Asian insurance An update from the coal face::Macquarie Research,

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Asian insurance
An update from the coal face
Event
􀂃 We recently visited insurance companies, regulators and industry specialists
in Indonesia, Malaysia and Hong Kong to better understand the current issues
and trends across Asian insurance markets. This report summarises our
takeaways and discusses some of the key issues.
Impact
􀂃 Several new developments in Hong Kong: (1) New business growth in HK
has accelerated to 30%+ for a host of reasons and VNB margins remain high.
(2) Capital requirements have always been onerous but in the current volatile
environment the regulator is now asking insurers for daily reporting of
solvency ratios. (3) Acquisition costs remain very high (up to 170% of firstyear
premium) as banks and agents increasingly demand upfront payments
for distribution arrangements.
􀂃 Indonesia remains attractive: The demographics of Indonesia seem likely to
drive some of the strongest growth rates amongst Asian insurance markets.
The life industry is widely expected to keep growing at ~30% pa, with the
largest players potentially achieving even higher growth rates. We understand
the regulator is scrutinising the high level of investment-linked business, and
we sense a competitive threat emerging for “insurance” products which
merely replicate a mutual fund.
􀂃 Takaful the next growth driver in Malaysia: Premium growth picked up last
year, partially driven by Takaful. These Shariah-compliant products (both life
and P&C) appear to be competing directly with conventional insurance, and
profit sharing arrangements can be more attractive to customers. Takaful
growth is widely expected to continue at >30% pa, notwithstanding a new
regulatory framework for this business to be applied from January 2012. The
regulator seems comfortable with industry RBC ratio of 224% currently.
􀂃 Headwinds in Thailand: Most insurers we met with downplayed the impact
of: (1) the lighter mortality table recently introduced which implies lower
margins; and (2) the introduction of a risk-based capital regime from this
month. We observe that the Thai sovereign yield curve has flattened
considerably in recent months which we expect to weigh on VNB margins.
􀂃 India may not have bottomed out yet: Insurers are still recovering from
adverse regulation of 12 months ago. No one was prepared to declare a
trough yet as volumes and agent numbers continue to fall.
Outlook
􀂃 In general, it appears to us that retail investor appetite remains intact, the
bank channel continues to grow quickly and the largest players are best
positioned, whilst regulators increasingly seem to be advocates for customers.
􀂃 We expect AIA’s strong capital position to have weakened significantly since
1H11 due to a combination of lower bond yields, weaker equities markets and
consolidation of regional branches under stringent HK capital requirements.
We have an Underperform rating on AIA. Our top pick is China Pacific.