Life Insurance in Asia: Sustaining Growth in the Next Decade

By Stephan Binder and Joseph Luc Ngai

An incisive look at the war for market share in the Asian life insurance market

Although the life insurance industry in Asia has emerged from the financial crisis stronger than ever, it has not escaped unchanged. As the general focus of insurance companies across the continent moves towards profitability beyond growth, tightening regulatory measures, shifts in consumer preferences, and risk tolerance, battle lines have been drawn between local incumbents, attackers, and foreign players. Life Insurance in Asia: Winning in the Next Decade, Second Edition looks at the ways in which small local agencies and multinational companies alike are seizing control of as much of the market as they can by aggressively recruiting new agents, leveraging new channels, and selling new products to cash in on the explosive Asian markets.

Thoroughly revised and updated, this new edition offers a comprehensive introduction to the booming Asian life insurance markets and outlines exactly what it takes to capture the opportunities that are emerging. Drawing on the research and experience of the McKinsey Asia financial services team, it includes everything you need to know about the battle for the life insurance market in Asia.

• Looks at how China and India are becoming increasingly important players on the international life insurance scene
• Goes behind the scenes of the Asian life insurance industry and the contentious battle for market share
• Outlines the steps to successfully entering, and prospering, in the Asian market

The life insurance industry in Asia is changing like never before. What the future holds, no one knows, but with Life Insurance in Asia in hand, you'll have a clear idea of the factions in play and the rules of the game.

• Language: English
• Publisher: Wiley
• Release date: Sep 24, 2012
• ISBN: 9781118360262

Book preview

Introduction

The global life insurance industry has faced unprecedented changes over the last few years, in particular the global financial crisis that reduced economic growth and created huge turmoil in capital markets, which in turn impaired assets on the balance sheet at an unprecedented scale. Life insurers all around the world have been dealing with extremely low interest rates, highly volatile capital markets, a flood of new regulations, and a completely changed risk framework.

While Asia has fared fairly well in this environment, it is not immune to the turbulences of the global turmoil. Economic growth is slowing down in Asia, too, although it remains significantly higher relative to Western markets. GDP growth is still forecasted at 7 percent across Asia (excluding Japan) for the next 5 years, compared to 2 percent in the United States and 1 percent in Europe. Interest rates are low in Asia, too, and equity markets have been equally disappointing in performance and highly volatile. Those life insurers with heavy exposure to international capital markets have suffered directly from the collapse of some parts of the market in the West.

Amidst this gloom, fundamental growth drivers remain strong in Asia. In particular, the emergence of a new middle class in Asia, with sufficient income and wealth levels to buy savings and protection products, will be the primary force to propel the industry forward. We forecast that over the 10 years from 2010 to 2020, Asia will contribute more than half of global premium growth, measured by gross written premiums. However, across all the diverse markets in Asia, life insurance companies will face a much more challenging environment to capture these growth opportunities. Beyond the macroeconomic challenges of low interest rates and volatile capital markets, the industry is facing some structural challenges: Regulators are tightening their scrutiny on industry practices across the region and investment products, key growth drivers of the last decade, are increasingly falling out of favor with consumers due to disappointing returns. At the same time, the bancassurance channel that has driven much of the growth in the past is proving much less profitable than captive channels, and agency—the bedrock of the life insurance industry—is reaching a tipping point where the product-push approach and mass recruiting are no longer sustainable. In fact, the number of life insurance agents has started to shrink for the first time in some key markets in Asia.

Against this backdrop, life insurers will have to change their mindset and shift from a strong growth focus, mainly looking at the top-line and premium rankings, to a more value-oriented approach. This is a new paradigm for the industry and will require significant changes in how the life players operate. They will have to revisit their distribution models, explore potential opportunities from new technologies and innovation, revamp their investment management functions to address challenges in the more volatile market environment, and adjust their product portfolios to cater to specific customer segments and maintain a strong value perspective.

We remain very positive on the outlook of the life insurance industry in Asia. The coming years will witness the development of some strong Asian champions that play in the regional, if not global, league alongside some multinational companies (MNCs) that will remain powerhouses across the region. We also predict that competition will intensify and that many more companies will be forced to exit or consolidate as they do not successfully adapt to the new reality in the industry.

