Why emerging markets in the region are most vulnerable to insurance risks

Analysts have named five risks the insurance sector in Asia will have to navigate in the coming months.

The region is more susceptible to insurance risks as developing markets lack political stability, have less mature legal frameworks, and have weaker regulatory environments, analysts said. Despite insurers appearing robust in the early part of the year, experts believe that developed insurers in the Asia-Pacific region would grapple with challenges in the capital markets, posing a potential strain on earnings for the year.

“I think it's fair to say that the developing markets are more exposed to geopolitical risks than the mature markets. Typically, a developing market is more likely to have a less stable government and internal factions within the population, which can have a spillover effect on the country’s prosperity, including lower gross domestic product (GDP). These factors can also make developing markets more susceptible to being a pawn in a bigger player’s manoeuvres,” Anna Tipping, Norton Rose Fulbright Partner and Head of Asia Insurance told Insurance Asia.

Angela Rowley, Chief Risk Officer at FWD Life Philippines separately told Insurance Asia that although the markets in the region are at snail-pace, there are multiple strategies to overcome these risks.

Combining Rowley and Tipping’s perspectives, these risks are summed up to five: geopolitical, climate change, ageing population, financial literacy, and cyber-related.

Along this line, S&P Global Ratings suggested that the industry might face a shift due to the looming impact of macroeconomic factors. S&P also advised insurers in Asia to exercise caution in light of the potential repercussions of geopolitical risks.

For developed Asia-Pacific markets, such as Japan, Australia, New Zealand, Korea, Hong Kong, and Singapore, it is imperative to brace for the implications of climate change, geopolitical shifts, and cyber risks.

In contrast, emerging Asian markets require vigilance with regard to foreign exchange fluctuations, geopolitical developments, and cyber risks. Still, they also have to brace for geopolitical situations that can change rapidly, necessitating quick decision-making.

These insurance players need to have robust policies and procedures in place for scenarios such as writing or ceasing coverage for a particular country and managing currency and convertibility risks. Multinational insurers entering these markets must navigate these hurdles whilst respecting local regulations and potentially facing a two-tier system where domestic players receive preferential treatment. It is a delicate balance that demands a nuanced approach.

From a climate change perspective, insurers must anticipate the implications for their business: Will we see an increase in natural disasters, typhoons, and windstorms? The rising climate-related risks challenge insurers to assess whether their current policies sufficiently cover or exclude these eventualities.

As climate change evolves, new threats may emerge, including crop failures and changing business dynamics. Insurers must remain vigilant and adaptable to accommodate these emerging challenges.

Geopolitical risks are another crucial facet of the insurance landscape. They encompass a range of issues, from war and trade sanctions to supply chain disruptions.

Strategies for navigating risks

Tipping offers insightful strategies for insurers to navigate geopolitical risks effectively. First and foremost, it is essential to conduct thorough due diligence and stay informed about the political climate in the regions where they operate.

“Be aware, be informed, and conduct appropriate diligence. Be prepared to move fast, whether it's putting people into or moving out of a country, or stopping writing risks from a country or region. Other considerations include having appropriate wording and policies to protect the firm from currency inconvertibility. Active monitoring of sanctions and appropriate KYC and AML checks as conduct that leads to these measures being imposed is often a byproduct of geopolitical instability,” Tipping said. 

Smaller insurers have an advantage in their ability to act swiftly compared to large multinational corporations that may be hindered by global mandates.

Regulatory shifts and their impact

In the Asia Pacific region, regulatory shifts play a significant role in the insurance landscape. Over the past decade, one of the most notable changes has been the increased acceptance of foreign direct investment.

Whilst restrictions on foreign investment still exist in some countries, like India and Indonesia, these policies are slowly being relaxed.

“For example, while India has a requirement that there be Indian management control of insurers, foreign direct investment of up to 74% of paid-up capital is now permitted,” Tipping said. 

“Indonesia has requirements that any multinational investor has to transfer knowledge and know-how to implement resources and expertise into the Indonesian market. As mentioned earlier, there is an understandable desire of local regulators that foreign investors should help develop the domestic market. This requirement for knowledge transfer is a good way for the Indonesian market to achieve both growth from the increased capital contribution from multinational investors and upskilling of local employees,” Tipping added.

