Emerging opportunities: since the fall of communism and rise of the World Trade Organization, small countries are showing the greatest growth in insurance markets.

Multinational insurers have always had to make difficult decisions in their perennial quest for new markets. These days, the toughest part of that quest may be choosing from a few dozen markets that simply didn't exist five or 10 years ago.

Several trends have contributed to a burst of new insurance markets beginning in the 1990s. Most important are the collapse of the Soviet Union and the discrediting of Marxist economics, and the rising influence of the World Trade Organization and the European Union as regulators of crossborder business.

The poster child for the rapid emergence of new insurance markets has to be China. Since the country's accession to the WTO in 2001, virtually every multinational insurer in the world has been pushing for its part in a potential market of 1 billion people. Smaller countries such as those of Eastern Europe--eight of whom joined the European Union last year--and Vietnam have quietly, and less spectacularly, attracted the attention of those multinational insurers, albeit in China's shadow.

Many of the global heavyweights have announced new ventures in these markets--most of them former communist countries--with increasing frequency over the past year or two. These markets include Eastern European countries such as Poland, Slovakia and the Czech Republic; Russia; Southeast Asian countries such as Vietnam; and countries of the Middle East, including Turkey, the bridge between Europe and Asia.

In many of these markets, life insurers tend to lead the way, entering joint ventures, buying existing operations or creating their own from the ground up. But increasingly, commercial property/casualty and personal lines are attracting attention.

Stepping It Up

One multinational insurer that has been aggressively pursuing emerging markets is Bermuda-based Ace Ltd. Since the beginning of this year, Ace has secured commercial property/ casualty licenses in Russia and Poland and a life insurance license in Vietnam.

According to Ace's former Vice Chairman Don Kramer, emerging markets are beginning to discover insurance in two areas. One is conventional insurance--property and life. The other is personal accident insurance, where Ace is a significant player. "Ace does over $1 billion a year in personal accident premiums," he said. "It is individually marketed and carries very good margins. It's not correlated with the conventional property market. It's an important line of business for Ace, and that's where we've had a lot of growth."

Kramer said the model for penetrating emerging markets is exemplified by American International Group Inc., famous for its success in countries such as China and Vietnam. "You see the kind of success AIG has had in emerging markets," he said. "You start small, but the rate of growth is so high that it compounds itself, and before you know it, it becomes serious money."

AIG has continued to expand into emerging markets, despite its many legal and accounting problems in the United States. In June, the group announced it won a general reinsurance license from the Republic of Georgia, a market that has only barely begun to develop. AIG is also expanding into the Baltic states from its life insurance base in Poland, and is seeking markets in other Central Asian states, most of them former members of the Soviet Union.

And recently, the prime minister of Vietnam, Phan Van Khai, announced an AIG subsidiary will be awarded a general insurance license to operate in the country--a first for a U.S. insurer.

As is often the case in Pacific Rim markets, foreign life insurers are usually first in when a country begins to open up. In Vietnam, insurers such as Ace, AIG, New York Life Insurance Co. and the United Kingdom's Prudential plc have all entered the Vietnamese life market.

Vietnam is an interesting market in that it illustrates the "rising tide lifts all boats" logic of open markets. "Here you had a state-owned monopoly, a single company, Bao Viet," Kramer said. "And then Prudential U.K. came into the market and took significant market share from Bao Viet. And yet, Bao Viet did not have a decline in revenue."

The market had actually expanded significantly, so that Bao Viet also had significant growth with less market share. "The market expanded in response to more products being offered in personal savings, in a community that has a large, very young population," said Kramer.

Joint Ventures

In markets such as China, which has been working longer at opening itself to foreigners and moving more slowly than smaller countries, the joint venture is a common entry strategy.

In China, Ace took a 22%, interest in Huatai Insurance Co. in 2002, then brought in the chief financial officer, the internal auditor and the chief operating officer. "These are Chinese-speaking Ace people who are infusing the company with the Ace culture," said Kramer. "We have a good marriage between the two, and now we're seeking a full Chinese license for life insurance, that Ace and Huatai will do on a 50-50 basis."

The joint venture has also been employed in Eastern Europe. Yet, there are risks involved, so some insurers prefer to take more time and build their own operation from the ground up. "In some places, you don't want to go into a joint venture, because the culture, history and background of the predecessor companies may be questionable," said Kramer. "You don't want to take on legacy issues."

Patience Pays Off

Russia typifies the test of patience many insurers must pass to succeed in emerging markets. "It takes time to establish a presence in Russia," said Kramer. "Russia is not going to move the needle for a company like Ace, which does $16 billion in gross premium worldwide in a given year. But in Russia, Ace went in and took its time, on its own and without Russian partners, because we want to do things the Ace way."

Allianz A.G., Germany's top insurer, has five companies operating in Russia, offering insurance, provision, asset management and banking. Allianz entered the Russian market in 1990--one of the first international insurers to have been licensed in both life and nonlife insurance there. Allianz has always touted the Russian market as promising, especially in personal property/casualty lines.

Poland and other Eastern European countries are attracting a lot of interest from European multinationals interested in developing their life insurance and wealth management potential. Dutch financial services giant Aegon N.Y., for instance, is using an already well-established presence in Hungary to expand into neighboring countries, including Poland, Slovakia and the Czech Republic.

Aegon relies on its top management in Hungary to build up newer operations in neighboring countries, said Aegon spokesman Willem van den Berg.

"Poland and other Eastern European markets have life insurance and pension penetrations that are much lower than in Western Europe, and provide opportunities for profitable growth," said van den Berg. "The growing importance of life and pension savings combined with opportunities created through ongoing reforms in the social security and pension arenas make these markets particularly attractive for Aegon."

