The new frontier: global trade integration opens new territory for multinational insurers.

Market saturation and a highly competitive nature are driving multinational insurers farther afield in their search for new markets that can support rapid growth.

Insurers and brokers surely have in mind the sudden transformation of China's market after it joined the World Trade Organization in 2001-the rapid regulatory liberalization and sudden access to a huge population with little, if any, prior access to insurance.

For a variety of reasons, developing markets tend to attract foreign insurers in batches. While China grabbed most of the industry's headlines over the past five years, countries such as Russia, Turkey, Ukraine and the United Arab Emirates have been steadily, if slowly, seeing rising interest from Western companies.

Greater regulatory and market transparency, driven partly by WTO membership, partly by efforts from within the insurance industry, are driving an increased tempo in new-market exploration.

"There is virtually no country on the planet that is off limits to insurers, unless there is warfare or some U.S. government prohibition on doing business," said David Snyder, vice president and assistant general counsel with the American Insurance Association, a trade group representing about 400 property/casualty insurers. "We've got companies that are interested in virtually every country on the face of the earth."

Insurers consider a number of factors when eyeing new markets. They may simply want to follow their clients. Also, as countries accumulate new wealth, they have more building projects and other activities that drive demand for insurance.

They also want a relatively stable political and economic system. "Except on a cross-border basis where they're serving their customers, insurers have to have a reasonably long-term outlook, since insurance is not something you can simply move into and out of quickly or easily in developing countries," said Snyder.

James Sutherland, head of development and operations for Lloyd's Worldwide Markets, said distribution factors are key to evaluating the viability of new markets, especially for Lloyd's where the underwriting platform is based in London. The presence of brokers in a developing market is often key to establishing a presence.

"We would certainly talk with the broking community and find out where they're putting their investment focus," he said. "There's also got to be a potential for scale. There has to be potential for the market to en a reasonable return from the investment."

To Russia with Luck

Russia is emerging as one of the more intriguing among high-risk growth markets. Along with other former members of the Commonwealth of Independent States, including Ukraine, Georgia and the "stans" of Central Asia, Russia "is being seriously looked at" by foreign insurers, said Snyder.

"Five years ago, when I was in meetings with insurance company representatives and I mentioned Russia--because we were approached by the U.S. government to do some technical assistance work--I would just get blank stares," said Snyder. "Now, you don't get blank stares"

Patrick Holcroft, group chief executive of Lloyd's insurance and reinsurance broker RFIB Group Ltd., said his company last December opened a representative office in Moscow "to have some eyes and ears on the ground" in a market that is showing every sign of future rapid growth. Holcroft prefers to describe Russia as a "developing" rather than an "emerging" market because it has a more developed base--highly educated population, stable institutions--than other markets, yet it is still underserved with regard to insurance. Other such markets include the Middle East and China.

"The growth rates of these economies are much faster relative to others," he said. "Growth rates for insurance premiums tend to grow at least as fast as gross domestic product, if not faster."

As Europe's most populous country with more than 140 million people, Russia has doubled its nominal gross domestic product over the past three years to $766 billion, or $5,364 per head, according to U.K.-based multiline insurer Aviva plc. The insurer expects strong growth in the short and medium term.

Among those taking an interest in Russia lately are Munich Re Group, which this year registered for a life reinsurance license, and Paris-based trade credit insurer Euler Hermes, which last August set up a representative office in Moscow in partnership with Rosno, a Russian trade credit insurer. Ace Ltd. in 2005 won regulatory approval to conduct commercial property/casualty operations in the country.

Holcroft also sees positive signs among Russian insurers. Many of them are under-capitalized, suggesting they would be in the market for reinsurance from Western counterparts. And though under-funded, most have had good results for some time, even better than some Western insurers, he said.

Aviva began writing life insurance in Russia in June, just three months after gaining a license, and it plans to gain a spot among the country's top five life insurers within five years.

With the opening of its Russian business, Aviva plans to gain a 10% market share within the next five years through offering long-term savings and protection products and a multi-distribution strategy. Licensed in March, the Russian unit has just written its first policies in the corporate market, including group life, accident and sickness policies, said Grant Barrans, director of Aviva Life International.

Barrans pointed to attractive factors in the Russian life market: Recent regulatory reforms have made it possible for a foreign insurer to operate a 100% owned company; steady economic growth; and a growing middle class.

"We're looking at markets where people are going to have to look after themselves in the future, and at the same time, they've got enough income to be able to do something about it" he said. "Russia as a communist country--not much opportunity for us. Russia as a largely entrepreneurial environment--dramatic increase in opportunity for our products."

