Tower Group: North American Insurers See Growth in Emerging Markets for Asia, Europe and Latin America

August 3, 2004

North American insurers currently are pursuing global expansion at a pace rivaling that of European insurers’ entry into U.S. markets in the early 1990s.

According to TowerGroup, more favorable economics, key demographic trends and the gradual dissolution of international barriers to entry underscore the high growth possible for U.S. insurers in key emerging markets.

“TowerGroup believes that the most compelling emerging markets for North American insurers are South and East Asia, Central and Eastern Europe, and Latin America,” said Cindy Saccocia, senior analyst in the Insurance practice at TowerGroup and author of the research. “Swiss Re found that the inflation- adjusted growth rates for life and non-life insurance premiums for these emerging regions were 6.6% and 8.5% respectively in 2003. This is compared with 2003 growth rates in industrialized countries of negative-1.7% for life insurance premiums and 5.7% for non-life premiums.”

Highlights of the research include:

* Relatively low penetration rates for insurance in these emerging markets, as well as the aging of populations around the world, represent substantial opportunity for North American insurers. In addition, the stability of many employer-sponsored pension plans is
uncertain. Over time, this will drive demand for insurance-oriented products as individuals in emerging markets take on more responsibility for their retirement security.

* TowerGroup cautions insurers to approach new markets with a fresh
perspective on distribution, operations, technology and services. Of
particular importance is a thorough evaluation of how the insurer will
manage infrastructure, insurance operations and regulatory demands. If not carefully examined, these areas can later incur the greatest costs and cause the insurer to miss break-even targets.

* While insurers have many options relative to implementing a globalization strategy, nearly 50% of those interested in international growth prefer to “go it alone” and build out new operations – as opposed to leveraging the on-the-ground expertise and infrastructure of a vendor partner. Building unique operations for each new market is
costly, while trying to leverage end-to-end operations across all international markets can be challenging due to regional differences.

TowerGroup believes North American insurers can best maximize their
opportunities in emerging markets by leveraging the capabilities of select vendors with global expertise in software applications and services.

“Leveraging the right vendor partner affords an insurer the necessary leeway to focus on the critical success factors of cultural acceptance, distribution, regulatory or accounting differences, and setting strict governance policies,” added Saccocia.

One way insurers can reportedly do this is by establishing “processing hubs” in select locations to bring together common, regional functions and deliver cost-effective standards for business operations and technical support.

Saccocia noted that this approach drives down operational and infrastructure costs, because the insurer maximizes its investments and derives economies of scale.

“Globalization is not for all insurance companies. It is a challenging
strategy that requires thoughtful planning and long-term investment. While revenue may take many years to realize, the eventual returns will be substantial,” said Saccocia.

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