It’s A Small World After All

It was in 1964 that Walt Disney first told us in song that “it’s a small world, after all.” As we apply the concept to insurance in 2010, it is clear that Walt was well ahead of his time. The opportunities and challenges for today’s insurers around the globe seem to transcend time zone and cultural differences. I recently spent a week in Tokyo, in part for the Celent Insurance Roundtable. (No, I did not go to Tokyo Disney.) To be successful, a trip like this has to include some very fresh sushi, and a flurry of fresh perspectives. Thankfully, I found both. In our roundtable discussion and in my conversations with Japanese clients I was struck by how similar Japanese insurer concerns are compared to those of North American insurers. Common themes included finding the right levers to drive company-level growth despite flat industry-level demand, concerns over outdated IT approaches, and the challenges associated with optimizing short- and long-term strategies simultaneously. Comparing Tokyo consumers to their counterparts in North American cities of similar size is also interesting. Looking around a Tokyo Starbucks, I saw that same curious mix of eccentric 20-somethings and 40-something professionals that I see in New York. Most were on laptops or smart phones, enjoying high speed connectivity to stay in touch with friends or to crank out emails from their virtual offices. The Japanese may still have more affection for their keitai (cell phones) than do North Americans, but the gap is clearly closing. Another symptom of our rapidly shrinking planet (where is Al Gore when you need him?) is that global competition is no longer limited to the manufacturing sector. Looking at the names on Tokyo buildings tells the story. IT services firms are aggressively building out their presence in new geos. Insurers are buying companies halfway around the world. Software vendors that got their start in one country are now reaching critical mass in others. While I typically preach focus for any firm that haven’t mastered its “home” domain, I think that expanding the vision to new countries is essential for successful firms that have high growth ambitions. Good ideas, powerful tools, and game-changing strategies are welcome visitors to just about any country. As a futurist and as an entrepreneur, Walt Disney dreamed big dreams. We may not be commuting to work by personal jet pack (yet), but otherwise Walt had it about right. It’s a small world, indeed.

Distribution strategy in China’s diverse market conditions

I talked with a reporter recently about Asia distribution channels. She asked me question about in emerging markets like China, what the challenges are, and issues facing by insurers to build up a cost effective distribution channel, and what being important for a successful distribution strategy in China’s diverse market conditions. China is a big and diverse market. Most places in China are emerging markets. It is not common for people to initiate the purchase of insurance products. This is due to the limited knowledge they have of life insurance. Insurance is mainly sold in a face-to-face setting with an individual agent of an insurance firm, where the agent would provide a detailed introduction of the product; hard selling may be involved as well. Hence, the main sales channel for life insurance in these emerging markets is individual agents. But in many big cities in China, insurance markets are maturing. People are more aware of insurance product; they’ll purchase insurance through banks, car dealers, travel agencies, telephone, and internet. Individual agents are still an important distribution channel in these big cities, but in the face of stiff competition with other distribution channels, as well as the increase in diversity of financial products, some insurance companies are investing in more training to equip agents to become financial advisers, and establishing online and mobile support system. The biggest challenge by insurers to build up a cost effective distribution channel in China is the market diversification. Multi-channel distribution is very important. Any single distribution channel, any single distribution strategy can’t meet all market conditions. The important thing for a successful distribution strategy in China’s diverse market conditions is the alignment of product and distribution channel. Design of product should be aligned with target customer and designated distribution channels.

Electronic and cross-border trading in Asia

I recently participated as a moderator in two panel discussions on the South East Asian markets in the SunGard City Day held in Singapore on 14th July, the topics being electronic trading and cross-border trading respectively. An important point that came out of the discussions was that Asia-Pacific cannot be seen as one market, unlike the European Union. It comprises of various national markets at different stages of development. Japan, Australia, Singapore and Hong Kong are the leading markets in the region. By comparison, markets such as Indonesia, Malaysia and China are lagging behind. The difference can be seen in terms of infrastructure, e.g., the differences in the latency of the exchanges, as well as the number of products that can be traded on them. In the leading markets, the circumstances are becoming more conducive to high-frequency trading and the operation of alternative trading systems, including dark pools. Co-location services are being provided by the exchanges and the regulators are reducing the barriers on off-exchange transactions, such as the limits on the size of transactions and the time limit within which a transaction has to be reported. A crucial factor in the adoption of greater electronic and algorithmic trading will be the willingness of the buy-side to develop the infrastructure for the same. An interesting example that was quoted in the event was that a buy-side trading desk took three months just to fine-tune the latency of their connectivity to the exchange. What this highlights is the fact that while many in the local sell-side and increasingly the buy-side are convinced of the need to have algorithmic trading, it will take time to put the necessary systems in place. Also, the local players are not sure about whether they can afford the level of investment (and the time taken) required to create the trading infrastructure. Hence, the barriers to adoption of technology are more practical than theoretical, unlike earlier. In fact, most of the panelists stressed that there has been a sea-change in the mindset of the domestic market participants in the last 2-3 years and they are much more open to having algorithmic trading and dark pools now. It is further expected that once ADR/GDRs can be traded in these exchanges, the level of algorithmic trading will go up, with the greater presence of exchange-traded funds also playing a similar role. However, the level of off-exchange trading in the next 3-4 years is expected to go up to 5% at the most, up from the current 1% but much below the 30% levels seen in Europe. Cross-border trading in the ASEAN region has picked up in the last few years. Regulation has also paved the way for this, e.g., in Malaysia, regulation has recently allowed up to 30% of the NAV of a firm to be used in trading assets abroad. Even before the recent ASEAN linkage between six countries was announced, cross-border trading was a prevalent phenomenon. The linkage is expected to increase the level of electronic trading and also make it cheaper and more efficient. The next step should be to develop the post-trading infrastructure and linkages between the central securities depositories.

World Cup’s Performance Correlation with Asian Markets – Irrational exuberance?

The World Cup in South Africa is finally here and besides all the focus on the unusually bouncy new ball and the loud yellow “elephant trumpets”, the performance of the football teams in the Asia-Pacific (we include South Korea) region has also been of great interest. Above is a lighthearted look at the potential impact of the past week’s world cup results on the relevant markets from the kickoff on 11th June. Japan 1 – 0 Cameroon – Nikkei 225 up 1.92% S.Korea 2 – 0 Greece – KOSPI up 0.87% Australia 0 – 4 Germany – S&P ASX 200 Index down 0.3% So I guess all those investors would be finding even more reason to root for their national teams now =) Graphical and data source: Bloomberg

Welcome to Celent’s Asia Blog

Celent is continually looking for ways to better connect and interact with the financial and technology communities. Continuing in the tradition of Celent’s industry-specific banking and insurance blogs, we are now launching a blog focused on issues in business and technology strategy in the Asian financial services. Welcome to Celent’s new Asia blog. From the beginning, a differentiator at Celent has been our coverage of financial and technology issues from a global perspective. As part of this commitment, over the past few years, we have been ramping up our research on Asia and India. We have now built up quite a substantial library of research on these regions, which we think is pretty unique. Building on this, we have recently also launched two new research services, one focused on India, the other focused on the rest of Asia. These services essentially bundle reports from our banking, securities & investments, and insurance services into regionally-focused services aimed at firms seeking cross-vertical competitive information on Asia and India specifically. And now the Asia blog. We have a baker’s dozen of analysts ready to lob commentary on what we see developing in the region, as well as on Celent’s activities. We think you will find our essays informative and stimulating. And we encourage you our readers to participate in the feedback loop by sending us your comments and questions. The goal is to create an active dialogue on the evolving financial services and technology markets in India and Asia.