WHAT IS NEW IN THIS SECOND EDITION?

This latest edition is based on the success of our first book Life Insurance in Asia: Winning in the Next Decade, published in early 2009. Even though it has been only three years, we felt it was time for a full revision rather than just a reprint. The life insurance industry has gone through quite dramatic changes over the last three years, and when we wrote the first edition we could not anticipate the scale and impact of the global financial crisis, which is still affecting much of the industry today.

We started this project with the idea of a focused revision, mainly updating market numbers and key changes in the industry (such as regulatory changes). However, the more we progressed in our research, the clearer it became how much the industry has really developed since 2008. In the end, we completely updated this second edition to provide a fresh look at the industry and how it may develop over the next several years.

As with the first edition, this book is written by practitioners for practitioners. As leaders of the Insurance Practice Asia-Pacific at McKinsey & Company, we draw on our many years of experience working with leading life insurance companies in the region, as well as that of our colleagues and clients who have generously contributed to this edition.

This book provides a holistic perspective on industry trends and outlook for executives in the life insurance industry in Asia today as well as those who are looking to enter specific markets in Asia. Investors, analysts, and journalists should also enjoy this edition, which gives a broad perspective on the inner workings of the industry and key challenges for market players. We also believe it supplies a good basis for further studies by academics and scholars who have research interests in this topic.

We do not aspire to cover every detail in every market. This is not intended to provide comprehensive, country-by-country market research (there are many, more timely sources for such market data). Rather, we are sharing a perspective on the industry across the region and our deep dives into specific markets are intended to show the differences and nuances, rather than aiming at completeness.

We look forward to receiving feedback and comments, and similar to last time, we anticipate rich discussion and debate, as well as the occasional word of encouragement from our readers.

Chapter 1

Emerging Themes in Asia

Joining an insurance company in the 1960s in Hong Kong was not an obvious choice. In fact, the industry was poorly understood, and only a few multinationals were active in the market at the time. Insurance agents had a difficult time explaining to customers what the product was about, and many viewed such agents with suspicion. It was in such an environment that Dominic Leung joined the American International Assurance Company (AIA) in Hong Kong as an IT analyst. He remembered that AIA was essentially run by locals—besides a few expats from the U.S., most of the management team consisted of Hong Kong executives. Over the years, the industry blossomed, as life insurance became one of the first financial products that most middle-class people purchased. As AIA expanded its presence across Asia, Dominic moved to Taiwan in 1989 to become the country head. There, AIA was known by its Chinese name, Nan Shan, (a company AIA acquired some years before). Over the years, many multinational insurers followed the lead of AIA in entering Asia, including Allianz, AXA, Manulife, Prudential UK, and ING. By the mid-1990s, as more multinational companies aggressively entered the Asian markets, Dominic was headhunted away to be the CEO of Prudential UK’s Greater China operations, overseeing the three markets of China, Hong Kong, and Taiwan.

In January 2004, Dominic made his latest career move. He moved to Ping An, the fast-growing, second-largest life insurer in China, and became the chairman of its life insurance subsidiary (which contributed the vast majority of the value of the group). In 2006, he took over responsibility for all of Ping An’s insurance activities, including life, property and casualty, pensions, and health insurance. Then in June 2010, Dominic retired from his formal role and became the company’s principal advisor. During his tenure, Ping An grew from $7.1 billion in life insurance premiums in 2003 to $17.6 billion by 2011. The company went public in 2004 and boasted a market capitalization of $47 billion at the end of 2011, making it the second-largest life insurer in the world. As he reflected on his career move in Ping An’s internal newsletter in 2004, I wanted to use my 30-plus years in the insurance industry to contribute to the development of the mainland China market. This is an once-in-a-lifetime opportunity.

From the international finance center of Hong Kong to the fast-growing Taiwan market, and then to the huge domestic economy of China, in many ways Dominic’s career reflects the development of the Asian life insurance industry. From a global life insurance perspective, opportunities in Asia developed first in the more accessible markets like Hong Kong and Singapore, before growing rapidly in the next wave of developing markets such as Taiwan and South Korea, and finally reaching the massive markets of China and India.