There is increasing penetration of life insurance and protection products in the Russian market, starting from a "very low base" of about 0.05% of gross domestic product, he said.

Aviva has been watching Russia as a potential market for about 10 years, and saw the opportunity to go in when the communist system of state support for individuals' needs collapsed. Barrans said Russia was a particularly attractive market in that the need for life products coincided with an average level of income that makes individuals capable of buying them.

One other key aspect is education. "Russia has highly educated people," said Barrans. "They're extremely sophisticated around the major urban centers. Contrast that with businesses we're building in India or parts of Turkey, where education is more scarce."

Regional Re-Focus

Alex Moczarski, president and chief executive officer of broker Marsh Inc.'s Europe, Middle East and Africa regions, said that when he took up his current position earlier this year, Marsh added Africa to the unit to facilitate natural links between the regions. Moczarski said the challenge is to "plug Europe, the Middle East and Africa into the global plan, so that we have this seamless organization"

For the past two years, Moczarski ran the International Specialty Operations region for Marsh, a region that included Africa, Asia, Latin America and the Caribbean, and the Pacific. With his move to the Europe and Middle East regions, the company placed Africa within his sphere.

"What I had led, with the exceptions of Australia, New Zealand and Japan, was pretty much an emerging market area," said Moczarski. "It was marked by fast growth and disparate cultures. We try to leverage our contents on behalf" of our clients and their expertise across a lot of different cultures."

The addition of Africa to Moczarski's current portfolio is a bow to practicality. "Most of our clients with businesses in multiple regions divide their business in a similar way," he said.

The potential for rapid growth in underdeveloped markets is of special interest to Moczarski. The European region includes eastern countries such as Ukraine and Georgia, where there isn't much of a domestic insurance market, but where Moczarski sees the potential for high growth. Insurers such as Ace and American International Group had within the past year set up new operations in those two countries.

Aviva's Barrans said that, if all goes well in Russia, his company will likely take a serious look at other countries belonging to the former Commonwealth of Independent States, the countries that once made up the Soviet Union, such as Ukraine and Georgia. For now, Aviva is focused on its Russian operation and on businesses in Central Europe, he said.

Middle East Crossroads

The Middle East region also promises rapid growth, with a concentration of wealth and assets that lends itself to insurance activity.

"Countries in the Middle East that have some stability, such as the United Arab Emirates, Saudi Arabia, Egypt, Lebanon and some North African countries, are all thought to have some reasonable prospects, particularly those countries that have political stability and are developing economically," said the AIA's Snyder.

Some European insurers are enthusiastic about Turkey, a Muslim nation that also sees itself as European. Since Turkey is seeking eventual European Union membership, its potential market of 70 million people beckons.

Aviva has built a substantial business in Turkey over the past 10 years, said Barrans.

Among the recent entrants into Turkey's market is Germany's Talanx Group, through the acquisition of Ihlas Sigorta A.S., an Istanbul-based property/casualty company. Talanx is the ultimate parent of HDI, Hannover Re and four other divisions.

"Our assessment of the Turkish market is very positive, and our acquisition of Ihlas Sigorta means that we will be well positioned to take advantage of this," Matthias Maak, the member of HDI's board of management responsible for HDI companies outside Germany, said in a statement. "Our attention is to consistently expand its market share."

Talanx sees Ihlas Sigorta as "an excellent platform" for a market launch into Turkish private customer business. There is considerable potential for growth in this market environment, and the population has a low average age, the company said.

Other European insurers to make inroads into the Turkish market include France's Groupama S.A., which acquired two insurers through a privatization program involving both international and local bidders for the companies. Groupama said it acquired Basak Sigorta, a general insurer, and Basak Emeklilik, a life insurer, in February.

Euler Hermes recently entered an agreement with Turkish insurer Koc Allianz to gain a foothold there.

In the greater Middle East, the Persian Gulf states of Dubai and Bahrain are vying to become the insurance centers of the region. Dubai seems to be winning the competition, attracting the most interest from foreign companies, including RFIB, which was licensed as an ancillary service provider in January 2006.

"What we are seeing in the Middle East is similar to Russia--strong cash flow moving into the region for commodities purchases and investment, and strong cash flow moving out to invest in global assets," said RFIB's Holcroft. "There is also a degree of stability among the Emirates."

While RFIB and other foreign companies set up in Dubai, the potentially huge market of neighboring Saudi Arabia beckons, said Holcroft. Saudi Arabia, which joined the WTO last December, is seen by global insurers as the greatest among promising prospects in the region.

