Insurance & Predictions for Chinese Year of the Snake 2013

Focussed on the real issues

1. Hong Kong industry pays higher price for regulation The introduction of the proposed new Independent Insurance Authority (IIA) will significantly increase the costs to insurers and insurance intermediaries of meeting more stringent regulation. While the consultation phase for the new regulator is under way, 2013 is expected to see the introduction of legislation that will make significant changes to the regulatory environment in Hong Kong. Like other sectors of the economy, insurance in Hong Kong has traditionally been subject to the principle of minimum intervention. However, the new independent insurance regulator (due to come into force in 2015) will have strong powers to regulate and supervise across the market, and will include conduct of business requirements. In light of the enhanced oversight powers and duties, the IIA may be more vigilant in its supervision of industry practitioners. All of this – plus new privacy and personal data obligations – will place a high, and increasingly costly, administrative burden on the insurance industry over the coming year. 2. International insurers seek new best friends in Myanmar The opening up of the insurance sector in Myanmar to local private operations has created considerable interest in the international insurance community who are targeting local firms for co-operation and alliances. The international insurance market is focusing on Myanmar, with insurers such as , Sompo Japan, Mitsui Sumitomo and United Overseas Insurance already establishing representative offices there. These, and other international insurers, are after a deeper understanding of the country with a view to accessing one of last untapped insurance markets in Asia Pacific. Even once the restrictions are lifted, it may still not be possible for any of these international insurers to apply and obtain a licence to write insurance business in their own name. We believe that international insurance carriers will only be permitted to enter the market in conjunction with local private insurers, so each of the existing 12 local partners can expect plenty of attention from potential ‘new best friends’. 3. Significant increase in investment by Asian 5. Sovereign wealth funds focus more closely on insurers outside domestic markets insurance industry in Asia In saturated insurance markets, such as Japan, South Korea Sovereign wealth funds (SWFs) are increasingly looking to and Taiwan, regulators are loosening the rules on outward invest in Asian insurance companies to broaden out their investment by domestic insurers to make it easier for them to financial markets portfolios, and to develop their local markets capitalise on opportunities elsewhere in the world. through strategic partnerships or outright investment. An illustration of this trend was the uptick in SWFs have a war chest of around US$ 3 trillion and, outbound activity by Japanese companies in 2012. over the last several years, there have been signs that Some of these were in the growth markets in Asia, they are committing resources to insurers. In 2010, for example Mitsui Sumitomo’s acquisition of the Kuwait Investment Authority invested about Indonesia’s Asuransi Jiwa Sinarmas PT and the US$ 1 billion in the of AIA group purchase by Insurance Co of a stake in the Ltd and a year later The Government Investment Reliance Life Insurance Co Ltd of India. The acquisition Corporation of Singapore purchased a stake in Chinese of Delphi, a US based insurer, by Tokio Marine insurer . provided Japan’s largest non-life insurance group with This trend looks set to continue. In January, 2013 the ability to expand its presence outside its home the State Administration of Foreign Exchange, the insurance market. government body responsible for managing ’s Korea Life Insurance, South Korea’s second largest US$ 3.2 trillion foreign reserves, established a new life insurance company, expressed an interest in ING investment body called SAFE Co-Financing to assist Group’s Asia Pacific insurance operations and, in May Chinese companies in investing overseas. It would 2012, was shortlisted in the bidding process for a deal not be surprising to see some of this flow to mature that could eventually be valued above US$ 7 billion. insurance markets such as Australia which can This has been followed by plans made by their chief supply both capital to insure assets owned there and rival, Samsung Life, to develop operations in the expertise and knowledge. In Malaysia, the national insurance markets in Thailand, India and Indonesian SWF – Khazanah Nasional – is teaming up with in 2012. Canada’ to acquire 98% of local life insurers, Malaysia. Previously Khazanah Overseas expansion helps to spread risk and balance Nasional supported the launch of Asia Capital Re business cycles, as well as enhance revenue, profit based in Singapore back in 2006. and stability and, in the case of both Japan and South Korea, regulators are actively encouraging this trend. As governments in these regions seek to close the gap between the current state of their financial sectors 4. Indonesian market set for substantial and the sophistication of the international markets, consolidation and development access to valuable resources and skills may be a keener New solvency rules in Indonesia mean that, by the motivation than pure investment returns. beginning of 2013, insurers need a minimum paid up capital of US$ 7.7 million. With many unable to meet 6. Australian insurers up the stakes in this target, there is likely to be a flurry of M&A activity Asian investment in 2013, and increased international interest beyond. The release of the