Emerging Risks/Markets Offer New Opportunities: 2017 Predictions, Part 3

By | December 21, 2016

Insurers and reinsurers continue to look for organic growth where they can find it – sometimes from emerging risks and sometimes from emerging markets. As always, the keys to success are market knowledge and patience.

Providing a heads-up for such global opportunities is the international law firm Clyde & Co., which has published a list of predictions for 2017.

Part three of Clyde & Co.’s predictions, which are being summarized by Insurance Journal, covers opportunities in motor-cyber, reinsurance in India, agribusiness insurance in Brazil, and the expectation that parametric insurance will beef up re/insurance penetration in emerging nations. Clyde & Co. also takes a look at regulatory changes in South Africa, which could threaten the status quo for foreign firms, but provide opportunities with the right business model. (See below for links to parts one and two).

Motor-Cyber Opportunities

Mark Hemsted, a partner in Clyde & Co.’s London office, predicts that motor-cyber will transform the motor market — even more than driverless cars — and will create new opportunities for insurers.

“Technology has not done the motor market any favours,” Hemsted affirmed. “Direct marketing has cut distribution costs, but the rise of the aggregation sites has closed down opportunities for brokers and put carrier margins under threat, driving many out of the market altogether.”

Adding insult to injury will be the introduction of driverless cars, which has led one consultancy to predict the traditional motor market will shrink 60 percent by 2040, he indicated.

But, Hemsted insisted that opportunities for insurers will remain. “Individual drivers will still require some level of liability and property cover. Car manufacturers will certainly require product liability – particularly if more follow the lead set by Volvo to accept liability for their cars when in driverless mode.”

Ultimately the industry will have to get to grips with the combination of motor and cyber insurance, he said.

“We predict it won’t be long before criminals start hacking the car auto drive management system thereby causing accidents, raising questions over where liability will sit,” Hemsted explained.

“Furthermore, hackers will look to access car wifi to see if it’s been used for work and contains sensitive data, or whether bored passengers have been online shopping. In this scenario it might soon be the case that the data in the car is far more valuable and far harder to protect than the car ever was.”

Global Reinsurers to Open More India Branch Offices

The Indian government is interested in encouraging more global reinsurers to set up Indian branch offices, according to an article written by Vineet Aneja, a partner in Clyde & Co.’s Mumbai office.

“In a bid to create a conducive investment climate for the insurance sector, the Indian government is all set to ease regulatory norms, including licence rules, to attract foreign reinsurance firms,” Aneja said. “The Finance Ministry will soon meet all financial regulators and Reserve Bank of India to discuss possible investment options for foreign players.”

Global reinsurers are unhappy with current rules that require them to conduct core activities – such as claims settlement, risk management and investment – within the country itself, rather than outsourcing them abroad, said Aneja, noting that reinsurers believe these rules increase their cost base.

“In addition, they do not feel that they are on an equal footing with Indian reinsurers as under current regulations Indian insurers must first offer business to a domestic reinsurer and, only if it is rejected, to a branch office of a foreign player,” he added.

Clyde & Co. predicted that India’s regulator may come up with new liberalized regulatory norms for global reinsurers in the near future, which will make it easier for them to set up a branch office and remove a number of operational issues.

Brazilian Agribusiness Insurance

Brazilian agriculture has seen strong growth with total output more than doubling in volume from 1990 and livestock production almost trebling, primarily due to productivity improvements and technological developments.

“Despite this success, the sector continues to face significant risks predominantly from adverse natural phenomena,” said Stirling Leech, a partner in the firm’s Sao Paulo office. “Brazil has experienced a range of these in recent years including heavy rainfall, devastating floods, high winds and hurricanes, storm tides and severe droughts.”

With such exposures, demand for agribusiness insurance policies has skyrocketed, with the number of policies covering agricultural risks rising from only 849 in 2005 to more than 100,000 in 2016, Leech continued.

He emphasized, however, that the market is still has room for growth.

Currently less than 20 percent of Brazil’s planted agricultural area is insured, although the market aims to increase this to 70 percent in the coming years, in part through government subsidies, Leech said.

Parametric Insurance Aids Emerging Nations

The concept of “insurance as aid” will come of age during 2017 but only with concerted action by insurers, according to Nigel Brook, a partner in the firm’s London office.

Parametric insurance is set to transform the way disasters are managed as governments and aid agencies realize that aid can be made available more quickly by using these developing insurance products, he said. (Editor’s note: parametric insurance makes claims payments upon the occurrence of a triggering event, such as hurricane wind speed or earthquake magnitude.)

Success in this area has already been achieved by mutuals formed by neighboring countries in the developing world, which pay out promptly for defined natural hazards. Brook pointed to the example of the CCRIF SPC in the Caribbean (the pioneer of the concept in 2007) which paid out $29.2 million to member countries within two weeks of them being hit by Hurricane Matthew.

“We predict that in 2017, commercial insurers will develop an appetite for offering this type of cover to national and regional governments. Swiss Re and a Lloyd’s consortium have led the way in China and other parts of Asia,” he said.

One of the key challenges for the industry will be to help non-governmental organizations and others explain to potential donors why it makes sense to fund premiums for a parametric cover that might only occasionally pay out, Brook affirmed.

“In insurers’ favor is the inalienable argument, borne out by the Hurricane Matthew experience, that payment based on a range of scientific data triggers is faster and more reliable than politicized decision-making about aid allocations could ever be.”

South African Rule Changes Ahead

South African government is set to usher in a raft of legislative and regulatory changes, which will lead foreign re/insurers to restructure their businesses.

One substantial change that will affect the insurance market is a tightening of the prohibition of foreign insurers and reinsurers conducting business in South Africa. “The vast majority of operating models which were utilized by foreign insurers and reinsurers, for example the typical ‘fly-in fly-out’ models, will in most instances no longer be viable,” Ernie Van Der Vyver, a partner in Clyde & Co.’s Johannesburg office.

Foreign direct insurers will have to consider whether they will seek to amend their model to comply with the new rules, incorporate a local insurer in South Africa, operate via a Lloyd’s underwriter, or simply abandon their South African business altogether, Van Der Vyver said.

“Foreign reinsurers will, in certain instances, have the additional option of establishing a branch office in South Africa,” he added.

“With the regulatory and cost burden of a fully incorporated entity, we foresee a substantial up-tick in business by way of Lloyd’s underwriters, and it is likely that Lloyd’s will increase its local capabilities ahead of this,” Van Der Vyver went on to say.

A minority of insurers will withdraw “from underwriting South African risks where their footprint does not justify the incurring of costs in pursuing the market.”

Tomorrow’s Clyde & Co. predictions – the final in our series – cover the Chinese and Hong Kong markets.

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