Going Global 2010 Developments In The Insurance Markets Around The World

Foreword

Developments in the global re/insurance markets

The global nature of the (re)insurance markets means flows of investment and business development between the countries and markets. If the last two decades were defined by investments in Lloyd's and Bermuda, there is no doubt that the next will be about the emerging markets.

The economic cycle is driving insurers and intermediaries in more mature economies to look for growth in new territories, to provide capital and underwriting skills to meet the re/insurance needs in those markets – as well as looking for risk diversification and cost reduction. Since the beginning of the 1990s, international insurers have been expanding their activities into the emerging markets. The market share of insurers who are either partly or fully foreign-owned now stands at around 47% and 41% in Latin America, Central Europe and Eastern Europe respectively, while in Asia the average is much lower at 2%.

For players in established markets, the low insurance penetration in developing countries is a key driver – the emerging markets account for just 9% of global premium. The development of insurance markets in China, India and Russia is being driven by the growing consumer class, increased foreign direct investment, infrastructure development and an increased awareness of catastrophe exposure. However, there is traffic in both directions – for example, the strong interest from Indian and Chinese companies in setting up operations in Lloyd's.

The challenge of the unknown

The opening up of these markets presents a number of challenges to the (re)insurance industry. The market will need to assess the impact on the amount of capital it holds, or can access, when writing significant volumes of business in economies where there may be little historic data available. This may accelerate development in capital market risk transfer products, such as catastrophe bonds, insurance linked securities and contingent capital.

The further convergence between the (re)insurers and the capital markets over the underwriting of catastrophic risk will continue as the (re)insurance markets march along their path of globalisation. These capital challenges may also be exacerbated by the technical implications of Solvency II (although delayed now until 2012) and IFRS II, both of which require the movement of capital around the balance sheet.

A guiding hand

Understanding this industry inside out is what makes the Clyde & Co insurance and reinsurance practice a world leader. More than 70 partners work solely on insurance related matters and our depth of understanding covers all types of claims, corporate and regulatory advice. With clients all over the world, involved in every sector of the industry, we have both a local and global view of development and trends.

Our knowledge and expertise has been brought together here to provide an overview of some of the key emerging markets. This publication gives key facts about countries in which we are active and views on current and future trends.

Michael Payton Senior Partner

China

Market overview

According to data published by the China Insurance Regulatory Commission (CIRC), the total annual premium income for 2009 reached the equivalent of RMB1.1 trillion (approx €134 billion). Of this amount, roughly RMB826.1 billion (approx €100 billion) was for life insurance and RMB287.6 billion (approx €35 billion) was for non-life insurance respectively.

China's insurance market continues to grow at rates that are unprecedented in other regions of the world. According to CIRC, the total assets of the insurance sector reached RMB4.3 trillion (approx €524billion) by the end of March 2010, up 7.5% from the beginning of the year. In the first quarter of 2010, insurance premium rose 38.6% from a year earlier, reaching RMB454.1 billion (approx €55 billion). Property insurance premiums rose 38.4% and life insurance premiums rose by 38.7%.

Key facts

Following China's accession to the World Trade Organisation, these limitations / restrictions on foreign-invested insurers in the form of corporate entry vehicles, geographical coverage and business scope, have been gradually lifted. There has been a continuous growth in foreign participation in the Chinese insurance market in 2010, which is probably supported by the China's macro-economic policies in an effort to enhance the role of commercial insurance in supplementing social insurance schemes.

In the property and casualty insurance market, international insurer XL received approval from the CIRC to commence preparatory work to set up a full-fledged property and casualty insurance company in Shanghai in November 2009. In May 2010, Lloyd's Reinsurance Company (China) Ltd based in Shanghai was granted a licence by the CIRC to write direct insurance business in China. This may potentially allow other insurers to use the Lloyd's China platform to gain entry into the Chinese insurance market.

There has also been a marked increase in foreign participation in the healthcare insurance industry during the period from late 2009 to early 2010 after the Chinese government has confirmed that commercial health insurance would be an integral part of the overall healthcare system in China. Both Wellpoint and Humana Inc have received approvals from CIRC to establish their respective representative offices in Beijing early 2010. In addition, many other companies have opted to enter the Chinese market as Third Party Administrator in the form of service or consulting companies. An example of this is Beijing Prestige Health Consulting Services Ltd established by Swiss Re in 2008.

On 12 April 2010, the CIRC approved the Administrative Measures for Equity Interests of Insurance Companies which came into effect on 10 June 2010. These Measures seek to regulate equity investments in domestic insurance companies with less than 25% foreign shareholding. These Measures have primarily provided for the qualification for eligible shareholders investing in domestic insurance companies, shareholding limit for each single shareholder and non-compete restrictions for domestic insurance companies under common control.

On the contentious front, China adopts a civil law system and the common law doctrine of binding case precedent does not apply. A judge presiding over a case will decide based on what the Chinese laws and regulations say. Chinese law does not impose any restriction on the choice of dispute resolution mechanism. Parties to an insurance contract are free to decide whether to submit their disputes to either an arbitral tribunal or a Chinese court. Specialised maritime courts are located in 10 coastal cities in China for handling marine insurance cases.

Clyde & Co in China

Clyde & Co's Shanghai and Hong Kong offices operate as an integrated unit and there is much involvement and interaction between the two offices. We have the critical mass, resources and depth of experience to handle the largest and most complex transactions. We have extensive experience in dealing with corporate and regulatory insurance as well as claims issues in the region. We service our local and international clients in a wide range of legal issues including their investment in the Chinese reinsurance / insurance market, liaising with regulatory authorities, policy wording compliance review and dispute resolution.

India

Market overview

Despite the presence of many international insurance companies, the Indian insurance market remains significantly under-exploited and thus offers opportunities to both, the existing players and potential entrants.

The insurance sector exhibits immense potential for growth. According to the Investment Commission of India, the Indian insurance market is expected to grow at a compounded annual growth rate of over 30% per annum.

Even with the life insurance sector clocking a growth of over 18% in total premium received in the fiscal year 2010, the penetration level of life insurance remains at about 4% of the GDP as against the global average of over 7%. Higher disposable income, aging population, no universal life cover and tax benefits to life insurance products make life insurance market an attractive proposition for insurance companies seeking expansion.

On the other hand, despite an average annual growth of about 16%, the penetration level of general insurance business in India is less than 0.60% of the GDP as against the global average of 2.14%. Untapped rural markets, lower consumer preference and constrained distribution channels are understood to be the reasons for the lower levels of penetration. These, combined with ongoing reforms, will certainly make this growing sector appear more attractive for existing and newer participants.

Key facts

Insurance industry is regulated under the provisions of the Insurance Act, 1938, the Insurance Regulatory and Development Authority (IRDA) Act, 1999 and the rules and regulations notified by the IRDA The IRDA has been conferred with powers and function relating to the regulation of insurance companies and insurance intermediaries like insurance brokers, surveyors and loss assessors and agents. It stipulates the guidelines and code of conduct with the objective of protecting policy holders In addition, it regulates investments of funds by insurance companies, maintenance of solvency margins, social sector obligations of insurers and adjudicates disputes between insurers and intermediaries Licenses are necessary for insurance brokers, insurance agents, loss assessors and surveyors, third party administrators and other such insurance intermediaries Further the principal officers or designated persons of such intermediaries must also possess the prescribed qualifications including practical training in some cases Currently 23 life insurance companies and 23 in general insurance companies are licensed to carry out their respective insurance businesses in India. All insurance products are subject...