An A.M. Best comparison of the performances of small, medium and large companies in emerging and developed markets has found that smaller insurance companies in both markets examined are the main engines of growth, although in mature markets these companies tend to operate in specialised niches of unique expertise while companies in emerging markets, regardless of size, compete in all segments and businesses. However, the benefits of being larger are not only evident in the economies of scale, which result in lower combined ratios, but also in the dependency on investment yields and reinsurance.
For the Best’s Special Report, titled, “For Insurers in Emerging Markets, Size Matters,” A.M. Best studied more than 1,900 insurers across four geographical groupings, examining results from 2007-2012 to compare market dynamics, drivers of profitability and balance sheet composition for companies in each region. The regions studied were:
- Mature Markets, represented in this study by France, Germany and the United Kingdom;
- BRIC (Brazil, Russia, India and China);
- MENA (the Middle East and North Africa); and
- MINT (Mexico, Indonesia, Nigeria and Turkey).
Emerging markets have shown much faster compound annual growth rates over the past decade than the mature ones – a range of 12% to 20% versus about 4%. Emerging markets have insurance penetration of less than 4%, measured as the ratio of premiums to gross domestic product (GDP), while in developed markets the same ratio exceeds 7%. Therefore, emerging markets have far greater untapped potential relative to the size of their economies.
Vasilis Katsipis, general manager, market development – MENA, South & Central Asia, report researcher and writer, noted the economic resilience in the emerging markets. “While the global economic crisis produced an outright shrinkage in gross written premium in the mature markets, the effect in the emerging markets was only a temporary slowdown in the rate of expansion,” said Katsipis. “In the MENA region, growth weathered not only the economic slowdown but the social and political upheaval of the Arab Spring.”
The companies operating in the markets were classified based on their gross written premium, into three groupings, i.e., large (the top five insurers in each market), medium (the following 10) and small (the remaining insurers). Other market-dynamic observations detailed in the report include:
- The introduction of compulsory coverages in emerging markets, in most cases, has led to greater insurance penetration;
- The gap in size between larger and smaller companies is much narrower in the emerging markets. The average small company in the emerging markets is five to 20 times smaller than the average of the top five companies in these markets; in developed markets, the large insurers are almost 40 times larger than their small competitors;
- The large BRIC companies are comparable to medium-size companies in developed markets, whereas the large companies in MINT and MENA are of similar size to the small companies in the developed markets;
- Emerging and mature markets share one marked similarity: the top 15 companies typically account for 90% or more of a market, across non-life and life sectors. In the BRIC and MINT markets, however, that 90%-plus share of life business is more concentrated in the top five players.
The Best’s Special Report also discusses the drivers of profitability in the different regions. In this area, Mahesh Mistry, director of analytics, noted how the relationship between companies’ size and performance begins to diverge between mature and emerging markets.
“In mature markets, small companies hold some distinct advantages, particularly in their underwriting performance, which tends to be marked by good claims ratios. Large companies by and large have good claims ratios when there is low frequency of large claims or no catastrophic activity impacting their results, and midsize companies tend to have the highest claims ratios in their markets and combined ratios that seldom dropped below 100% in the period examined,” said Mistry. “Claims ratios in emerging markets tend to be in the same groupings as those observed in the developed markets, thereby dispelling the belief that claims ratios in emerging markets tend to be several percentage points better than those in developed markets.”