Van den Berg said life insurance penetration (premiums as a percentage of gross domestic product) in Poland is only 1.6%, compared with 4.8% for the EU's 25 member states on average, and 5.1% for the 15 EU member states prior to last year's accession of 10 new members--eight of them, including Poland and Hungary, from Eastern Europe.

Another insurer very much interested in the Polish market is Denmark-based Nordea Group, which recently acquired the Polish life and pension operations of Finland's Sampo plc. "The compulsory pension system is one of the fastest growing segments of the long-term savings market in Poland, with an expected growth rate of around 20% annually," said Allan Polack, head of life and pensions for Nordea. "It offers stable monthly savings flows into pension funds and it is without traditional guaranteed returns."

Polack said he expects a high demand for savings products in Poland, which is expected to have stable gross domestic product growth, leading to increasing wealth accumulation.

With the expansion of the European Union to 25 members from 15 a year ago, eight former communist countries joined the club--Poland, Hungary, Slovenia, the Czech and Slovak republics, Lithuania, Latvia and Estonia. The accession added 75 million people to the EU's common market, opening up plenty of opportunities for insurers in one swipe.

"EU membership has been a major catalyst for the overall growth of the pension and insurance industry in Poland," said van den Berg. "It has also driven the sweeping regulatory and structural reforms that have taken place during the last few years."

Challenges still confront insurers in Poland, as in the other Eastern European markets, said van den Berg. They include developing a broader range of product offerings and multichannel distribution systems. On the distribution front, the market is currently "heavily skewed" to the agency channel, he said.

Turkey

Turkey is emerging as a unique case for several reasons. The country, unlike most other emerging insurance markets, was never part of the communist world that fell apart in the early 1990s. It is also a Muslim country, and acts as a bridge between Europe and Asia.

The country's population of 70 million is young and its economy is growing, albeit in fits and starts.

Most insurers in Turkey are domestic, but the country's main insurance trade group, the Association of Insurance and Reinsurance Companies of Turkey, has been active in efforts to harmonize its insurance market with that of the European Union. The association's application to the European Commission's Technical Assistance Information Exchange Unit for market harmonization has been recently accepted.

Also within the past few months, the association's representatives participated in the annual general assembly of the Paris-based Comite Europeen des Assurances, Europe's club of insurance trade groups, and met with the Finance Department of the Organization for Economic Co-operation and Development.

The association reported insurance premium growth in 2004 of nearly 40% over the previous year.

In April this year, Dutch-Belgian financial services group Fortis said it would acquire a controlling stake in a Turkish bank as part of a strategy to diversify outside its core market of Belgium, the Netherlands and Luxembourg. Under terms of the agreement, Fortis would acquire an 89.3% stake in Disbank, Turkey's seventh-largest privately owned bank. Fortis also would make a public bid for the remaining 10.7% of the bank's shares.

Fortis said it intends to leverage its bancassurance expertise through the Turkish bank, in an insurance market where total business represents only 1.35% of gross domestic product, compared with 7.98% insurance penetration for Europe as a whole. Fortis sees great distribution opportunity through Disbank, particularly in life insurance and pensions, as 80% of the small Turkish market is taken up by nonlife insurance and bank distribution is currently very limited.

Disbank has more than 1 million customers, about 120,000 small-enterprise customers and about 10,000 commercial banking (medium-sized) clients, said Fortis. The bank has a network of 173 branches.

Key Points

* China is the poster child for the rapid emergence of new insurance markets.

* Although life insurers are leading the charge into emerging markets, property/casualty is attracting attention.

* Many large insurers have announced new ventures in Eastern European countries as well as Vietnam and Turkey.

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Ace Ltd.

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Poised for Growth

Industry research shows remarkable growth for insurance markets in the smaller emerging markets, particularly those of Eastern Europe. In its annual Sigma study of global markets, "World Insurance in 2004." Swiss Re Group found that life insurance premiums rose 10% in Central and Eastern Europe last year. In Russia, life premiums fell 38.4%, mostly due to tax optimization moves that affected short-term policies. But the rest of the Russian life market is estimated to have grown by about 50%.

Slovenia life premiums rose 38.3%, while those of Poland rose 11.2%.

"The healthy economic environment combined with significant market growth potential are expected to promote further life insurance growth," said Swiss Re in its report. "However, developments in Russia will continue to dominate the regional life insurance market."

Nonlife premiums in Eastern Europe rose 13.5% in 2004, as Russian premiums surged 17.6% on a growing compulsory third-party motor market, said Swiss Re. "Nonlife premium growth in 2005 is expected to be lower than 2004, mainly because of decelerating growth in the motor third-party liability insurance in Russia," the reinsurer said.

Emerging Markets'
Aggregate Premium
Volume--2004

                                     Change %    Penetration
                           Volume    (Nominal      (Premiums
                   (US$ millions)      US$ *)      % of GDP)

Russia                     16,352        15.6           2.83
Poland                      7,431        18.8           3.07
Turkey                      4,619        39.9           1.54
Czech Republic              4,393        17.0           4.15
Hungary                     2,887        18.0           2.83
Slovenia                    1,809        25.6           5.61
Slovakia                    1,488        30.9           3.61
Vietnam                       904        34.2           2.02
Worldwide               3,243,906         9.7           7.99

* Current prices

Source: Swiss Re Sigma No. 2/2005

Lands of Opportunity

Insurers are venturing into the following
emerging markets:

* Poland           * Russia
* Slovakia         * Vietnam
* Czech Republic   * China
* Hungary          * Turkey

Emerging Market Growth
Rate, 2004

                            Life   Non-Life

Industrialized countries    1.7%     1.7%
Emerging markets            7.4%     7.7%
Total                       2.3%     2.3%

Source: Swiss Re Sigma No. 2/2005