The global financial services industry has gone through extraordinarily rough times in the last few years, and the life insurance industry is no exception. Insurers globally have been hit hard by sluggish growth, low interest rates, falling equity prices, high volatility in capital markets, product blowups (most notably, variable annuities), and increasingly tough regulation. It is no surprise that the mood in the boardrooms of life insurance companies globally is not very cheerful these days. Against this global backdrop, life insurers in Asia have fared fairly well. For the 12 Asian markets studied, total gross premium continued to grow even in 2008, the first year of the global financial crisis, when they increased 11 percent from 2007 levels, in contrast to Western Europe¹, where premiums declined by 4 percent. Growth rates in Asia have continued to outperform Western markets throughout the financial crisis over the last years. Asian insurers’ resilience through the crisis can be attributed to their largely domestic businesses, smaller write-downs on their asset books (given limited exposure to U.S. mortgage-backed securities or government bonds from peripheral EU states), and a set of strong macroeconomic fundamentals underlying the insurance market. These fundamentals include robust economic growth, a high savings rate, and the continued emergence of a strong middle class.

Consequently, the role of Asia in the global life industry is becoming ever more prominent. Asia is expected to contribute more than half of global premium growth over the next 10 years and profitability should remain higher than that in the West. (See Figure 1.1.) A combination of higher growth expectations and better margins has led to higher market valuations for Asian insurers, and in particular, Chinese insurers. At the end of 2011, four out of the top ten life insurers of the world by market valuation were from Asia. This is in stark contrast to the picture 10 years ago, when all top 10 companies were from Europe and the United States.

FIGURE 1.1 Asia is a major driver of global insurance: Breakdown of world gross life premium by geography, 2007–2020F.

Sources: Country regulatory bodies; McKinsey Global Insurance Pools

A NEW PARADIGM

Despite the history of strong growth, the Asia life insurance industry certainly has its own challenges. The industry is entering into a new paradigm, during which insurers will be faced with a set of issues very different from those seen in the last decade. Growth rates, even if still high relative to the West, will come down, and shareholders and regulators will place more pressure on insurers to generate value rather than just top-line growth. The competitive landscape will change too. Multinational insurers will find themselves faced with stronger local competitors and will be forced to up their game when it comes to where and how to compete. The mass-recruiting model of tied agency, which has been the primary growth engine across Asia, is fast coming to an end (except for truly developing markets such as Indonesia and Vietnam). The rapidly growing bancassurance channel is ending up with banks capturing most of the value. New alternative channels are emerging, but remain small, and will require radically different skills to manage. Meanwhile, the pace of technological development is producing a new generation of digital users across Asia who are shifting from traditional to online channels for gathering information and making purchases. Lastly, rising wealth levels and growing sophistication of Asian consumers are creating many distinct segments with increasingly diverging and specific needs in products and services.

The following five pan-Asian themes will characterize the Asian life insurance market over the next several years:

Asia as the emerging powerhouse in life insurance.

A heated battle between multinationals and locals.

The changing face of distribution.

Driving innovation in insurance.

Changing product mix to meet the new needs of the Asian consumers.

These are the important themes that are present in most, if not all, of the Asian markets, and are essential to understand the industry. It is important to note that the Asian life insurance market is not homogenous. In a region that sweeps down from the borders of Europe and Africa to the Indian and Pacific Oceans, each market differs in terms of economic development, levels of market penetration, and regulations that govern the various players, not to mention the more obvious differences in culture and social values. Winners in the Asian life insurance industry have, and will always be, those who are able to understand these intricate differences and to tailor their strategies accordingly.

