MEMS, Emerging Technology?

Ever heard of “MEMS”? I guess most people will answer ‘no’ to this question. “MEMS” is an acronym for Micro-Electro-Mechanical Systems – which can be further defined as miniaturized mechanical and electro-mechanical components. So how does this affect us? This technology has been around for a number of years now, and is slowly becoming more and more useful in everyday life. Very small components can collect data and stream the results to an increasing number of devices, thus making data collection far easier and convenient. No, I am not talking about invasive data collection. But imagine a small device implanted in your arm that can collect data about your health! Such as rising blood pressure, an impending heart attack, changes to your blood composition, etc etc. Imagine further that this data can be streamed in real time to your smartphone and your doctor! Research on “MEMS” usage is ongoing, and in some cases people are already predicting that its use will reduce disease and surgery in future. This could have far-reaching implications in the life and health insurance industry. Sometime in the future we may be pricing life and health products and using the availability and ongoing usage of MEMS devices as an input into our rating – just as we are currently using telematics data to price for auto insurance. Is this going to be the next big change in our industry?

Thailand’s Growing Insurance Market

Thailand’s Insurance market is small but one of the fastest growing in the Asia Pacific region next only to China & India. The country is relatively underdeveloped both in terms of insurance penetration and insurance density as compared to some of the developing countries with in APAC region. Both insurance density (Thailand USD 199, world average USD 267 in 2010) and insurance penetration (Thailand 4.3 percent, world average is 11 percent) is considerably low. Life insurance premium constitutes about 2.6 percent of GDP and non-life insurance premium about 1.7 percent of GDP. In Asia, Taiwan’s insurance market’s contribution is the highest accounting for about 18 percent of GDP, followed by Hong Kong, Korea and Japan contributing 12 percent, 11 percent and 10 percent respectively in 2010. Growing number of young population, new pension policy and inadequate health insurance are some of the growth drives in Thailand’s insurance landscape. Life and non-life insurance in Thailand are mainly sourced by insurance agents. However, other channels, such as bancassurance, are quickly catching up. The number of insurance players in Thailand doubled from 12 in 1995 to 24 in 2009. As the insurance market is introduced to new players in terms of foreign ownership, capital requirements, and solvency ratios, it is likely to see mergers and acquisitions in the years to come. Thailand’s life insurance market is highly concentrated, with the top five life insurance players holding nearly 70 percent of market share, and the remaining 19 players fighting for the remaining 30 percent. Thailand’s property/casualty insurance business (US$2.8 billion) is nearly 4 times smaller than the life business ($9.5 billion), which experienced negative growth in 2009 due to the financial crisis. Property/ casualty insurance in Thailand is highly fragmented, with 71 non-life insurance players operating in the space. The top five players held nearly 40 percent market share, with over 40 additional players possessing less than 1 percent market share. IT investment by Thai insurance companies in 2009 was estimated to be US$413 million. Due to the impact of the financial crisis, IT spending in 2010 was limited to maintenance of existing systems. Celent expects IT investment in the market to reach US$1.5 billion by the end of 2013.

