Success In Insurance Business - What It Takes To Win In Asia

Success In Insurance Business

When viewed from 10,000 meters, the pace of change in life insurance in Asia can appear almost glacial. Most of the large players have been dominant for a very long time, and the market-share rankings in most countries barely shift from year to year. However, there are many forces that are about to change the industry fundamentally. In fact, life insurance in Asia is reaching an inflection point, where the industry; in the next 5-10 years, will likely witness some very dramatic changes that will make it look very different from the one in 2008.
 
Key Success Factors 
Asia is entering a new phase of development following a period of extraordinary growth. While the overall growth drivers in Asia remain very strong for the next 5-10 years, competition is increasing significantly, margins are beginning to erode, and local and foreign players alike will have to build superior skills in distribution, product innovation, operations, and investment management to be able to sustain current levels of value creation. We see five key success factors to win in Asia over the next decade:

• Building a sustainable agent force
• Creating value in bancassurance and alternative channels
• Upgrading the business model to combat intensifying competition
• Capturing the pan-Asian opportunity
• Sustaining margin pressure

Building a Sustainable Agent Force
Over the last decade, most of the enormous value in life insurance in Asia has been created through the agent channel. Bancassurance only started to take off in the early 2000s and, in most markets, has much slimmer margins. However, the model of the past - building vast but low-qualified agent forces with a "landgrab mentality" - is unlikely to lead to success in the next decade. In fact, we believe that some of the massive agency sales forces that have provided the core growth engine of life insurance distribution in Asia are likely to reach their maximum size and will slowly begin to erode. This is already happening in Japan and South Korea, as the housewives sales forces gradually scale down in number and influence.
 
While the pace of this development will differ from country to country, the sizes of the agency forces will not grow indefinitely at the current growth rates. At some point, even in a country as large as China, we anticipate the growth of the agency forces will "max out" and move into the next phase, which will be characterized by consolidation, upgrade of capabilities, and management of quality. In many countries, reform of these sales forces is already underway and the process will accelerate as, for example, most of the unproductive and part-time sales agents leave the business. Over the next several years, the nature of the competition will change from size to quality, and this will pose serious challenges to many insurers who will not be able to manage the transition. Success In Insurance Business
 
It is well known that the massive sales forces of large Asian insurers suffer from problems such as low productivity, high agent turnover (up to 80 percent annually in countries like China and India), and, in extreme cases, mis-selling. On the other hand, there is no doubt that these sales forces are also tremendous assets for those who have been able to build them, since their distribution power is unmatched. In the past, these sales forces have carried insurance companies through upturns and downturns, and the loyalty and strong bonds between the agents and these incumbents are legendary. Nevertheless, the traditional sales model, relying on a large number of low-quality sales agents, is staffing to show cracks due to three interlinked factors.
 
First, there is an emerging segment of mass affluent consumers in Asia that are demanding a better level of service, which includes better understanding of products and customer needs, as well as more professional advice. These mass affluent customers are typically not well-served by the agency forces of the incumbents, since the education levels and sophistication of the agents are quite different from those of their customers.
 
Second, the growing complexity of products, particularly in the investment-linked area, is creating difficulties for the traditional sales forces. For example, the push tactics of the mass sales force can create mis-selling practices as agents understate the risks of the investments. While there are signs that insurers are finding ways to control mis-selling, their agents are not the most natural investment advice-providers. Success In Insurance Business
 

Third, a lot of these agency forces are aging. While the relationships the sales forces have with their customers remain strong, aging sales forces are quite difficult to motivate and manage. For example, many agents are almost semi-retired, living off their existing customer portfolios. For these agents, and their managers, who have spent the last two decades pursuing the same mass market with a push-driven business model, one can imagine how difficult it is to inject more professional skills. Compared to some of the latecomers - in particular foreign players - with their younger and more professional sales forces, it is easy to see why, in many markets, the incumbents are losing momentum.
 
Indeed, across Asia most of the incumbents are losing market share. Life Insurance Corporation (LIC) of India's gross written premium (GWP) market share in India plummeted from nearly 100 percent in 2000 to 82 percent in 2006. This trend is even more pronounced in the larger cities where competition is fiercer. For example, in China, China Life's GWP market share in Shanghai dropped from 29 percent to 22 percent between 2000 and 2007. Furthermore, measuring by gross premium masks the effect somewhat. These incumbents may still have a large market share overall, but in terms of new business, they are losing momentum rapidly. 