ASIA AS THE EMERGING POWERHOUSE IN INSURANCE

Without growth, there is no point in being in Asia, a senior insurance executive once explained when analysts asked about his company’s top priority in Asia. Growth is undeniably a hallmark of the Asian life insurance markets. Asia, excluding Japan, accounted for 17 percent of global life premiums in 2010, but perhaps more significantly, it accounted for 45 percent of the growth in the global market from 2002 to 2010. Looking ahead to the next decade, Asia will further establish its role as the global growth engine—the region is expected to grow on average at 6 percent per annum, compared to the 2–3 percent expected from North America and Western Europe, and to also contribute more than half of the global growth in premiums. The growth will not be uniform across Asia. The two lighthouse growth markets, China and India, are expected to deliver 75 percent of the growth in Asia; but Indonesia and Vietnam will also grow quickly from a lower basis, with forecast growth rates in the low to mid teens. The mature markets of South Korea, Taiwan, Hong Kong, and Singapore will likely grow at a slower but healthy pace, in line with their markets’ GDP growth. The exception is Japan, where there has been no growth for the last two decades, and that is unlikely to change in the future.

Moreover, the profitability of most Asian markets, with the exception of India, is superior to that of many mature Western markets. For example, return on life reserves² was on average 0.6 percent in Asia versus 0.4 percent in Western Europe in 2010. The margin of difference between the two regions is expected to remain the same for the next decade, and by 2020 return of reserves are predicted to stand at 0.7 percent in Asia versus 0.5 percent in Western Europe. It is this combination of growth and profitability that has made Asia the premier destination for so many global life insurers over the last decade. See Figure 1.2.

FIGURE 1.2 Asian life insurance markets are growing quickly.

Sources: Country regulatory bodies; McKinsey Global Insurance Pools

Solid Fundamentals Supporting Growth

Asia’s strong continued growth is underpinned by the region’s robust macro-economic fundamentals, which include a growing but aging population, steadily increasing wealth levels, high savings rates, and the rise of the middle class.

The United Nations’ population database shows that projected demographics are staggeringly in favor of Asia. The combined population of the countries under review in this book is expected to grow from 3.3 billion in 2010 to 3.6 billion in 2020, adding another 300 million potential customers. In the same time frame, the U.S. population will grow by a mere 30 million, and that of Western Europe will increase by 12 million. That means that Asia will have more than seven times the total population growth of the United States and Western Europe combined, or in absolute terms, Asian growth will match the population of the entire United States. This growth will be unevenly distributed. Populations in India, Malaysia, and the Philippines will increase by 13–18 percent; North Asian countries such as China, Taiwan, and South Korea will grow by 3–6 percent, while Japan will continue its gradual population decline.

At the same time, some of these countries, such as South Korea, Japan, and China, will see the emergence of a large aging population, like those in the Western world. Aging is no longer a Western phenomenon. The proportion of the population over the age of 65 is expected to increase significantly from 2010 to 2020. As a result, the number of working adults supporting each retiree will decrease, thus dramatically altering the shape of the age pyramid. Take South Korea for example, where this figure will decline from 4.5 in 2010 to 3.9 in 2015 and 3.4 by 2020. This phenomenon will drive demand in health insurance, annuity and endowment policies, and retirement-related products.

It is a well-known fact that economic growth in Asia is much higher than elsewhere in the world. However, it is still worthwhile noting just how significant this trend is. The projected real GDP growth rate for the Asian countries excluding Japan ranges from 4–9 percent per annum between 2010 and 2020. In contrast, the U.S. economy is expected to grow by less than 3 percent during the same period. In total, the 12 Asian countries studies accounted for 43 percent of the world’s real GDP growth from 2002 to 2010 and 42 percent of projected growth from 2010 to 2020. As Figure 1.3 shows, even countries projecting rather modest levels of growth by Asian standards are still expected to almost double the estimated pace of growth in the U.S. economy.

FIGURE 1.3 Strong growth of Asian economies.

Sources: Global Insight; EIU

With fast-growing GDP levels, the personal financial assets of the population will also grow proportionally. For example, personal financial assets in China and India grew at annual rates of 22 percent from 2002 and 2010, whereas the volume grew just 5 percent in the United States and 7 percent in the United Kingdom over the same period. The increase in the personal financial assets (PFA) will naturally drive growth for life insurance products. Furthermore, a changing attitude on investments and personal finances is accelerating this opportunity even beyond these absolute growth numbers. Traditionally, Asians are more prone to leaving their personal financial assets in deposits or cash. In 2002, Chinese consumers put 84 percent of their PFA in cash or bank deposits, while Indian consumers did so with 74 percent, and Thai consumers with 72 percent. There has already been a considerable shift away from savings in bank deposits into investments. Between 2002 and 2010, without exception, consumers from these Asian nations shifted their cash into investment products. By the end of 2010, the Chinese put only 67 percent of their PFA in cash, while Indians did so with 54 percent, and Thais with 52 percent. There is much more room for growth, when considering that in mature markets such as the United States, cash holdings as a percentage of PFA are at only 14 percent.

