Smaller insurance companies in both emerging and developed markets are the main engines of growth, according to a report from A.M. Best.
It states that, in mature markets, these companies tend to operate in specialised niches of unique expertise while companies in emerging markets, regardless of size, compete in all segments and businesses.
However, the benefits of being larger are not only evident in the economies of scale, which result in lower combined ratios, but also in the dependency on investment yields and reinsurance.
A.M. Best studied more than 1,900 insurers across four geographical groupings, examining results from 2007-2012 to compare market dynamics, drivers of profitability and balance sheet composition for companies in each region.
The regions studied were: Mature markets, represented in this study by France, Germany and the UK; Brazil, Russia, India and China (BRIC); the Middle East and North Africa (MENA); and Mexico, Indonesia, Nigeria and Turkey (MINT).
According to the report, emerging markets have shown much faster compound annual growth rates over the past decade than the mature ones—a range of 12 percent to 20 percent, versus around 4 percent.
Emerging markets have insurance penetration of less than 4 percent, measured as the ratio of premiums to GDP, while in developed markets the same ratio exceeds 7 percent—a far greater untapped potential relative to the size of their economies, according to A.M. Best.
Vasilis Katsipis, general manager of market development for MENA, South & Central Asia, commented: “While the global economic crisis produced an outright shrinkage in gross written premium in the mature markets, the effect in the emerging markets was only a temporary slowdown in the rate of expansion,” said Katsipis.
“In the MENA region, growth weathered not only the economic slowdown but the social and political upheaval of the Arab Spring.”
The report also discusses the drivers of profitability in the different regions. In this area, Mahesh Mistry, director of analytics, noted how the relationship between companies’ size and performance begins to diverge between mature and emerging markets.
Mistry said: “In mature markets, small companies hold some distinct advantages, particularly in their underwriting performance, which tends to be marked by good claims ratios.”
“Large companies [usually] have good claims ratios when there is [a] low frequency of large claims or no catastrophic activity impacting their results, and midsize companies tend to have the highest claims ratios in their markets and combined ratios that seldom dropped below 100 percent in the period examined.”
“Claims ratios in emerging markets tend to be in the same groupings as those observed in the developed markets, thereby dispelling the belief that claims ratios in emerging markets tend to be several percentage points better than those in developed markets.”
