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Insuring the frontier markets

By Swiss Re

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Emerging markets account for around 86 percent of the world’s population and 40 percent of global gross domestic product (GDP). But according to data for 2015, they are under-represented in insurance with a combined share of 18 percent of global premiums.

The rise of emerging markets in the past decades has brought to the forefront large markets, in particular Brazil, Russia, India, China and South Africa (BRICS). The BRICS countries account for over half of emerging market output, and 69 percent of emerging market insurance premiums. These, and other more established emerging markets, will remain major contributors to global insurance growth, according to forecasts by Swiss Re Economic Research & Consulting.

Of late, there has been increasing focus on some smaller and less well-developed emerging markets known as the “frontier” emerging markets. For the purposes of this sigma and from the insurance sector perspective, the frontier markets are typically those emerging countries with smaller-sized economies, lower income levels and insurance sectors in the early stages of development. Another important characteristic is a favorable insurance premium growth outlook, driven by strong fundamentals, impending regulatory changes and the influence of some external trends. Most frontier markets are in Sub-Saharan Africa (SSA). Others are in the Commonwealth of Independent States (CIS), Southeast Asia and the Middle East. Generally speaking, annual growth in real GDP in these countries is forecast to be strong (5 percent to 10 percent) in the near future, and total insurance penetration rates are low (less than 1.5 percent currently).

A key attraction of frontier markets is their catch-up potential. This in turn rests on different drivers including improving socio-political stability, which supports economic growth and insurance market development. Many frontier markets also have abundant natural and human (young population) capital. These favorable conditions will boost economic growth, which in turn will filter through to insurance sector growth in the years to come. Also, regional trade agreements and investment forums are set to provide additional momentum for growth in several markets.

The realization of growth potential will take years. Investment in frontier markets requires a long-term perspective. Some markets are small and a regional focus may be more appropriate for insurers to build up scale. Frontier markets will likely follow a sequential growth pattern favoring non-life and commercial business over life and personal lines in the initial years of acceleration in insurance penetration. The exception could be personal motor, if supported by enforcement of compulsory third-party liability insurance. Later, as incomes rise, premiums for life products, with their emphasis on savings, are likely to grow more rapidly.

Insurance premium growth is non-linear relative to income growth, following an S-curve. At low incomes, premiums grow along with income, but at middle incomes premium growth is more rapid than income, before slowing at higher income levels. The same will apply in the frontier markets but other factors will also play a role. For instance, the introduction of enabling regulations like mandatory insurance and more sophisticated solvency systems should expedite sector growth. Likewise, the ability to leverage latest technologies can accelerate insurance sector growth, reducing the time from many years in the advanced markets to just a few years in the emerging countries. As a result, the development path of frontier markets will not necessarily follow that of advanced or other established emerging markets.