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Alliance Life Insurance Malaysia - The Rise of the Multinational Insurers in Asia

Alliance Life Insurance Malaysia

Multinational insurance companies (MNCs) are not new in Asia. The best known example is AIG, which has its roots in Shanghai, and a large presence across most of the region. However, the recent bailout of AIG by the US government in late 2008 will likely change the ending of this story. Apart from AIG and a few other large MNCs that have a true pan-Asia business, most MNCs have a much smaller footprint across Asia, and are mostly active in the financial centers of Hong Kong and Singapore.

In the last decade though, we have seen a strong rise in the foreign presence in Asian insurance markets. Across all markets, foreign players have increased their market share substantially, often at the expense of local incumbents. Several changes in the marketplace fostered this growth of foreign participation in Asia markets: deregulation, economic conditions conducive for entry, and superior capabilities which allow foreign insurers to grow once they have arrived in the market.

Of all the factors driving the increasing market share of MNCs, deregulation was the most critical. In some markets, deregulation created access where there was none; in other cases, deregulation allowed foreign players to exploit new channels or market niches and enter markets that were technically open but de facto monopolized by local incumbents.

India was the slowest nation in allowing the entry of foreign players. The insurance sector was deregulated in 2000 after over 40 years of market domination by a single government entity - Life Insurance Corporation (LIC). Since deregulation, over 20 private life players have entered the market, most of them joint ventures with MNCs such as Alliance, Prudential (UK), and New York Life. It is important to note that while the deregulation happened very late, once deregulated, there were very few handicaps preventing the foreign joint ventures from expanding across the country. This is in contrast to China, where expansion into new cities requires regulator approval on a case-by-case basis, which is the single largest deterrent to growth in China for foreign insurers. 

At another end of the spectrum is South Korea where foreign players had been permitted to operate but the market was so locked up by the domestic "Big 3" players - Samsung Life, Kyobo, and Korea Life - that foreign insurers could make little headway. However, the competitive landscape shifted with the introduction of variable (investment-linked) products in 2001 and bancassurance the following year. Once these products and channels were opened, MNCs took advantage of their superior know how and experience from other markets, which helped them grow market share significantly. Alliance Life Insurance Malaysia

This phenomenal growth in Asia for MNCs happened at a time when growth in their home markets was slowing down. Coupled with higher profitability in Asia compared to their home markets, Asia has quickly become a high priority for many MNCs. For example, Prudential (UK)'s new business profit from Asia is already at more than half of the company's total and is rising in line with the region's rapid growth. "It is an Asian story," says Barry Stowe, the chief executive of Prudential's Asia business. "And it is happening at a phenomenal pace."

There are operational factors that also make MNCs competitive in Asia. MNCs can leverage their product knowledge across markets, often coming up with the more innovative product features compared to the locals.
Another important skill is sales force management. A survey of insurance agents showed that across six markets - South Korea, China, Taiwan, Hong Kong, Singapore, and Indonesia - agents overwhelmingly preferred to work for MNCs, with better training and sales force management being the most frequently cited reasons.

In addition, MNCs also tend to recruit higher quality agents capable of selling more sophisticated products. In South Korea, for example, MNCs revolutionized the agency channel by moving away from the "housewife" model, where insurers employed housewives to sell insurance during their free time - often to friends and family. In contrast, MNCs targeted college educated candidates who were dedicated to the job full-time, and were savvier in selling more sophisticated products such as investment-linked insurance. Similar approaches were also observed in Japan and Taiwan.

An interesting question is whether MNCs who operate across several Asian countries have advantages over those who only have operations in a few select countries. The diversity of the Asian markets with the myriad of languages and local regulations may suggest that synergies across markets are limited, and therefore operating across more countries does not give MNCs additional advantages. However, this narrow view misses a very important point: executive talent. 

One of the key success factors in Asia is the quality and depth of the top executive bench. MNCs without scale across Asia have generally found it tough to atua~ a high-caliber executive team. Without a strong team at the top, it is very difficult to redeploy resources, leverage high value-added activities across countries (for example, investments and risk management), and develop a truly pan-Asian business for the long term. Alliance Life Insurance Malaysia

The difference between those who have critical mass and accelerating growth in the region and those who have a few operations and are barely keeping up with the market, stands in stark contrast. This is not to say that the large players are always performing better or always attract the top performers, but without scale ambitions, it is difficult to see the smaller MNCs consistendy attracting the right talent across the board to bring them to the next level.

The entry opdons for MNCs are greenfield setups, joint ventures, and acquisitions. While most MNCs have entered Asia as greenfield operations, there has been a handful of acquisitions over the years. For example, Prudential (UK) bought Chinfon in 1999 as a way of gaining access to Taiwan. 

Alliance bought First Life in South Korea in 1999, But given the scarcity of deals and the complexity involved in dealing with local insurers' legacy issues (for example, high guaranteed policies and aging sales forces), acquisitions remain difficult, if not impossible, as an entry method. Forming joint ventures, on the other hand, is a common strategy, especially in markets where it is mandated by regulations (such as China and India). 

Since opening its market to foreign participation in 1992, China has only granted AIA a license to operate independently. The other 24 companies entering after AIG all operate on a joint-venture basis. Under China's WTO commitment, foreign insurers can hold up to 50 percent stakes in the joint ventures. Meanwhile, the Indian government has banned outright wholly-owned foreign insurers.

Foreign players must tie up with a local enterprise, with the requirement that foreign investment should not exceed more than 26 percent of the joint venture's equity. The industry has been pushing for an increased proportion of 49 percent but it is unclear when this will be allowed.

As of December 2007, among the top 10 largest non-Asian insurers - life, non-life, and reinsurance - in the world measured by market capitalization, eight were already present in Asia, with six operating in more than five markets. The two exceptions are Berkshire Hathaway and State Farm. As Asia life insurance enters an era where outperformers will dominate - the future has never looked brighter for those MNCs who are able to find their competitive edge in these markets.

To learn more, you can check out Alliance Life Insurance Malaysia right away!