Australian government’s Asian Century White Paper in October 2012 articulated the view that Asia Indonesia has seen impressive growth in GDP over is the economic epicenter of the region and pledged greater the last five years with levels of employment and per federal support for businesses looking to expand into the capita income rising – a situation that will undoubtedly region. Insurers are likely to embrace this ambition. help drive demand for insurance products. However, in many cases, local insurers are seen as weak, with Government support for businesses wishing to insufficient business controls, hence the increased expand into Asia includes regulatory reform to make regulatory oversight and control. Australian businesses more competitive, as well as a commitment to make it easier for Asian businesses This will likely drive market consolidation creating to transact in Australia, including improving the more robust businesses that should attract the interest availability of visas, developing the foreign investment of international insurers. As new licenses are hard screening process and the reduction of tariffs. to come by, this will likely be in the form of equity investments. IAG is setting the pace. In July 2012 it announced that it had invested US$ 720 million in five Asian countries, 2012 saw some start to this with Japanese insurers including US$ 500 million in established businesses in Mitsui Sumitomo Insurance, Hitachi Capital Corp and Thailand and Malaysia and US$ 220 million building Insurance Co all making acquisitions. its presence in India, China and Vietnam. Managing In June 2012, ACE announced that it was continuing its Director and CEO Mike Wilkins has said “It remains our Indonesian expansion with the agreement to acquire target for Asia to represent 10% of the Group’s GWP, on a Jakarta based PT Asuransi Jaya Proteksi (JaPro) in a proportional basis, by 2016”. cash transaction worth approximately US$130 million. 2013 and beyond should see other strong players QBE Insurance Group is also taking steps by acquiring looking at ways to emulate these moves. Hang Seng General insurance Co. Under the agreements, QBE will become the exclusive provider and underwriter of bancassurance general insurance products to ’s customers in Hong Kong and mainland China. 7. Distribution in Chinese insurance market set of 8. Inbound investment in China is the short-term seismic change focus, while outbound will take much longer With agents for insurance sales in rapid decline, With foreign life and property & casualty (P&C) new rules limiting the number of insurers players only holding 4.3% and 1.2% respectively of distributing through bancassurance and the growth the Chinese insurance market in 2012, its sheer size of e-commerce, the channels so vital for product and potential remains a compelling proposition for distribution are seeing considerable change. inbound investment. The pace at which insurers are able to penetrate China Compared to the rest of Asia, China remains an has always been hampered by the geographic size of underinsured market, with insurance penetration the market and their lack of access to distribution. extremely low at around 2%. While real premium Historically, tied agents were a vital sales conduit (in growth is extremely strong, penetration rates are 2010 there were three million life insurance agents in still below most other Asian markets. So, foreign China) however this channel is now in decline, with P&C insurers continue to see this market as offering concerns over expertise and significant opportunities for strong growth. mis-selling. The opening of the motor third party liability New regulations from the China Insurance Regulatory insurance markets in 2012 represents a major Commission have also been introduced which limit opportunity, as does any possible opening up by the the sale of insurance products in bank branches, regulator of other key areas of the market. For example and these insurers are now not allowed to have sales on the life side, changes on pensions, retirement representatives on site. Banks are also starting to roll product, tax incentives and health insurance could out their own proprietary products. allow foreign insurers to leverage their knowledge and expertise. All of this means that China remains All of China’s major insurers now have e-commerce a very attractive destination for international offerings. Ping An intends to set up an insurance joint underwriting businesses. venture with and , pending regulatory approval, and China Taiping’s e-commerce Chinese domestic insurers are facing a more subsidiary has started operations in Shenzhen. The challenging regulatory environment, with increasing other three major insurers, China Life Insurance, capital adequacy pressures, significant shifts in PICC, and China Pingan Insurance have also started distribution and a shortage of local talent. This will to provide online insurance services. All of this mean that, while their longer term goals might include will means that the traditional methods for getting international expansion, in the shorter term the focus products to market will come under intense scrutiny. will remain domestic.

Further information If you would like further information on any issue raised in this overview please contact:

Andrew Holderness Michael Cripps E: [email protected] E: [email protected] T: +65 6544 6550 T: +86 21 6035 6129

Ian Stewart Carrie Yang E: [email protected] E: [email protected] T: +65 6544 6534 T: +86 21 6035 6123

Dean Carrigan Simon McConnell E: [email protected] E: [email protected] T: +61 2 9210 4401 T: +852 2287 2723

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CC002625- January 2013