A severe cyclical economic slowdown is on the way for advanced economies and will have a widespread impact on Asian insurance markets.
There are four key areas in which the insurance industry in Asia-Pacific and India is feeling the brunt of the financial crisis.
First is the impact on unit-linked products. As equity prices have nose-dived and fund values have fallen dramatically, the industry has seen a sharp decline in sales of unit-linked products.
Insurers in India who have made an aggregate investment of above Rs55,000 crore in equities as on March are beginning to feel the tremors. Compared with the peak levels of January, the net asset values (NAVs) of growth funds of insurers have slipped between 28% and 60%.
These funds have returned up to 40% last year when the stock market had soared and helped boost the sales of unit-linked plans. Even for balanced funds that usually allocate about half of the fund corpus to debt instruments, there has been a fall in NAV of around 30%. This has some long-term implications from the actuarial perspective. The profitability levels of most insurers from fund management fees would be considerably dented for the next few years, pushing the business break-even farther in time.
The second key impact is on the investment function, where insurers in the US and Europe have borne the brunt. Insurers in Asia-Pacific have largely escaped unscathed because of their portfolio’s limited exposure to foreign entities. Most insurers in Asia have confined investments to debt instruments and equity exposure in local markets, unlike their US and European counterparts.
India has remained unaffected in this regard, thanks to its conservative investment regulations which require investment of controlled funds almost entirely in gilt securities and government-backed paper. As a result, Indian insurers have escaped much of the fallout from the market rout, although they’ve stood to make lesser gains in normal times relative to companies in other parts of the world.
Distribution and sales
The third major impact of financial crisis is on insurers’ distribution channels and sales platforms. Income has slumped for the agency channel—the backbone of distribution for most insurers—and agents have suffered a loss of morale, becoming insular and losing confidence in the sales process and customer interaction. Insurers in several countries, including Hong Kong, are feverishly working on measures to keep the morale of the agency force intact, with some offering financial incentives to agents by way of interest free loans to make up for the steep fall in earnings.
In India, the adverse impact is felt in several ways. The most visible aspect is the loss of confidence of new policyholders in their neighbourhood agents, who most often have sold unit-linked products to unwary customers.
Instances of mis-selling are coming in the open in the bancassurance channel, where sales personnel at bank counters is seen to be poorly equipped to explain the situation to anxious customers. In a few cases, policyholders have preferred to make formal compliant to the bank as distributor and have even threatened legal action, which could imperil the reputation of the banks concerned.
The fourth aspect of the insurance industry to feel the impact of the crisis has been the regulatory regimes across the region. Regulators are becoming more aware of the challenges of regulating in a dynamic environment. They are making fresh assessments of the risk management capabilities of local and foreign insurance partners and their ability to meet rising capital infusion requirements of insurance operations.
China’s Insurance Regulatory Commission took emergency coordination measures in tandem with the China Banking Regulatory Commission and the China Securities Regulatory Commission. The People’s Bank of China made daily status reports for the benefit of the State Council.
In Singapore, the Monetary Authority of Singapore issued public statements to reassure consumers over the capital adequacy of authorized life insurers, and demanded insurers update it on capital adequacy levels going forward.
Insurance Regulatory and Development Authority (Irda) in India is taking a balanced view, and is known to be closely examining the ability of domestic and overseas partners to come up with the required capital as and when needed. The regulator is also considering approaches to nudge insurers to have a more balanced product portfolio, including a potential mandate to write a minimum percentage of non-linked business, especially to suit the population that is currently fed only with unit-linked options.
The regulatory landscape has generally changed with insurance regulators becoming more active across the region to ensure more transparency. It can be expected that the compliance requirements would escalate, especially for bank-owned insurance firms.
In conclusion, while there are several shades of panic reaction currently in Asian countries, once calm gets restored in the world economy, the insurance business will pick up the lost momentum gradually. However, the landscape of products, distribution and regulation is likely to emerge in a fresh paradigm chastened by the developments of the last few months.
Richard Holloway is a senior actuary and regional director, Asia-Pacific, of life insurance consulting practice of Watson Wyatt based in Singapore as well as the managing consultant for Watson Wyatt in India. Rajagopalan Krishnamurthy is with Watson Wyatt’s insurance consulting practice in India and the former managing director and CEO of SBI Life Insurance Co. Ltd. Respond to this column at firstname.lastname@example.org