Asia’s Unfolding Markets: Financial Services Firms Vie for Stronghold in Emerging Economies
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by Cal Harrison
As the world’s economies recover from the global recession, more eyes are turned to Asia than ever before. Multinational companies see this diverse market with more than 3.8 billion people as a key growth area for years to come. While incomes rise and Asian countries open their markets to competition, demand for banking, investment, insurance and healthcare services is unfolding.
“Asia was certainly not immune to the global downturn, but there are signs that it is recovering faster than the rest of the world,” says Doug Benfield, managing partner and vice president of CSC’s financial services organization in Asia. “While Asia has mature markets such as Japan and Hong Kong, where the market has been slower to recover, it also has emerging markets such as India, Singapore, China and Vietnam that are attracting a great deal of interest.”
Following the money
One clear indicator of that interest is the increasing merger and acquisition activity in the financial services sector. AIG, under pressure to pay back a $180 billion U.S. government bailout, entered talks to sell its two international subsidiaries. MetLife is set to close on its $15.5 billion deal to buy AIG’s Alico, one of the world’s largest life insurance companies with operations in Asia, Europe and the Americas. MetLife CEO C. Robert Henrikson described the deal as “a terrific opportunity to extend our lead and power in the marketplace worldwide.”
Meanwhile, AIG’s UK-based rival Prudential bid on another AIG subsidiary, AIA, but backed out of the deal when the two boards couldn’t agree on the $35.5 billion asking price. Instead, AIG chose to spin off AIA, now expected to be Hong Kong’s largest-ever initial public offering. Another European insurer, Zurich, recently announced plans to expand its footprint in Asia, in Malaysia and Indonesia.
“These companies are simply following the money,” notes Cyrus Daruwala, managing director of IDC Financial Insights, Asia Pacific region. “Instead of putting their money in mortgage derivatives or other exotic vehicles, people are investing their money in financial services, healthcare and agriculture — the real growth markets in Asia Pacific.”
A fragmented market
Throughout most of Asia, there is plenty of room for competition for new business. While the region accounts for more than 60 percent of the world’s population, insurance penetration is extremely low — accounting for less than .25 percent of global insurance market share and less than five percent of gross domestic product for Asia’s developing countries, according to a 2010 study by AM Best. The amount of property covered by insurance is miniscule compared to Western practices. For example, losses in Indonesia from the devastating Indian Ocean earthquake in 2004 were estimated at $4.5 billion, but the insured loss was only about $500 million.
Despite the relatively low demand for insurance, in 2007 Indonesia was home to 94 registered nonlife insurers, with the top five players controlling only about 40 percent of the market, according to AM Best. That fragmentation is what makes developing countries in Asia attractive to new entrants.
“The multinationals entering these markets have an advantage in terms of technology and speed to market, and in many cases, they start doing business in these countries under a joint venture with locally owned companies,” says Prakash Thomas, CSC’s vice president of financial services sales and marketing in Asia. “This technological advantage helps large carriers introduce much more innovative products that the local companies have a hard time competing against. The biggest obstacle for these new players is getting regulatory approval, which tends to level the playing field.”
Tapping in to the mobile channel
In Asia, where mobile phones vastly outnumber personal computers, financial services firms are looking for ways to exploit the mobile channel for selling and servicing insurance and investment products. Unlike Western consumers, who are more likely to buy from three or more different companies, Asian consumers are more likely to purchase a bundled product — such as a healthcare plan, life insurance, and motor vehicle and liability coverage.
“While most business is distributed through banks, captive agents and brokers, a growing number of consumers are beginning to use mobile phones to perform a wide range of transactions,” Thomas says. “Those customer expectations are putting a lot of pressure on the financial services industry to modernize and take advantage of the mobile channel.”
In fact, CSC is supporting a leading Asian insurer with a proof-of-concept for a comprehensive suite of mobile insurance apps that would give policyholders the power to view policy information, pay bills and apply for new coverage. It would also give agents the ability to manage new business and ongoing customer support. An innovative aspect of the plan is that these key insurance functions can be accessed by agents using just a $50 mobile phone.
CSC’s ability to support the expanding mobile channel stems from more than 25 years of experience in Asia as one of the region’s leading providers of insurance administration systems. Today, these core systems process more than 100 million policies in nearly 40 countries, for a client base of almost 150 companies in Asia and Europe.
We combine our understanding of underlying systems with the ability to help organizations develop comprehensive mobile strategies, create mobile apps and manage the entire infrastructure.
Rapid expansion capabilities
Financial services companies in Asia are focusing on a growing middle class looking for protection and investment opportunities. Most of these new investors are highly risk-averse, so insurers must respond quickly to this growing demand with simplified products that have a guaranteed return on investment.
To support the need for rapid growth and bundled products, this year we introduced Integral™, a portable Java-based system that supports multilingual and multicurrency processing for life insurance, pensions, property and casualty/general insurance and group insurance. Integral’s development was a collaborative effort among CSC’s operations in India, China, Vietnam and the United States.
“Speed is essential to companies moving into a new country,” says CSC’s Benfield. “As soon as they get regulatory approval, they need to be able to issue policies, build a distribution network and demonstrate compliance. Integral is ideally suited for a wide range of situations — multinational firms seeking a single platform for international operations or domestic insurers wanting to launch a new product quickly or set up a new venture without disrupting their existing operations.”
Serving the vast Islamic market
Another major potential growth area in Asia is Takaful banking and insurance. Takaful, the only type of financial transactions allowed by the Islamic religion, is gaining popularity in Islamic regions of Asia. Indonesia, in fact, has the world’s largest Muslim population. Overall, an estimated 62 percent of the world’s Muslim population lives in Indonesia, China, India, Pakistan and Bangladesh.
Under Islamic teachings, Muslims must avoid gambling and the risk posed by interest fluctuations. At a Takaful company, policyholders are member-owners, similar to Western mutually owned companies, except that principal and interest calculations are replaced with subscription and profit-sharing calculations.
To ensure they adhere to Islamic teaching, insurance products must be formally approved by a group of religious leaders, called a Shari’ah Board, which designates compliant products in the marketplace. The underlying insurance system is key to creating successful Takaful products. CSC has already implemented Shari’ah-compliant systems for seven different companies, and in one case completed the implementation in just eight weeks.
“It’s crucial for systems to be highly flexible because of the need to tailor financial products to consumer preferences,” Benfield says. “Companies that can deliver the right products at the right price — and are easy to do business with — will be the winners in this market.”
Cal Harrison is manager of editorial services for CSC’s Financial Services Group.