Current Issues in Emerging Markets in Latin America and Asia
Current Issues in Emerging Markets in Latin America and Asia
by Jen Abbatacola
Learn what impact new international accounting standards will have on emerging markets in Latin America and Asia.
At the Society of Actuaries' annual meeting in New York, panelists discussed current issues in Asia and Latin America regarding the implementation of new international accounting standards. The Actuary catches up with some of the speakers to hear what has happened since the meeting.
At the session "Don't Cry for Me, Argentina (and Hot Topics in Asia and Latin America)," Jose Luis Berrios-Martin, ASA, MAAA, a consulting actuary at Milliman Inc. in Denver, Colo., provided some background on the current situation in Mexico. The commissioner of Mexico recently finished his appointment as head of International Insurance Commissioners and has been getting feedback from the United States and Canada, as well as other parts of the world, on new regulations regarding solvency. In 2003, a circular related to minimum reserve calculation came out as well as one regarding reserve adequacy. Early 2004 produced two regulations concerning the role of auditors and actuaries. Most significantly, in mid-2004, there was the dynamic solvency regulation.
The thought behind dynamic solvency testing, Berrios explains, "in essence is a framework similar to cash-flow testing, but with the inclusion of new business as well as projected future new business. The idea is that the regulator will come up with its own set of scenarios for the company to test." Berrios explains that it is still "fuzzy at this point," because each company is also responsible for developing its own set of scenarios, but "some of them can be better or worse than what the regulators prescribed scenarios may be. Some scenarios may be based upon correlated assumptions, but these are not yet well defined." Other issues with dynamic solvency testing, according to Berrios, include a "readiness issue with regards to the insurers." Because there are few people who have done this type of work, necessity dictates a need for an appointed actuary leading that role. Berrios sees the problem with having systems and models in place by the first quarter of next year. "A lot of the local companies' talent did not migrate their traditional Excel-based models to more robust modeling platforms at the start of the new regulatory environment in 2003. Some foreign-owned business units are the exception and are in a better position to meet the new regulatory requirements as well as the home-office strategic needs."
Another change in Mexico implemented in mid-2004 is the new certification requirements, which are single examinations by area of practice. According to Berrois-Martin, experienced actuaries, who feel it unnecessary to take the exam, are being phased out of the market. The exam process itself is in need of some revision. All types of materials are allowed into the exam room (textbooks, notebooks, formulas, laptops, etc.) so people could literally spend a whole day taking the test. Many experienced actuaries view this as a waste of time. Meanwhile, those getting certified become more valuable, and are forming a tight-knit group. When actuaries from the United States and Canada expressed the desire to take these exams, they were told that the rules were not clearly defined for non-Mexicans. Therefore, overseas actuaries have not broken into the tight circle in Mexico.
Berrios was concerned that "because the insurance commissioner has been involved in a committee that is fairly active on solvency and regulations, maybe the Mexican market is becoming over-regulated." This could benefit those companies that plan on being there for the long term, but it may deter those wanting to start a Mexi-can operation because of the cost involved. Also, with this perceived "over-regulated" market, actuaries have the risk of being called whistle-blowers. As Berrios explains, Mexican culture is rather hierarchical, and requiring actuaries to blow the whistle could be problematic. Vagueness in ethical guidelines leaves too much room for interpretation and could lead to professional misconduct. These new regulations, therefore, put a great deal of pressure on actuaries.
Despite the complications with some of the new regulations, Berrios stresses that Mexico remains a very attractive market for two important reasons:
- Mexico has close proximity to the United States, its primary trading partner. NAFTA will have a positive impact on Mexico's economic development.
- There are a vast number of young people in Mexico, who, in the near future, will need insurance coverage as well as financial planning in the long-term.
The role of the actuary in Mexico has become enhanced. Solid actuaries will need to "change the perception that actuaries are number crunchers." An actuary's insight, particularly as Mexico goes through these changes, is critical. The new regulations are going to take some time to fully impact the market, but overall, should have a positive effect.
China and India
Ronald A. Colligan, who heads up the global life and annuity practice at Guy Carpenter, discussed the emerging markets in China and India. These two countries, according to Colligan, are the highest growth opportunity markets in Asia. Indigenous companies in developing markets have significantly more growth opportunity than companies in markets that have already developed. The world's two most populated countries, China and India, are, as Colligan relates, "relatively undeveloped relative to insurance penetration and premium expenditures as a percentage of gross domestic product. ...Asia, and more specifically, China and India, are very fertile sources of life premium growth as their market really moves from infancy into maturity."