IPO for Indian Life Insurers

In October 2010, the capital market regulator, Securities and Exchange Board of India (SEBI), approved life insurance companies to issue IPOs. India’s insurance regulator, Insurance Regulatory and Development Authority (IRDA), has been planning to come up with guidelines for IPOs of life insurance companies for quite some time; an announcement is expected within the next few months. Current regulations allow only those insurers that have been in business for at least 10 years to go for an IPO. The government is likely to bring this down to five years; however, a final call is yet to be taken. Another such pending proposal is raising the limit of foreign ownership in a joint venture life insurer to 49% (currently capped at 25%). After an IPO, foreign promoters will have to bring down their stake to ensure Indian promoters hold a majority. An insurer opting for a public offering must also offer at least 25% of the shares to the public. Like any other IPO, pricing of an insurance IPO is an area of concern. This is more so for two reasons. First, insurance is a key sector of the economy with a large number of stakeholders; this sector is being allowed to participate in fund-raising from the capital market for the first time. Therefore, overly optimistic valuation may be detrimental to the sector in the long run. Second, in light of the recent events in Japan, it has become critical that all relevant factors affecting the insurance industry are priced in appropriately. The IRDA is likely to spell out appropriate guidelines regarding valuation accordingly. Insurance IPOs are expected to gain traction in the medium to longer term; however, this will also depend on the evolution of the markets and regulatory landscape. The Indian capital market seems to have hit a roadblock in recent months due to high inflation threatening growth prospects. The insurance sector in particular has been adversely affected. New policy sales by private firms took a hit in 2010, and margins are also under pressure. The Direct Tax Code (DTC), scheduled to implementation in 2012, is another cause for concern. This may remove some tax advantages for certain insurance products and raise the tax burden on insurance companies, which is likely to have an adverse impact on sales and profits. Several private sector insurers, including the likes of ICICI Prudential Life, Reliance Life Insurance, SBI Life Insurance, and HDFC Standard Life, are planning to tap the capital market. However, their expected times of offering may differ. While some may go for IPOs in the very near term, others may wait for some time. For example, Reliance, which has been supporting the reduction of the 10-year operations rule to five years, can be expected to raise money from the public in the short term. On the other hand, SBI Life is not in a hurry and wants to wait and watch as the regulations evolve. So even if IPOs do not pick up in the near term, they are likely to become popular in the medium to longer term.

Insurance and Japan

One might naturally assume that the tragic events in northeastern Japan would also be devastating the Japanese insurance industry. By the beginning of April some 320,000 P&C claims related to the disasters had already been filed with insurers. After the Kobe earthquake of 1995, when many home and business owners discovered their policies did not cover the damage, people got in the habit of buying earthquake / tsunami insurance. So fortunately more properties were insured on 3/11 than may have been otherwise. In conversations with Japanese carriers, however, Celent has found that insurers are remarkably sanguine about the likely effect on the industry here. Firms say they have adequate reserves set aside precisely to cover an event of this magnitude, which has long been predicted. As a result, Celent expects that major Japanese insurers will continue to invest in strategic initiatives to boost competitiveness and lower costs in this very crowded market. IT spending growth at Japanese insurers, which has been close to flat for years anyway due to the maturity of the market, will suffer a modest dip in the short term. Smaller insurers are likely to put off renewal projects for a while. Pressure to merge will increase at some firms, but again the industry has seen a spate of consolidation activity in recent years already. The recent events are likely to encourage Japanese insurers to accelerate their international expansion efforts, which are already underway. Carriers have been looking abroad for growth opportunities, especially to the Asia Pacific region but further afield in the Americas and Europe as well. In Tokyo, along with the concern, there is a new competitive spirit in the air. April is the start of Japan’s fiscal year and businesses look determined to find ways to grow even as the economy is forecast to contract. The insurance industry would be no exception. For example, the past year has seen the emergence of new internet and mobile based distribution models and products, approaches which seem almost tailor-made for the post-3/11 era. Technology suppliers will want to know that amplified interest in business continuity is leading insurers to think seriously about cloud computing. The blooming sakura and early spring sunshine might be distracting me from some of the harsher realities of 21st century Japan. But certainly a little optimism is not misplaced in what is after all one of the world’s major insurance markets.

Outsourcing in Indian Life Insurance Market

India’s domestic outsourcing market is gaining momentum. Most outsourcing service providers are turning inwards both to diversify risks and partake of the growing opportunity on home ground. Focus is now shifting from telecommunications and technology outsourcing to financial services outsourcing in the country. Of these, the Insurance BPO services market is expected to grow to USD 1.5 billion in size in the next three years- a substantial increase over its current USD 720 million size.Interesting to note here is that unlike their European & North American peers, Indian carriers are not driven by cost compulsions but rather are challenged by volume and manpower constraints resulting in the built-up of a favorable disposition towards outsourcing (See Image).

Carriers see vendors as partners providing best in breed knowledge and performance to enable them to focus on their growth objectives. Indian vendors and multinational vendors have only recently started catering to the outsourcing needs of the domestic market. With the increasing incidence of outsourcing in insurance sector, critical manpower base and know how specific to the Indian geography are also evolving at the vendor end. More firms are likely to realize profitability once the market acquires sufficient breadth and depth.

Celent recently published ‘Outsourcing Trends in Indian Life Insurance’ which captures the key issues and trends in the domain.