For example, by GWP, the market share of South Korea's Big 3 dropped from 76 to 57 percent between 2002 and 2007, but by first-year premiums (FYP), their share dropped even further - from 77 percent to 44 percent. Next post, we'll talk about restructuring of the sales force. At mean time, you can check out Success In Insurance Business.

What Types Of Insurance Are There - Product Mix For Needs of Asian Consumers

What Types Of Insurance Are There

With the growing penetration of life insurance and the increasing wealth levels in Asia, it is natural that life products have been evolving. As one would expect, the product trends vary according to the maturity of the markets. While 10 years ago most insurers were selling basic protection and long-term savings products, the rapid wealth accumulation and increasing sophistication of consumers and booming equity markets have led to massive demand for investment-linked products in recent years (also known as unit-linked products). 

As such, insurers have been quite successful in penetrating the wealth-management market, which is probably the single largest market opportunity across Asia. For even more mature markets, such as Japan, with aging populations, retirement and health are likely to emerge as significant growth segments. Finally, niche areas such as Islamic insurance (takaful) are relevant for pockets of consumers whose needs are not met by the traditional insurance offerings.
 
The increasing diversity of products and consumer needs is forcing insurers to stay on top of these developments. To succeed in these new areas means proficiency in product development and marketing, as well as further training of those working in the distribution channels. These trends have also enabled latecomers in the market to gain share. For example, the overall growth of investment-linked products has provided an unprecedented opportunity for multinational insurers to grab market share from local incumbents across many countries. Most of them have grown disproportionately through training a younger and more sophisticated sales force targeted at selling these more sophisticated products.
 

Investment-Linked Products 

The rapid growth of investment-linked products has blurred the divide between life insurance and investment products. While most of the investment-linked products have some form of protection element built into the product, the bulk of the policyholder premiums are invested in various local and international asset classes. In fact, many of the sales agents are marketing these policies as investments and asset allocation instruments, capturing the investment appetite of the Asian investor.
 
Why have investment-linked policies experienced such considerable growth in Asia? First, deregulation provided the environment for investment-linked policies to be created, giving insurers the opportunity to participate in the market. Second, investment-linked policies form part of the general rise in wealth-management products, as Asian customers turn from "savers" into "investors." 

This trend has been further accelerated by the boom in Asian equity markets during 2002-07. The demand for such products has pushed life insurers to adapt quickly and compete with asset management products such as mutual funds for a share of this market. Last, in some jurisdictions, there are also tax advantages for investors in investment-linked products that give them an unique selling point over traditional asset management products.
 
Life insurers started selling investment-linked products in most Asian countries in the late 1990s and early 2000s. In 2001, investment-linked sales in Asia were only around US$12 billion, and were marginal relative to the sales of other products. However, by 2007, the figure surged to US$100 billion, accounting for around 65 percent of absolute gross premium growth in the region. 

In Hong Kong, Taiwan, India, Malaysia, Singapore, Indonesia, and the Philippines, investment-linked sales accounted for 30 percent of gross premiums. This gave rise to two interesting phenomena: first, investment-linked has become the key growth component in overall sales and second, foreign players have tended to dominate this market. What Types Of Insurance Are There

Investment-linked sales, plus bancassurance, are the biggest drivers behind life insurance premium growth across Asia. In Japan, for example, sales of variable annuities grew annually by 44 percent between 2002 and 2006. This is a staggering growth number considering that Japan is a mature market with shrinking total premiums. Similarly, in South Korea, the sale of variable products skyrocketed by 87 percent between 2002 and 2007, while sales of endowment policies shrunk to 60 percent of their 2002 figures.
 
The characteristic of investment-linked products presents a double edged sword for the insurers in the region. On the one hand, insurers find the product attractive because it carries lower risk. Since the investment portions of the funds are passed through to mutual fund houses, insurers are not carrying the guaranteed liabilities on their balance sheets. In most of the Asian markets, where there is a lack of long term assets to match long-term liabilities, the asset-liability mismatch often carries substantial risks. Therefore, investment-linked products lessen the already-substantial burden of these insurers to underwrite these investment risks. 

On the other hand, insurers find these products to be less profitable on an actuarial basis compared with traditional products. It is not uncommon to hear Asian actuaries complaining about the low profitability of investment-linked products. However, it is much less clear whether these actuaries are considering them from a risk-adjusted basis, given that it is almost impossible to hedge the long term investment risks.
 
