2-speed system emerges in Asia-Pacific insurance markets

Analysts said that investments have been significantly beneficial to insurers, most especially in Singapore and China.

In Asia-Pacific’s insurance market, a clear dichotomy is emerging between developed markets versus their developing counterparts. This divide not only reflects the varying levels of economic maturity but also influences how these markets respond to macroeconomic forces.

Under all the tension the year has endured, an expert at Norton Rose Fulbright (NRF) pointed out that insurers in developing and developed markets face various risks and influences, moving them to accelerate at different speeds.

“What is becoming starkly apparent is that there is a two-speed system to the insurance and financial markets in Asia. Those markets that are relatively well developed and internationally mature, principally Singapore and Hong Kong (and Japan and Korea in relation to the former) and the rest,” NRF Partner and Head of Asia Insurance Anna Tipping told Singapore Business Review.

“The well-developed and domestically or internationally mature markets have strong prudential regulation and are working on transitioning to risk-based capital regimes and in some cases the second version,” said Tipping.

Insurers in the APAC region, including developed markets such as Japan, Australia, New Zealand, Korea, Hong Kong, and Singapore, should exercise caution and preparedness in the face of evolving risks, Fitch Ratings said in a report. These risks encompass climate change, geopolitical tensions, and cyber threats.

Developing markets in Asia should also be vigilant, with a specific focus on foreign exchange fluctuations, geopolitical challenges, and cyber risks. The insurance industry across the region must remain adaptable and responsive to these multifaceted challenges to effectively mitigate potential impacts on their operations and policyholders.

Singapore as an outlier

In the APAC insurance arena, the “two-speed system” is becoming increasingly apparent. The divide separates developed markets such as Singapore and Hong Kong from their less developed peers, with Japan and Korea falling in between.

What sets these markets apart is their regulatory landscape.

Developed markets boast strong prudential regulation, with some transitioning to risk-based capital regimes. In contrast, less developed markets are still grappling with the enforcement or implementation of robust regulatory frameworks.

The result is that well-developed markets provide a sense of regulatory certainty and predictability, which makes them attractive to international insurance groups. Conversely, less developed markets, despite offering promising growth potential, struggle to attract significant investments.

“The less developed markets, while offering, on paper at least, much better growth opportunities, still present significant challenges for international insurers because of the lack of transparency in the application of the rules and seeming preference given to domestic participants in terms of deferral of the obligation to comply with enhanced regulation. The result is that the less developed markets are still not receiving the quality investment that they need to boost their insurance sector,” Tipping said.

Singapore, as a developed market, stands out as a prime example of a well-regulated insurance environment, Tipping noted.

The Monetary Authority of Singapore (MAS) is a robust regulator currently implementing Phase 2 of a risk-based capital model.

“There is relatively light touch conduct regulation. This should point to greater growth opportunities than appear to be realised. The reasons for sticky growth lie more in the nature of the Singapore market than its regulatory regime,” Tipping stated.

However, the challenges in Singapore’s insurance market stem more from the unique characteristics of the nation than its regulatory regime.

Singapore boasts a safe environment for individuals and their possessions, with a social security system, good healthcare, and lower taxes, reducing the need for personal insurance.

Commercial lines, such as credit insurance, warranty and indemnity insurance, and cyber insurance, are experiencing notable growth in Singapore. This growth is largely attributed to Singapore’s status as the most desirable hub for Asian operations, attracting companies to establish their headquarters in the city-state.

“The next piece in the jigsaw puzzle is to facilitate cross-border underwriting to allow regional centres of excellence to develop,” Tipping expressed.

To further boost the insurance landscape in Singapore and the broader area of the Association of Southeast Asian Nations (ASEAN), the focus is now on facilitating cross-border underwriting.

The ASEAN blueprint aims to foster regional centres of excellence, but achieving this goal presents its own set of challenges. Emerging jurisdictions may be wary of agreeing to a freedom of services model akin to the European Union’s due to potential losses outweighing gains.

China’s regulatory transformation

Meanwhile, a major player in the Asia-Pacific insurance landscape is China. The nation has shown significant developments that have been unfolding in recent years.

Ai Tong, corporate and insurance partner at NRF, said a pivotal development is the substantial legislative opening of China’s insurance market to foreign investments.

“China has been consistently exploring a proper and safe way to welcome foreign investment, and now foreign investors can wholly own insurance companies, all types of insurance intermediaries and insurance asset managers, same as their domestic peers,” Tong said.

This move has accelerated foreign capital inflow into China’s insurance sector, allowing foreign investors to wholly own insurance companies, intermediaries, and insurance asset managers, equaling their domestic counterparts.

This shift demonstrates China’s commitment to welcoming foreign investment in a controlled and secure manner.

Tong also emphasised that China’s recent milestone is the establishment of the National Administration of Financial Regulation (NAFR), a “super” regulator replacing the previous banking and insurance regulatory bodies.

“Compared with the responsibilities of the previous insurance regulator, NAFR has received broader powers and will seek to eliminate regulatory arbitrage and gaps in supervision which previously existed. This has demonstrated China’s resolution to enhance financial supervision and impose a stricter stance towards financial misconduct,” Tong said.

China has also prioritised governance and compliance within insurance institutions, with a particular emphasis on Environmental, Social, and Governance (ESG) initiatives.

Comparing the contrasts

The disparities between Singapore and China in the Asia-Pacific insurance sphere highlight the divergent paths that developed and developing markets are taking.

The industry is undergoing significant digitalisation efforts, reflecting the broader trend in insurtech across the globe.

Data privacy has emerged as a key concern, aligning with global movements towards stricter data protection regulations, Tipping emphasised.

Singapore’s well-established regulatory environment is characterised by prudence and predictability, whilst China’s reforms are ushering in a new era of openness and stringent oversight.

In this regard, while Singapore leads the way in terms of regulatory infrastructure, the road to fully integrated cross-border underwriting across the ASEAN bloc remains uncertain.