According to a recent Sigma report, insurers are increasingly interested in emerging markets that are smaller and less developed, also known as "frontier markets". From an insurance point of view, frontier markets are usually in developing countries with smaller economies, where the income level is low and the insurance sectors are in an early stage of development.
The majority of these markets are in Sub-Saharan Africa (SSA), the Commonwealth of Independent States (CIS), Southeast Asia, and the Middle East. Overall, the report forecasts strong annual growth in real GDP for these countries (of 5% to 10%) in the short term; at the same time the rate of insurance penetration in them is low (currently below 1.5%).
Nonlinear growth trajectories
In insurance, frontier markets tend to follow sequential growth trajectories and favour general and commercial insurance rather than life insurance and personal lines during the early years as insurance penetration rates increase. An exception may be automobile insurance, provided that liability coverage is made mandatory. In a second period when incomes are rising, premiums for life products that focus on savings are very likely to grow more rapidly.
The report notes that there are a number of common patterns in how insurance grows in frontier markets. Insurers must understand them in order to define their entry strategy and how they will operate.
Non-life accounts for 60% of premiums
To begin with, non-life insurance usually makes up the bulk of premiums during the early stage of development in frontier markets. In emerging markets outside of Brazil, Russia, India, China and South Africa (BRICS), non-life accounted for 60.8% of total premiums in 2015. On the other hand, in the more developed BRICS markets non-life accounted for 41.6% of total premiums.
What's more, the share of life premiums grows gradually as insurance penetration increases. China is a striking example, where non-life accounted for almost all of the premiums in 1980 but shortly after the country joined the World Trade Organisation in 2003 they only amounted to 31.2%.
In non-life insurance, the segments that develop first tend to be commercial auto, property, and fire as well marine, aviation and transport (MAT) lines. The growth in personal lines comes during a subsequent phase.
The non-life market tends to be more fragmented and the life market is more focused. The level of concentration will depend more and more on regulation, in particular on how solvency capital requirements are strengthened in frontier markets.
Scale is an important factor
In addition, the question of scale can be a problem given the limited size of markets during their early development. In some cases, insurers take an interest in a group of regional markets rather than a single country in order to lower trade costs and to leverage other economies of scale. Leveraging technology and new business models, such as working with NGOs to support micro-insurance programs are other options to improve scale.