In general, foreign players are more active and aggressive in capitalizing on the demand for investment-linked products. This is probably because foreign multinationals know these products better than their local competitors, who have only recently been allowed to engage in this business as a result of demgulation. Therefore, from a product design and structuring perspective, the multinationals have a substantial advantage over the locals - in most of the markets the products from the multinationals tend to be more innovative.
 
Moreover, the advantage of foreign players in investment-linked products is not only limited to product design. Investment-linked policies are essentially investment products, and thus require a lot more explanation of the risks and benefits to customers. Many of the local insurers, who built their sales forces over the past decades, have agents who are often less-educated, older, and part-time. 

Compared to the locals, the foreign insurers' agents can be more easily trained to sell these policies to customers due to the higher quality of their recruits. They also come across as more credible and professional. Indeed some multinational insurers focus almost exclusively on investment-linked products, offering aggressive equity products with high risk/return profiles.
 
While investment-linked products have been a big growth story for Asian insurers, they have their downsides. The unique strengths of life insurance companies, with their strong balance sheets, cannot be brought to bear here. Life insurers are distinctive from other asset managers in their ability to provide long-term guarantees and smooth, stable returns; however, in the investment-linked market, this advantage is not utilized and they find themselves in direct competition with mutual fund companies and their distributors, which are primarily retail banks. Furthermore, life insurers are relying on a very high-cost channel, tied agents, to compete against banks in selling these investment products. What Types Of Insurance Are There
 
Investment-linked products will surely continue to grow in the long term as the investment needs for Asian consumers can only increase. In the short term there will be volatility, depending on the performance of the equity markets. At times of equity market downturns the sales of investment-linked products tend to suffer. In particular, Asian investors' investment horizons are much more short-term than those in more developed markets - this is partially due to the fact that the Asian equity markets are much more volatile than those in the West. At the low end, Chinese investors hold mutual funds for seven months, whereas at the other end of the spectrum, US investors hold mutual funds for an average of five years.
 
Across Asia, we believe that the sensitivity of investment-linked products to swings in the equity markets will differ according to the maturity of the sales force and the customer base. In the more mature Asian markets (such as Hong Kong and Singapore) where the long-term growth trend is positive and policyholders are more mature and equipped with a long-term mindset, investment-linked sales are more likely to flatten out rather than significantly slow down, even in times of equity market downturns. In other Asian markets where the long-term growth trend is steep but investors are less sophisticated and more speculation-minded, investment-linked sales are likely to fluctuate more with equity market booms and busts.
 
Over the past few years, investment-linked products have given life insurers a big boost in growing the overall size of the market. This has undeniably been aided by a benign economic environment and very high returns in the local equity markets. Starting in 2008, the economic environment has shifted into an extremely bearish mode with significant volatility in the equity markets. This volatility will again remind investors of the risks in the equity markets, and the benefits of long-term savings and stable returns. In these markets it would not be surprising to see some shift from investment-linked products back to more traditional products.
 
One last caveat on investment-linked products: History shows that over aggressive "mis-selling" by insurers can have substantial negative effects on the market as a whole. This first happened in Japan where a series of misselling incidents turned the Japanese consumer away from these products.
 
In the late 1980s, Insurance agents pushed investment-linked products to unsuspecting customers without fully disclosing the risk of such offerings. In addition, the agents made alliances with banks to allow customers to take out large loans for the purchase of these products, thus further increasing the customers' risk exposure. When the Japanese stock market crashed in the early 1990s many saw their savings disappear.
 
From 1994, customers filed lawsuits against insurance companies and banks alleging a lack of sufficient explanation of the risks entailed in variable insurance. The impact on reputation was lethal. Sales subsequently stagnated for over 10 years. What Types Of Insurance Are There

Annuities 

Annuities have traditionally been a small segment of the insurance market in Asia, despite their unique product characteristics. Annuity policies are the only products that protect one against longevity risk the risk of outliving one's expectations. Although there are various flavors of annuities, typically these products provide a stable stream of income that is guaranteed for as long as the policyholder is alive.
 
The one country in which annuities have a large share of the market is Japan where, in 2006, the annuities business accounted for about 40 percent of annualized premium for new individual policies. In fact, annuities, as a segment, have been growing since the 1980s. The Japanese enthusiasm for annuities policies can be explained by the maturity of the market, a large aging population and the presence of many wealthy pensioners.
 
