World Target Practice.

U.S. and European insurers are pursuing expansions in the emerging markets of Latin America, Asia and Central and Eastern Europe.

Since the beginning of the 1990s, leading U.S. and European insurers have been aggressively expanding their activities in emerging markets. With premium growth slowing in the developed economies, the underdeveloped emerging markets in Asia, Latin America and Central and Eastern Europe provide more attractive growth prospects. The global insurers are using a variety of methods to increase their market penetration, including mergers, acquisitions and joint ventures, as well as organic growth. Often, the strategies are determined by the legal conditions surrounding foreign investment in the host country.

The market share of insurers that are partly or fully foreign owned has tripled in Latin America and Central and Eastern Europe to more than 40% in 1998. The average in Asia is 12%. The figure depends largely on the relevant legal framework--market-entry restrictions and strength of local providers--and ranges from less than 2% in India, China and Russia to more than 70% in Hungary and Argentina.

In the United States and Europe, insurance markets are becoming saturated, resulting in ruthless competition--particularly in the property/casualty business. The emerging markets of Asia, Latin America and Central and Eastern Europe are growing rapidly, often with double-digit growth rates (see "Growth in World Insurance Markets," page 46). In the 1990s, the growth rate of the premium volume in emerging countries was twice as high as in the industrialized economies, despite the temporary setback caused by the financial crises in Asia, Latin America and Russia. The increased liberalization of these markets has enabled international insurers to take advantage of the growth opportunities in emerging markets, to follow their clients and to increase the diversification of their books of business. Most Latin American and Central and Eastern European countries began removing barriers to market entry about 10 years ago. In Asia, the recent financial and economic crisis has speeded up the liberalization process.

The total premium volume of all emerging markets combined, however, is still rather small, accounting for just 9% of global premium volume or about one-quarter of total U.S. premium volume. The biggest markets, with more than $4 billion premium volume, are South Korea, Taiwan, China, Brazil, India, Mexico, Argentina and Poland. Most global insurers generate between 3% and 5% of their premium volume in emerging markets.

Global Players

Among the world's most important global players in emerging markets are several U.S. companies. AIG is the most global of all direct insurance companies, with a presence in more than 130 countries. It is often the first insurer to get a license in a newly opened foreign market. It generates about 18% of its premium income in emerging markets. Cigna and Chubb also belong to the leading group of international insurers that have been active in Latin America and Asia for many years, although they clearly focus on their core competencies--Cigna on health insurance and Chubb on commercial insurance. Aetna was a major foreign player in life and health business in emerging markets in 1998, generating about 15% of its premium income in these markets. But in 2000, it sold its international business to the Dutch company, ING.

Other U.S. life insurers recently have intensified their foreign ventures. Metropolitan Life Insurance Co., which has operations in the largest markets of each region--South Korea, Taiwan, Indonesia, Argentina, Brazil, Mexico and Poland--wants to continue to expand its global presence. One of the goals of its demutualization is to gain access to better financing facilities for additional acquisitions. Similarly, Prudential Insurance Company of America is examining the possibility of demutualizing to increase its flexibility for further growth. It has expanded its international presence over recent years, particularly in South Korea, Taiwan, Philippines, Argentina, Brazil and Poland.

New York Life, however, has decided to remain a mutual company. Its recent focus for pursuing growth opportunities in emerging markets has been Asia. Apart from the existing operations in South Korea, Taiwan and Indonesia, it entered the Philippines and Taiwan in 2000. China and India also remain high on its priority list for future investments. In Latin America, the company ranks among the top five in Argentina and Mexico.

The main international competitors of the U.S. insurers are the leading European insurers. Similar to AIG, Allianz is a leading foreign player in almost all emerging markets in nonlife as well as in life business. ING, which already had a strong presence in life insurance in Central and Eastern Europe and some Latin American countries, is more than doubling its emerging market premium income through the acquisition of Aetna International. Zurich, Generali and Royal & SunAlliance are very strong in some markets, though insignificant in others. Winterthur, CGU and Axa have so far operated only in selected countries and market segments (see "Global Direct Premiums," below).

Focus on Latin America

Latin America is the preferred region for most U.S. insurers. The far-reaching economic reforms that swept through Latin America at the beginning of the '90s opened up promising new business opportunities to domestic and foreign insurers in the financial-services sector. Today, there are generally no more restrictions on the stakes held by foreign insurers or on the setting up of subsidiaries in Latin American countries. The largest exceptions to this are in Mexico, for companies from non-NAFTA (North American Free Trade Agreement) nations, and in Brazil, where there are severe restrictions regarding the placement of reinsurance because of its local reinsurance monopoly.

U.S. insurers, such as AIG, Chubb and Cigna, first seized the opportunity by setting up subsidiaries or taking over small and midsize local companies in all major markets. Liberty Mutual became an important player in the region in the second half of the 1990s through takeovers in Venezuela, Colombia and Brazil and the establishment of a workers' compensation subsidiary in Argentina. Until very recently, the leading local insurers were independent, but now foreign insurers are taking over large local operators. In March 2000, for example, ING acquired a stake in the largest Mexican insurer, Comercial America; New York Life acquired Seguros Monterrey, ranked No. 3 in the Mexican life market at the end of 1999; while Allianz purchased Colseguros, No. 2 in Colombia in 1999. Generali secured top place in the Argentinean market by acquiring a stake in the market leader Caja de Seguros y Ahorro, and Liberty Mutual became No. 2 in the Venezuelan market by acquiring Seguros Caracas in 1995.

