The growth differential between Asia’s emerging insurance markets and their mature developed world counterparts has widened since the beginning of this century: Asian non-life insurance growth has outpaced Europe’s, for example, by a factor of seven.

Therefore, not surprisingly, an increasing number of insurers and reinsurers from advanced countries are exploring opportunities in Asia in search of greener pastures.

Against this backdrop, the following article sheds some light on the market structure, underwriting performance, regulatory environment and some other relevant underlying dynamics of South, Southeast and Northeast Asia’s (excluding Japan) rapidly growing non-life insurance markets.

In terms of premiums, these markets are worth more than $192bn (see table 1), one-tenth of the world’s total. They vary significantly in size, ranging from China’s $87bn (coming close to France) to Indonesia’s $5bn (comparable to Finland).

In terms of non-life insurance penetration (premiums as a share of GDP), only South Korea and Taiwan exceed or match the global average of 2.8%. In India and Indonesia, non-life insurance continues to be of marginal relevance, accounting for less than 1% of GDP.

These insurance markets, however, are poised to grow particularly briskly as they capture a larger share of GDP. The embryonic nature of India’s and Indonesia’s markets is exposed even more strikingly when looking at insurance spend per capita, which is less than 10% and 5%, respectively, of the global average of $283.

Most Asian markets display loss ratios lower than many other regions (see chart 1). However, the unabated influx of new insurers puts pressure on rates and, as a result, loss ratios. Acquisition cost ratios are on the rise too, adding to higher combined ratios. In addition, it is important to keep in mind that Asian market statistics generally report loss ratios on an incurred claims/gross written premiums basis. Thus, loss reserves are not included.

All this suggests some caution when looking at market underwriting results in Asia. In addition, claims trends suggest rising loss ratios going forward.

While litigiousness continues to be relatively low in Asia, there are signs of deterioration, for example in Malaysia and Brunei. Also, property results may come under lasting pressure as both the frequency and severity of natural catastrophes increase.

On the regulatory front, there is a growing tendency towards refining existing risk-based capital (RBC) regimes and incorporating the lessons learned during the 2008/2009 financial crisis. Market risk, equity and credit risk in particular, is subject to heightened regulatory scrutiny.

In general, regulators such as the Monetary Authority of Singapore or the Taiwan Financial Supervisory Commission are shifting their focus to enterprise risk management, i.e. an holistic approach to managing asset and liability risks. In this context, they diligently examine the draft provisions of Pillar II of the European Union’s Solvency II framework.

Other jurisdictions have just implemented RBC schemes (Thailand and South Korea), building on the experience with existing RBC regimes in Japan, Malaysia, Indonesia and Singapore.

In addition to RBC-related developments, it is noteworthy that most regulatory authorities in emerging Asia are moving from micro-regulation to consumer protection and solvency control. Tariffs have been largely abolished in China, Taiwan, South Korea and India. Malaysia is one of the few countries where tariffs in fire and motor business still persist.

Concentration ratios reflect the heterogeneous character of the emerging Asian insurance marketplace. On the one hand, the formerly monopolised insurance sectors of China and India exhibit very high levels of concentration, with the top five non-life insurers accounting for approximately 75% and 62% of the market, respectively (see chart 2).

The same is true for South Korea where the non-life insurance market structure mirrors the dominant position of the leading Chaebols in the national economy. Some Southeast Asian markets such as Indonesia, in contrast, are highly fragmented, with a top five share of less than 40%.

This gap, however, is set to narrow as highly concentrated markets become more fragmented – and the other way round: In China, the market share of the “Big Three” (PICC, CPIC, Ping An) might further decrease as new providers consolidate their position.

The same development is likely to occur in India: the market share of former state-owned monopoly companies (New India, National, Oriental and United India) has already eroded to below 54% and new privately-owned companies are (with a maximum foreign equity stake of 26%) gradually broadening their footprint.

On the other hand, markets such as Indonesia, where close to 100 non-life insurers chase after a premium pot of less than $5bn, are set to consolidate as regulators hike minimum capital requirements and foreign insurers make further inroads into the market.

Asia’s non-life markets display similarly sharp differences in terms of foreign insurers’ market share. In Hong Kong SAR, for example, foreign players enjoy a dominant position. In Malaysia and Singapore, they have also captured a sizeable market share. In South Korea and China, however, their market presence remains marginal, at 3% and 1%, respectively.

While there is a trend towards market access liberalisation throughout the industry, significant barriers to market access remain, such as a 26% foreign equity participation cap in India, a 25% foreign ownership limit, a ban on new foreign branches in Thailand, and geographical and operational restrictions on foreign branches in China.

In addition, there are also non-legal obstacles such as conglomerate relationships and customer preferences for national insurers, for example in South Korea.

Also, foreign insurers frequently struggle to build strong local distribution networks. This puts them at a severe competitive disadvantage vis-à-vis local insurers, for example in China and South Korea.

Chart 3 shows the real, inflation-adjusted average growth performance of some of the region’s non-life insurance markets from 2001 to 2011. China leads the league table of growth, given its rapid macroeconomic development and the still nascent nature of its insurance markets.

India ranks second, reflecting an accelerated pace of economic growth since the early 1990s, when deregulation and liberalisation catapulted the country to a higher growth trajectory, including the insurance sector.

In general, most countries’ non-life insurance markets have grown faster than underlying GDPs. As a consequence, insurance penetration (premiums as a share of GDP) has increased from 2001 to 2011 – for example, in China from 0.7% to 1.2%, in India from 0.5% to 0.7% and in Singapore from 1.3% to 1.6% (the latter’s relatively low penetration measured against GDP per capita primarily reflects the limited scope for motor insurance).

This trend of robust growth is expected to continue as increasing levels of private wealth will further boost personal lines business.

Also, the corporate sector will require more sophisticated and comprehensive insurance solutions as it moves beyond pure manufacturing and starts to embrace globalisation by venturing into non-Asian markets.

But there are challenges too. Fierce competition, driven by an unabated influx of new players, the abolition of tariffs and the emergence of new technologies in distribution, threatens to erode overall profitability.

Further, some markets highlight the large portion of underinsured, uninsured and – as the Thai floods of 2011 have demonstrated – poorly understood natural catastrophe exposures.

Reinsurers have responded to the lessons from the catastrophe year of 2011 by introducing event limits, requesting more transparency from cedants on insured ‘interests abroad’ and by trying to close catastrophe modelling gaps.

Last but not least, cultural reservations towards insurance are a major structural challenge in a number of countries. Insurance buyers tend to prefer savings-type forms of insurance over pure risk transfer products.

Looking ahead, despite these challenges, the Asian insurance markets continue to be among the world’s most attractive. Their growth momentum will not abate any time soon as middle classes grow more prosperous.

Further market liberalisation, in conjunction with the emergence of a younger, ‘insurance-savvy’ generation, is expected to lead to increasing levels of sophistication. This should also help domestic insurers explore the option of expanding beyond Asia, as they feel the need to follow a growing number of their corporate clients who set their eyes on markets in Europe and the Americas.

The rapid emergence of regional rather than purely national Asian insurance players may be just a precursor to a truly global scope of activities.

In summary, the unparalleled growth momentum and mounting sophistication of Asian insurance markets keep fascinating domestic and, in particular, non-Asian insurance professionals.

No aspiring player, be it a global giant, a regionally operating Asian insurer or non-Asian specialty provider can afford to ignore these markets’ opportunities.

Equally, any responsible market participant will keep a close eye on certain weaknesses and risk factors in the region and within itself.