China, with a population of 1.3 billion, has a quickly developing middle class. The culture is traditionally family and savings oriented. Also, the government wants a very highly educated, highly developed workforce. Colligan sees this as the "seeds of an industry, the life insurance industry in China that is going to be very, very productive."
There have been very strict geographical restrictions on joint ventures. In China, a joint venture is an outside company coming in with a partner in China and creating competition for purely Chinese-owned businesses. There has been a prohibition against the joint ventures in China selling group life insurance, which is one of the more productive areas in China. This prohibition will end in December 2004 or January 2005. Many joint venture companies will be able to compete in the group life market, and that will enable them to attain significant penetration there.
It is important to keep in mind, though, that local companies still dominate the market share by a huge margin of 90 to 95 percent. Colligan believes what happens is, "as the industry in China internationalizes, and more companies from outside China come in with some product innovations, that spurs the local companies on. It really enables competition to go on in a more beneficial way."
As for China's future, Colligan predicts "increasing competition in result and product innovation as the geographic and product restrictions are eliminated from the joint ventures. Look for increase in sales of term products and some migration of North American underwriting techniques in China." Significant innovations in IT as well as the influx of Western style distribution methods further contribute to China's attractiveness.
Like China, India has an enormous population. Demographically speaking though, India's population is 63 percent in the 15 to 64-year-old age group. Therefore, like Mexico, India has a large population needing insurance coverage.
Also, given the former British colonial status of India, the common law system and English language are well established. This adds to India's appeal toward British and American companies.
Foreign companies in India are now able to own up to 26 percent of the company; in China it's 49 percent. The Indian government, though, is expected to increase the percentage of foreign ownership to 49 percent. There are foreign reinsurers operating in India now. The regulatory environment seems to be looser.
India's future is bright. Colligan sees continuing progress of private companies and gaining market share from the Life Insurance Corporation of India. As a result, there is continuing product innovation and price competition. There is also continuing liberalization of foreign ownership restrictions and adoption of North American underwriting techniques.
The last market we will look at is Japan. The difference between the other markets we have discussed and Japan is that Japan already has the second largest life insurance market in the world.
Mr. Masaaki Yoshimura, a representative of the Sumitomo Life Insurance Company and appointed actuary, described the past, present and future of the Japanese insurance market. In Japan, there are about 40 life insurance companies, and the Asians are the mainstay of distribution channels for traditional life insurance companies.
Yoshimura's brief history of the Japanese insurance market focused mainly on the changes that occurred during the boom of the early 1990s. (see Table 1)
Endowment insurance was predominant until the early 1960s. In the 1960s and 1970s, endowment with term became popular. "Cancer insurance" was introduced and many riders like "sickness" and "hospitalization" were developed in the 1970s.
Main product shifted to the "whole life with term" with various riders in 1980s. Sales volume of single premium endowment (SPE) started to upsurge in 1985.
In 1989, the Insurance Council of the Ministry of Finance (MOF) started its deliberation to make overall amendments to Insurance Business Law that was previously revised about half a century ago.
After the bubble of economic growth in the 1990s burst, companies that managed to survive had to take various measures to recover. On the liability side, as product design changed, account type products like universal life with short-term interest rate guarantees were created. To avoid interest rate guarantees, variable products and variable annuities were started. Also, in terms of the capital and business restructuring, the various measures taken in the other part of the world were considered and applied when necessary.
Yoshimura goes on to discuss current issues in Japan. Low interest rate policy by the government or Bank of Japan to save the major banks for the sake of the financial system is now being implemented, so one of the issues is how to cope with the expected rising interest rate environment. Another current matter is the Japanese Bank setting individual annuities since October of 2002, and a debate among members of the Financial Service Council over whether regulators will allow banks to sell a wide range of insurance products. Also, the Japanese population is aging and few babies are being born, so many insurance companies believe the markets of traditional death benefits or non-life products do not have much room for expansion and are stepping up efforts to make attractive health and medical related products for consumers. Finally, a debate continues to heat up according to Yoshimura, over the level and method of the standard valuation reserve for minimum guarantee of variable annuities in Japan.
With the ever-changing legal and economic circumstances throughout the world, and the implementation of new legislation, the emerging markets of Mexico, China, India and Japan present attractive opportunities for the foreign investor. North American and European influences on these markets drive local companies to further product development as well as create competition, thus in-creasing the size and improving upon the quality and quantity of insurance companies worldwide.
Jen Abbatacola is editorial assistant for the Society of Actuaries.