As a relatively small broker with international ambitions, RFIB has to choose its markets carefully, said Holcroft. Aside from its base in London, the broker has offices in just three places: Moscow, Dubai and Tokyo, an indication of its view of the potential in Russia and the Middle East.

Key points

* For insurers and brokers, free-trade agreements and a growing commitment to international regulatory and transparency standards are transforming most, if not all, developing markets into promising new growth areas.

* Promising developing markets are characterized by a relatively advanced infrastructure with stable economic bases such as abundant natural resources, an educated population and low insurance penetration levels.

* These characteristics point to Russia as the next big developing market, ahead of the country s expected accession to the World Trade Organization.

Where WTO Goes ...

With the explosion of foreign insurance activity in China following that country's accession to the World Trade Organization in 2001, multinational insurers appear to be bracing for similar gold rashes with other potential WTO members.

Turkey, Bahrain, Egypt, Ghana and South Africa have been members since the WTO's founding in 1995. The United Arab Emirates joined in 1996, Georgia in 2000. Saudi Arabia became a member last December. Ukraine and Vietnam are in the advanced stages of the application process.

Russia is next in line. At press time, its application to the WTO was expected to be approved very, soon.

For foreign insurers, Russia's WTO accession is a strong signal the country is serious about attracting foreign business.

"We see greater stability from the Russian government, and greater potential for business partnerships, because some Russian insurers are increasingly solid, and there's increasing sophistication," said David Snyder, vice president of the American Insurance Association. Domestic insurers are beginning to influence Russia's trade negotiators and are recognizing that capital from foreign insurers can help grow the market, he said.

Grant Barrans, director of Aviva Life International, said Russia is "at the tipping point" in terms of being a serious market for global insurers, and WTO accession may put it over the edge into positive territory for many company strategists. Russian financial regulators have been working hard to build a legal framework that compares with more established markets, and WTO entry boosts their efforts, he said.

"We know that Russia's commitments toward the WTO include opening up their marine, aviation and transport insurance markets to offshore providers," said James Sutherland, head of development and operations for Lloyd's Worldwide Markets. "So, in some ways, the job is actually being done for us."

WTO is a major factor for Lloyds, he said, because "it indicates a willingness to open markets and of government to recognize the importance of foreign markets."

Enthusiasm for Russia has been somewhat muted by criticism of market reform efforts. U.S. insurance groups see a Russian unwillingness to fully open its insurance sector to foreign competition as the country negotiates a bilateral trade agreement with the United States ahead of its hoped-for WTO accession. Last tall, the Coalition of Service Industries' insurance committee highlighted the concerns--which include limits Russia would continue to impose on foreign equity ownership and market penetration--in a letter to then-U.S. Trade Representative Rob Portman.

But this year the U.S. National Association of Insurance Commissioners added Russia to its list of global relationships. The agreement with Russia's Federal Service of Insurance Supervision adds to the NAIC's list of agreements with countries such as China, Vietnam, Brazil and Iraq.

According to the NAIC, a new system of Russian insurance supervision, introduced two years ago, has taken on a large-scale program to improve the performance of domestic insurance operations.

The AIA still has some serious issues with Russia as the country negotiates its entry into the WTO. Those include a cap on foreign investment in Russian insurers, and limited branching within the market. "But we are seeing some movement on the part of Russian negotiators," Snyder said.

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Aviva plc

A.M. Best Company # 85909 Distribution: Brokers, bancassurance, corporate partnerships, financial advisers, direct sales force

Lloyd's of London A.M. Best Company # 85202 Distribution: Brokers

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The State of Selected Insurance Markets--2004

Insurance Density: PremiUms per Capita (US$)
Insurance Penetration: Premiums as a
Percentage of Gross Domestic Product (%)

Russia

                 Density ($)        Penetration (%)

Total                $114.4          2.8%
Life                   24.80         0.61
Nonlife                89.6          2.2

Ukraine

Total                 $60.9          4.8%
Life                    0.60         0.05
Nonlife                60.3          4.8

Turkey

Total                 $64.5          1.5%
Life                   12.0          0.3
Nonlife                52.6          1.3

Saudi Arabia

Total                  $51.4         0.5%
Life                     2.1         0.02
Nonlife                 49.3         0.5

United Arab
Emirates

Total                  $350.2        1.7%
Life                     59.7        0.3
Nonlife                 290.6        1.4

World

Total                  $511.5        8.0%
Life                    291.5        4.55
Nonlife                 220.0        3.43

Source: Swiss Re sigma

Note: Table made from bar graph.