Other than Japan, the annuities business elsewhere in Asia has been minimal. For example, in Singapore it accounted for only 2.2 percent of gross-premium income in 2007 and 5.3 percent in Taiwan in 2006. A likely reason for this low level of business is cultural attitude. In most Asian cultures, old people traditionally rely on bank savings, real-estate profits, and their children for post-retirement income, thus diminishing the need for a product to provide a stable source of retirement funding. 

In addition, Asians tend to be less interested in annuities policies because those with wealth are keen to pass it on to their children rather than use up their accumulated wealth in their twilight years. Moreover, in certain countries, such as China, wealth resides with a much younger age group, who are not yet at the age where they are considering retirement expenses.
 
There have been pockets of growth though. In South Korea, the annuities business grew from US$9 billion in premium income in 2002 to over US$14.5 billion in 2007, representing a 10 percent annum growth rate. This growth is attributable to the decline of pension benefits relative to rising living standards, less enduring family structures that make pensioners leas reliant on their children for income, and a growing retirement population. 

For example, South Korea has been worried about its public pension system going bankrupt for years; various organizations' estimates put the year when the national pension fund would dry up as somewhere between 2020 and 2060. We suspect that as parts of Asia age quickly over the next decade, the potential growth of annuities as a product segment will likely increase. What Types Of Insurance Are There

Accident and Health
 
With its huge population Asia should have a substantial market for accident and health products. However, this market is deceptively small. For eight of the markets - China, India, Hong Kong, South Korea, Singapore, Taiwan, Indonesia, and Malaysia - the aggregate accident and health market was worth a mere US$25 billion in 2007, or less than 10 percent of their total life gross written premium (GWP). The compound annual growth rate (CAGR) from 2002 to 2007 was 15 percent.
 
There are many reasons for this relatively small market size. First, strong government presence and the dominance of public payor systems limit the growth potential of these markets. Second, as maturing markets, the median income levels still render private health insurance a luxury for many. Third, underdeveloped healthcare infrastructure hinders insurers with such problems as nonstandardized treatment protocols, lack of case management, and fraud. 

Therefore, the market remains underpenetrated, although there are pockets of growth within specific segments. For example, the affluent segment, generally, is willing to pay for better healthcare than that which the State might offer. Especially in the more mature markets, such as Japan, health insurance will emerge as a key growth driver in the mid term.
 
Healthcare is a large topic both in Asia and the rest of the world.

Islamic Insurance

Islamic insurance, or takaful, is a nascent, underdeveloped market segment within the global life insurance market, but its market potential is substantial given the worldwide Muslim population of almost 1.5 billion. In Indonesia, India, China, and Malaysia alone, there are an estimated 350 million Muslims. Indonesia has the largest Muslim population in the world, with an estimated 200 million believers.
 
However, insurance penetration in these countries has traditionally been low - in part because some aspects of life insurance policies are in violation of Islamic Law or Sharia, which forbids the earning and charging of interest. Takaful was developed as a means of complying with Islamic requirements.
 
Due to its large untapped potential, many life insurers are now seeking to open this market, including international names such as Allianz and Prudential (UK). The market is still very small - takaful life insurance premiums amounted to US$600 million in Malaysia in 2007 and US$31 million in Indonesia in 2006 (8 percent and 1.1 percent of the overall market respectively). 

However, the growth of the takaful market has outperformed the overall market and the product has yet to reach a large proportion of Asian Muslims. For example, takaful life premiums grew 34 percent annually in Indonesia from 2001 to 2006, while the overall market grew 24 percent. With opportunities still available in China and India, both homes to large Muslim communities, it seems reasonable to assume that the takaful market has plenty of scope for growth. To find out more, you can check out What Types Of Insurance Are There.

Personal Injury Insurance Definition - Personal Injury

Personal Injury Insurance Definition

PERSONAL INJURY

This is a good time to discuss the personal injury coverage that is included in some homeowners policies, or that is an optional coverage to be added by an endorsement to others (such at the ISO HO 3 policy). As noted, while there are some variations from insurer to insurer, personal injury liability coverage extends to five basic categories of acts or conduct. These include: 

1. false arrest, detention, or imprisonment:
2. libel, slander, defamation, or product disparagement;
3. malicious prosecution (which may include abuse of process);
4. wrongful eviction, wrongful entry, or violation of right of private occupancy; and,
5. invasion of or violation of right of privacy.