Additionally, there has been a shift from solvency capital to risk-based capital in some markets, such as Hong Kong and Singapore.

Whilst this change represents a more advanced and comprehensive approach, not all Asian markets have adopted risk-based capital regulations yet. It is expected that as these markets mature, they will also transition to risk-based capital assessment to ensure a more sophisticated and precise risk management framework.

Rowley highlighted a significant regulatory challenge faced by Philippine insurance companies in reaching the mass market.

Current insurance regulations can be cost-prohibitive, particularly for insurers offering affordable policies. Premium taxes can consume a significant portion of the premiums collected, making it difficult to provide cost-effective products.

The Philippines at a glance

Specialising in the Philippines’ risk climate, Rowley pointed out that climate risks are likely to become more significant, affecting health in various ways. Climate change can lead to an increase in health issues such as skin cancers and respiratory problems.

This evolving risk landscape challenges life insurance companies to adapt and stay relevant to societal changes.

Moreover, technology is set to be a major game-changer. The proliferation of smart devices and the internet has made people more aware of health issues and the importance of insurance.

“Does it make people live a healthier life? These are sorts of things we have to think about and we know, things aren't done the way they would have done when I started in the industry back in the 80s. So, companies have to stay ahead and ask themselves how they stay relevant to the changing generations,” Rowley said.

Challenges of an ageing population

Whilst there is a growing market for insurance among seniors, there is also a significant underserved segment in this age group. One of the primary barriers for this segment is digitalisation.

Many seniors may not be comfortable using smartphones or navigating digital platforms. To address this challenge, Angela suggests collaborating with local communities, particularly “barangays” (small units of villages). Insurance companies can establish a physical presence in these communities to facilitate financial literacy programmes.

By promoting financial literacy and offering user-friendly interfaces, insurers can help seniors overcome digitalisation barriers.

Mitigating cyber risks

Cyber risks are also a formidable challenge for the insurance industry, and Rowley does not see them disappearing any time soon. The realm of cyber threats is constantly evolving. The days of rudimentary computer viruses are long gone.

Now, we face the prospect of AI-powered impersonations, where AI systems mimic sales agents or authoritative figures. AI technology is becoming increasingly sophisticated, enabling the creation of convincing deep fake videos and voice impersonations.

This creates an environment where individuals may unwittingly engage with AI impersonations, leading to potential security breaches and financial risks.

Tipping recalled that when cyber risks initially emerged in the Asia-Pacific region, the consequences of these threats were initially covered by standard property damage policies.

Insurers soon recognized that the cost of addressing and mitigating the impact of cyber risks significantly differed from dealing with traditional property-related perils.

Consequently, insurance providers began to incorporate exclusions for cyber risks in property damage policies and introduced separate cyber risk policies.

Transitioning this approach to address climate change poses a formidable challenge. “It's hard to say. But those are the sort of questions that insurers are going to be asking themselves: whether and how the cover that they currently provide addresses these issues (increased probability and severity of weather-related losses being just one example), and whether it's appropriate for the coverage to continue in that manner and form, or whether they need to create new types of cover.” Tipping concluded.

Rowley, on the other hand, emphasised the importance of community outreach at a small-scale level.

Insurance companies can play a vital role in promoting not just financial literacy but also computer literacy. This includes educating the public about potential cyber threats and how to protect themselves.

Furthermore, insurers can provide guidance on identifying and avoiding potential pitfalls in the digital world. The focus should not solely be on the negative aspects of cybersecurity but also on harnessing the digital economy to create income-generating opportunities.

Small businesses, like sari-sari stores (community stores in the Philippines), can benefit from digitalisation by expanding their reach and increasing their profitability, said Rowley. This challenge underscores the need for regulatory changes to adapt to the digital age.

“This is where we need legislation to catch up with the digital universe. And the whole concept of being able to reach the whole of the Philippines citizens, and to me that is very important, and that’s my passion, really. How do we reach out to Filipinos so that we can protect their lives, that’s what life insurance is. You want to make things better.” Rowley said.