As Asians move from saving to investing, a great deal more money will become available for investment in mutual funds and equities, as well as life insurance. Will the Asian consumer choose to invest this cash in life insurance rather than other investment products? In markets where life insurance ownership is very low, the answer is a resounding yes. In markets such as China, India, Indonesia, and the rest of Southeast Asia, market penetration of life insurance is still less than 5 percent of GDP (see Figure 1.4). For many customers in these markets, life insurance is often the first financial product they purchase, with the life insurance agent often acting as the primary source of financial know-how.

FIGURE 1.4 Life insurance penetration and density for Asia markets.

Sources: Country regulatory bodies; McKinsey Global Insurance Pools; Global Insight

In the more highly penetrated markets, such as Taiwan and Hong Kong, life insurance faces more competition from other types of financial products. Even so, it is still likely that growth will continue in the medium term as the levels of protection and investment both have room to increase. The level of protection, as indicated by mortality sum assured³ per capita, for Hong Kong and South Korea in 2010 was $48,800 and $24,000, respectively, where the same figure was $69,000 in the United States. At the same time, investment products are likely to see further demand from Asian consumers who are notorious for their penchant for savings. The 2010 household savings rates⁴ in China and India were 21 and 24 percent, compared to 3.8 percent for the United Kingdom and 8.4 percent for the United States. These significantly higher savings rates translate into a higher level of personal financial assets (PFA) at any given level of economic development (see Figure 1.5). Given this level of personal savings, it is not inconceivable that Asia will one day surpass the Western markets in many of the penetration benchmarks we observe today.

FIGURE 1.5 Asians are generally strong savers.

Sources: Global Insight; country regulatory bodies; central banks; monetary authorities

The socioeconomic status of life insurance customers is also changing rapidly as Asian countries become wealthier. The numbers tell the story: There are 160 million households in 2010 earning more than $10,000 per annum⁵ in the 12 countries studied. By 2015, there will be over 410 million. This translates to an influx of approximately 250 million new middle-class households into the Asian market over the next five years. By comparison, there will be a total of 120 million American households at that same income level by 2015.

Where do these new customers come from? A large middle class is emerging rapidly across many of the nascent markets of Asia, such as China, India, and Indonesia. In China, for example, 99 percent of urban households were considered poor⁶ in 1985, but only 24 percent are in that category today. At the same time, 69 percent of urban households are considered middle class⁷ today, and this number is expected to grow to 74 percent by 2025. On absolute terms, that means an additional 140 million middle-class households in China alone! Similarly, in India the middle class constituted only 13 percent of the population in 2010 but is expected to be more than 38 percent of the population by 2025.⁸

It is important to note that middle class in Asia does not connote the same absolute wealth levels as in the developed countries. For reference, a household that makes between $9,000 and $34,000 is considered middle class in China. The United States Department of Health & Human Services set the 2010 poverty guideline for a four-person family at $22,350.⁹ That is to say, a large number of households who fell into the middle-class definition in China would be considered poor in the United States. However, when accounting for purchasing-power parity, a household income of $34,000 would buy a Chinese family the same lifestyle as that of an American household earning $142,800. For these Asian consumers this growth in wealth means they will, for the first time, have money to spare for discretionary spending on items beyond the basic necessities—and they will be able to save and to buy financial protection for the first time.

Continued urbanization is a key factor driving the creation of this new middle class. In China, the McKinsey Global Institute estimates that by 2025, there will be more than 210 cities with over 1 million inhabitants, compared to around 150 in 2010. Consequently, China’s urban population will grow by more than 290 million within 15 years, which is roughly the same population