None of these categories of conduct can be an accident. As a result, most homeowners liability coverages refer to the covered events as offenses, rather than attempting to subject them to the policy's occurrence/accident requirement.

There is a temporal difference between the accident-base bodily injury and property damage coverage and the offense-based personal injury coverage. Coverage applies to bodily injury and property damage that occurs during the policy period, regardless of when the occurrence that causes the bodily injury or property damage takes place.
 
In contrast, the offense-based personal injury coverage applies to that the injured commits during the policy period. As noted, the injury offenses involve intentional conduct. There are, however, limitations on the scope of coverage for these categories of intentional acts. (These are discussed in the context of exclusions that apply to the personal injury coverages.) Personal Injury Insurance Definition

Personal Injury Additional Coverages

There is a single additional coverage under the ISO personal injury endorsement - for loss assessments up to $1,000 each assessment for the insured's share of loss assessments made as the result of covered personal injury. This provision is substantially similar to the bodily injury'and property and additional damage for loss assessments. 

BODILY INJURY

Bodily injury means bodily harm, sickness, or disease, including required care, loss of services, and death that results. There really are not any hidden concepts here. Everyone can readily appreciate that if someone is hurt as the result of an accident for which you may be held liable, that person's damages include many things, such as: 

• his or her medical and hospital bills;
• past and future wage loss or earning capacity;
• costs of ongoing care; and,
• damages for his or her inability to enjoy the activities enjoyed prior to the injury.

What can be an issue is whether mental or emotional distress constitutes bodily injury in the absence of physical injury. A growing trend in the law is the view that emotional distress that is the product of noncovered conduct does not constitute bodily injury within the meaning of standard liability policy definitions of bodily injury. 

For example, emotional distress that is the product of economic loss, such as the loss in value of an investment or savings, does not constitute bodily injury under this view.

PROPERTY DAMAGE

The standard ISO HO 3 homeowners policy contains the following definition of property damage.

Property damage means physical injury to, destruction of or loss of use of tangible property.
 
The concept of physical injury to tangible property is central to an understanding of the property damage coverage of liability policies. This physical injury to tangible property requirement has the effect of excluding coverage for damages claims based on injury to nontangible property interests. Even the loss of use portion of the property damage definition is tied to tangible property. Personal Injury Insurance Definition

Tangible property means property having physical substance, apparent to the senses. Examples of intangible property are things such as easements, leasehold interests, licenses, patents, copyrights, lost profits, loss of goodwill, loss of the expected benefit of a bargain, and loss of value of an investment.
 
Diminution in value of an investment constitutes economic loss, not property damage. However, diminution in value of tangible property as the result of physical injury can be used as a measure of damages resulting from physical injury to tangible property.
 
EXAMPLE:

Let's say an adjoining landowner has an easement across your property for access to the street or highway. You build a fence across your property, including across the easement, that prevents access. The adjoining landowner sues you. His lawsuit would not constitute a covered property damage claim. Your interference with his easement is interference with intangible property rights. The physical injury element is also missing.

Another example of a noncovered economic loss claim would be a suit against you arising out of your sale to another person of a car or motorcycle that breaks down and requires expensive repairs shortly after the sale. There is no property damage here. Rather, the essence of the claim is an economic loss - loss of the buyer's expected benefit of the bargain. The buyer paid a certain amount for the car or motorcycle on the expectation that it was in good working order, when, had its true condition been known, the fair purchase price would have been much less.
 
Similar comments would apply to a suit against you by a buyer of a house for alleged nondisclosure or concealment of defects in or damage to the house, such as nonpermitted alterations or remodeling.
 
What about loss of use property damage claims? An example of a covered loss of use claim is as follows. Your residence is situated upslope from one of your neighbors. The hillside, on your property, becomes unstable, causing the local authorities to order your neighbor and his family out of their home until the hillside can be stabilized. 

Your neighbor has lost use of tangible property, his house and premises, during the period required to stabilize the hillside. He would have a loss of use property damage claim against you. Some homeowners policies' property damage definitions only extend loss of use coverage to tangible property that has been physically injured. 

Thus, assuming the same facts as the preceeding example, under a policy whose property damage definition only extends to loss of use of tangible property that has been physically injured, your neighbor's suit against you would not constitute a covered property damage lawsuit.

Insurance is always a tricky thing to understand. To learn more, you can check out Personal Injury Insurance Definition. It provides tons of useful information there!