Citi Treasury and Trade Solutions
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Vietnam has made marked progress in modes 1,
2 and 3 for insurance and related services, while
mode 4 remains highly restricted.
Myanmar has strict limits in modes 1, 3, and 4
for market access and national treatment. With
its national reform underway, anticipation is
high for further opening up.
Entry of Foreign Players
To comply with the AEC blueprint, certain
countries have begun relaxing foreign equity
participation, such as 80% and 70% in
Indonesia and Malaysia, respectively. Thailand
lags behind with foreign investment at 24.9%,
which may rise to 49% with the permission of
the Office of the Insurance Commission.
That said, further investment flows to the sector
may prompt Asia’ smaller markets to review
their FDI limits to remain attractive.
Influx of foreign players may present a risk and
reward scenario, with results yet to be seen. For
example, the entry of mature global players is
likely to push out smaller, less efficient local
insurers. Heightened competition may lead to
market consolidation and result in more mergers
and acquisitions. Industry participants will be
pressured to streamline their operations, but
market efficiency will be enhanced in the long run.
Operating across multiple markets in the region
also requires insurers to be more nimble.
Further integration may present heightened
risks as business cycles of more markets
converge.
Insurers need to understand local consumer
trends to cater to diverse ASEAN markets. This
may spur the launch of specialized products for
certain geographies. Tougher competition may
see demand for free access as well as cheaper
and improved products.
In addition, enlarging market share and freer
movement of human capital is likely to trigger a
war of talents as skilled expertise will be much
sought after.
Regulatory Harmonization
Harmonizing different regulatory standards has
been a key concern for the industry. As such, an
umbrella organization, the ASEAN Insurance
Council (AIC), was formed in 1978 to implement
the AEC objectives. Latest recommendations
submitted by AIC to ASEAN regulators in
January 2015 include:
1 Regulators’ approach to adopt capital
framework developed for banks:
The main
concern centers on long-term investments,
the main stay of life insurance, which
may penalize insurers with higher capital
requirements.
2 Accounting versus capital requirements:
The proposed “mirroring approach” by the
International Accounting Standards Board
will not be able to adequately capture a
wide range of participating policies that are
commonly sold in this region. This will result
in non-economic volatility in the balance
sheets of the insurers selling long-term
products. This effect will be even worse in
countries where the capital market is not
deep and is illiquid. As such, the request is
that regulators help manage the transition
to a new accounting standard.
3 Underdeveloped capital market:
With
insufficient long-term bonds to match
insurers’ long-term liabilities, a request for
regulators to further develop local capital
markets and give priority to insurers to
purchase new bonds was presented.
4 Tax incentives:
Given increased capital
requirements for long-term products,
which render them less attractive, provide
incentives to insurers and consumers to
offset likely fall in demand was suggested.
Similarly, tax incentives to encourage
long-term savings will benefit governments
indirectly as their future funding of social
benefits will be reduced.
5 More rated bonds:
If regulators recognize
the ratings of local ASEAN rating agencies
(providing their methodologies are acceptable),
it will stimulate demand for rated bonds.
The key recommendation from non-life and
general insurance sub-sectors was that
cross-border freedom of services would offer
the biggest benefit for insurance and
reinsurance. This could lead to providing shared
services center functions across the borders,
thus enabling insurers to leverage a widely
used corporate practice.
No one denies that tightened regulatory
oversight and solvency requirements have put
pressure on insurers’ capitalization levels and
could lead to market consolidation. Nonetheless,
increased regulatory oversight can improve
financial strength of the sector in the long run.
Banks Beware
Insurance companies can be additional competitors
to the financial market as they enable business
entities and private households to diversify their
portfolio or substitute different investments.
Nonetheless,
increased
regulatory
oversight
can improve
financial
strength of the
sector in the
long run.
