President Wu Chia-lu looked across the table at the young man sitting opposite him. "Are you sure you want to do this?" he asked. The head on the other side nodded in agreement. Wu continued, "I want you to go home first, and think about this carefully for a few days. If you still haven't changed your mind, then you can come to work. Law graduates from National Taipei University like you usually don't want to join our insurance industry." The year was 1964, and Frank Cheng was applying for a job at Shin Kong Life Insurance, a small subsidiary of the large Shin Kong conglomerate that made its fortune in garments and textile.
Frank ended up joining Shin Kong, and witnessed the growth of the tiny company into the second-largest insurance company in Taiwan with over US$30 billion in assets and over 12,000 flail-time sales agents by 2008. He ended his career as the President of Shin Kong Financial Holdings, and devoted his professional life to building the life insurance company. During his memorial service, Wu (who became the vice-chairman of the Shin Kong Financial Holding Company) fondly remembered all the ups and downs that Frank led the company through, which in many ways reflected the economic ups and downs of Taiwan. Compared to the 1960s, when attracting people to work in the industry was difficult, the challenges faced by Shin Kong today are quite different. Competing in a much more mature market, Shin Kong has expanded beyond domestic life insurance, starting overseas operations in China, and investing over 35 percent of its assets overseas.
The Shin Kong story provides a glimpse into the development of the Asian Tigers - Taiwan, Singapore, Hong Kong, and South Korea. With their roots in manufacturing, few would have imagined the spectacular rise of life insurance in these economies. For many of the local conglomerates, their life insurance subsidiaries started off almost as an afterthought. Things have progressed quite a bit since then. During the 1980s, the Asian Tigers were the manufacturing powerhouses of Asia, but they have now ceded that title to other, lower cost markets, including China, India, and Vietnam.
Meanwhile, the Asian Tiger economies have moved towards higher value opportunities, including financial services. These are maturing economies where consumers are increasingly sophisticated and the commercial landscape is becoming ever more competitive. Insurance Market In Asia
Indeed, at first sight there appears to be little scope for growth because these markets have such high levels of life insurance penetration. But appearances are deceptive because, as the prosperity of the Asian Tiger nations continues and savings accumulate, there is plenty of scope for growth in the life markets. Not only are consumers saving more, they are also looking for new ways of preserving their wealth and they need greater protection.
Before looking at how insurers can benefit from opportunities here let us pause and consider the extent to which the economies of the four Asian Tigers boomed in the 1990s on the back of a relatively cheap labor force and an export-focused economic development model. From 1980 to 1990 these economies enjoyed real gross domestic product (GDP) growth of between 10 and 17 percent, then, from 1990 to 2007 they grew by 6-10 percent.
Collectively, the Asian Tigers accounted for 3 percent of world GDP in 2007. That year, the median annual household incomes in South Korea, Taiwan, Hong Kong, and Singapore were approximately US$24,000, US$26,000, US$37,000, and US$47,000 respectively. Earnings at this level well exceed those elsewhere in Asia with the exception of Japan.
Meanwhile, life insurance premium as a percentage of GDP shot up from below 2 percent in 1980 to 7-13 percent in 2007, across these markets. In 2007, the four Tigers accounted for 55 percent of all life insurance premiums in Asia ex-Japan. A McKinsey 2007 proprietary consumer survey of personal finances among middle and higher income consumers in these markets indicated that life insurance ownership ranged from 67 to 83 percent. Yet all four markets have expanded at compound annual growth rates ranging from 8 to 19 percent between 2002 and 2007. While their growth rates and potential market sizes may be less impressive than the emerging markets of China and India, these are still significant growth markets. Expansion will likely slow down though: in the next five years these markets are expected to grow in the high single digits or low teens at best.
The combination of slowing economic growth, high market penetration, and the entrenched positions of the leading players, will mean that new contenders, and even established players, will need to adapt and innovate if they are to expand.
Three common themes run through these Tiger markets: First, these markets all have a high insurance penetration compared to the rest of Asia; second, the competitive landscape is quite mature, forcing entrants to find innovative niches to enter; third, foreign players have been quite successful given the lack of regulatory barriers, even dominating certain segments in these markets. Insurance Market In Asia
Additionally, despite their commonalities, the Asian Tigers have many differences in terms of sociopolitical environment, regulation, cultural background, and geographic limitations. As such, the life insurance markets, despite their similarities, have also developed in different ways and present different challenges to players today.
High Market Penetration
We saw previously that the Asian Tigers have very high market penetration. Taiwan was the most penetrated market in 2007 globally, with life insurance premium equal to 13 percent of Taiwan's GDP. Hong Kong has life market penetration equivalent to 9.8 percent, second to Taiwan, while South Korea's was 8.8 percent. Even the least penetrated of the four, Singapore, accrued 7.5 percent of its GDP in life insurance premium, significantly more than China (2 percent) and Vietnam (0.8 percent).
The high penetration of these markets has a lot to do with their long history and the large number of insurance agents in them, given that life insurance is largely a "push" product. For example, in Hong Kong, there are around 30,000 licensed agents, which, in an adult population of 5.3 million, works out to one agent per 175 adults. In contrast, in the US, there is only one agent per 670 adults. With this ratio of insurance agents it is no wonder that many consumers in these markets view insurance as a priority savings product.
As a result, growth will have to come from a deepening of the same customer base. Both the levels of protection, as well as the investment portion, have plenty of growth potential. For example, while Hong Kong's per capita sum assured in 2006 was about US$51,000, sum assured against death was only US$39,000. Similarly, in Singapore, the sum assured was US$80,000 per capita, but against death the sum assured was only US$46,000. This compares with death assurance in the United States at US$63,000 per capita.
More importantly, these markets have some of the highest savings rates in the world, which means that there is an enormous amount of money accumulated in the financial system, mostly sitting in bank deposits. Diverting some of these savings into insurance products will be one of the key themes for many years to come. In fact, it is not surprising to see some of these markets with a higher insurance penetration per capita than the mature markets of the US and Europe.
The challenges to the insurers are significant though: life insurance for many years has been characterized by high agent churn and aggressive push tactics. If insurers are to gain a larger wallet share of their customers' financial assets, they will need to develop a much higher quality agent force with a more consultative and long-term approach. To find out more, you can check Insurance Market In Asia.
