-move” advantage to be gained for insurers who understand how to access and develop these markets.
“The benefits will come once these markets reach critical middle-income threshold when consumers and businesses start buying more insurance.”
The potential for insurance, reinsurance and even ILS players to grow in frontier markets is vast, but as noted by Swiss Re it is most likely going to require a long-term approach. Varied levels of regulation, social and economic stability, understanding and awareness of exposures and potential solutions, means that entry into frontier markets will vary by region.
So it’s important that re/insurers understand the local market dynamics in order to adequately and effectively provide solutions that will ultimately help to increase penetration levels, resulting in greater economic stability.
Swiss Re explains that regulation in the majority of Sub-Saharan Africa countries remains in its infancy, while the frontier market that’s Kazakhstan has fairly robust legislation and regulatory practices in place.
Regulation in some markets limits the amount of business foreign insurers and reinsurers can actually do in the region, so in some cases, as seen with emerging markets like India, partnerships with local insurers and even government entities might be the only way to access the market in early stages of development
Swiss Re highlights this point; “Joint ventures with local partners or tie-ups with distribution networks can also be used to establish a presence in emerging and frontier markets. This option provides the foreign entity a strong local brand name, market expertise, local skills to tackle location-specific obstacles more smoothly, and wide consumer reach.”
Furthermore, acquiring a local branch can also be a good way to enter a frontier market, although the limited size of local markets could mean that those insurers worth acquiring might be reluctant to sell as they have a dominant market share.
Swiss Re explains that each point of entry with a frontier market, like emerging markets, has its benefits and challenges, further highlighting the need to properly understand the local space in order to effectively serve its clients.
Low insurance penetration, low-income, small economies, and strong economic growth potential is the four key attributes of frontier markets, says Swiss Re, providing re/insurers with an opportunity to create solutions and enter the market where regulation allows it.
“Frontier markets can benefit from increased participation of international insurers, both in terms of underwriting capacity and technical expertise,” says Swiss Re.
Let’s not forget that many emerging markets that insurers and reinsurers are seeking to enter today, like India for example, which recently enabled greater participation from foreign re/insurers in its market via new regulation, where also once frontier markets.
So the key for re/insurers and even ILS players is to try to get a foothold in the frontier markets now, early, so that once penetration levels and income levels rise as the middle-class swells, they are well positioned to make the most of the potential increase in demand for their services and solutions.
A lack of education, awareness and understanding of risks and available solutions is also a hindrance to growth in frontier markets, with some of the most rural towns, cities and villages suffering from low levels literacy.
Combine this with a lack of historical data and underwriting expertise in frontier markets and the opportunity, but also the vast challenge for re/insurers and ILS players becomes clear.
“Frontier markets are relatively small and less developed than established and large emerging markets. However, individual markets or blocs of economies can still offer significant scale and uplift to insurance premium growth. There are clear drivers that will likely propel faster insurance development in some markets, “ said Swiss Re.
“The experience of some established emerging markets like India and China shows decades of insurance sector growth can be compressed into a few years. Technology can also help the industry leap-frog to the latest products or underwriting techniques,” concludes the reinsurer.
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