In the life area, MetLife and New York Life recently have stepped up their efforts in Latin America, and they currently concentrate on the region's three major markets--Argentina, Mexico and Brazil. In the first two countries, they are among the leading insurers in the market. These markets also are being targeted by a significant number of other U.S. insurers that have undergone considerable expansion. The leading foreign insurers in Latin America are Allianz, AIG and Mapfre of Spain. They are present and comparatively well positioned in the region's six biggest mar. kets: Argentina, Brazil, Chile, Colombia, Mexico and Venezuela.

The Brazilian market is of major strategic importance for all global insurers, although the strong position enjoyed by a number of local insurers (generally part of major financial conglomerates) makes it difficult for foreigners to rapidly gain a strong foothold, Some foreign insurers have formed joint ventures for this reason. AIG has invested heavily in a broad joint venture with Unibanco; ITT Hartford formed one with Icatu Bank in life insurance; and Prudential has a smaller joint venture with the market leader Bradesco in life insurance. Allianz and Winterthur, however, have terminated their many years of collaboration with Bradesco and Itau.

Banks Open the Door

In the past few years, the cross-border cooperation of bank and insurance companies has increased. Foreign banks often hold a stake in local insurance providers and foreign insurers often have stakes in local banks. The foreign insurers are clearly motivated by the access this gives them to an alternative distribution channel. The best example of this is the joint venture between MG and Unibanco in Brazil. And Mexico, in particular, has hosted several bancassurance collaborations.

Altogether, international insurers now control some 40% of the Latin American nonlife market. Their market share now ranges from well over 30% in Brazil to more than 70% in Chile. Their size gives them a distinct competitive advantage, allowing them to offer greater financial capacities and a broader product range.

Foreign insurers normally have a higher market share in life and health insurance business than in nonlife business (see "Life vs. Nonlife," above.) The average life share in the seven largest countries is about 55% and ranges from just under 30% in Colombia to more than 80% in Argentina. The number of foreign investors is also greater in this segment, particularly in Argentina and Mexico, where there are about 25 companies. The higher market share that foreign insurers hold in life business can be attributed to a superior reputation as solid, financially sound companies. This advantage is very important in a region previously plagued by high inflation and political instability. These problems weakened demand for life insurance products and reduced trust in the local financial intermediaries. Even today, a lot of consumers would much rather entrust their money to a company with a global brand name than to a local insurer. In addition, global life insurers are using their experience from more developed econom ies to take advantage of the growing demand for new personal investment products arising from the privatization of social security systems.

Asia Shows Promise

Lately, U.S. insurers have focused on Asia, the most promising region in terms of premium growth. To a certain extent, the recent financial turmoil has accelerated the otherwise slow pace of insurance market deregulation and liberalization in emerging Asia. Traditional global insurers (MG, Royal & SunAlliance and CGU, for example) have been cultivating the insurance markets in the region for a long time. Riding on the wave of global consolidation, they have strengthened their presence in Asia partly through the optimization of organizational structures and partly through mergers and acquisitions. With the phenomenal economic growth of emerging Asia in the 1990s, other global insurers also have made a determined effort to expand into Asia.

In Central and Eastern Europe, MG and global insurers from neighboring Western European countries have been the only ones so far to gain a foothold. U.S. insurers, other than AIG, have only recently started to look at this region. MetLife and Prudential both acquired licenses in Poland last year--by far the biggest market in the region. For New York Life, Poland also remains high on its target list for further expansion into emerging markets.

The trend toward ever-greater concentration on the global insurance market will continue. In the emerging markets, there is an increasing need for insurance companies that-in terms of capital strength and knowhow-are well-placed to take on new and bigger risks. The further removal of regulatory barriers to market entry is of particular relevance to countries in Asia, as this is where the biggest restrictions are still to be found. The focus of interest is currently on market liberalization in China and India. In various Central and Eastern European countries, former state monopolies are to be privatized or at least partially sold to foreign investors. This will provide foreign insurers with an opportunity to gain a stronger foothold in these markets. A further factor driving the globalization process is consolidation, particularly in Southeast Asia. In addition, in several Latin American and Eastern European countries there are numerous small, poorly capitalized companies that are searching out stronger part ners.

Esther Baur is senior economist of Swiss Re's Economic Research & Consuiting team in Zurich, Switzerland.

Growth in world Insurance Markets

In the 1990s, the growth rate of the premium volume in emerging countries was twice as high as in the industrialized economies.

                       Nonlife                                     Life
                     insurance                                insurance
                      premiums [*]                             premiums [*]
                                      Real             World
                    ($million)        CACR [**] market share ($million)
                          1999     1990-99              1999       1999
South and East Asia       34.4        9.7%              3.8%       80.1
Latin America             23.6        6.9%              2.6%       11.0
Central and
 Eastern Europe           10.6        6.0%              1.2%        4.6
USA                      401.4        0.6%             44.1%      393.8
                       Real             World
                       CAGR [**] market share
                    1990-99              1999
South and East Asia    9.6%              5.7%
Latin America         17.0%              0.8%
Central and
 Eastern Europe        5.3%              0.3%
USA                    4.5%             27.9%

(*.)All accident and health insurance premiums have been allocated to nonlife business in order to have internationally comparable figures. For the United States, the nonlife premium volume is composed of the premiums written by property/casualty insurers ($303.7 million) and the health and accident premiums written by life insurers ($97.7 million).

(**.)CAGR: Compound Annual Growth Rate

Source: Swiss Re, Economic Research and Consulting