What are the primary challenges to new market entrants?
Insurance & Reinsurance
The Central Bank requires the substance and “heart and mind” of an Irish-authorised insurance undertaking to be maintained in Ireland in order to ensure compliance with all applicable legal and regulatory requirements. As such, the primary challenge facing insurers and reinsurers seeking to establish in Ireland is demonstrating real substance. In considering an application for authorisation, the Central Bank will need to be satisfied that the key personnel responsible for the strategic decision making of the undertaking will be located in Ireland. There are no guidelines in terms of the specific numbers required by the Central Bank, as this will generally depend on the nature, scale and complexity of the business.
The UK has a long-established and therefore mature insurance market that covers all product lines in life, general insurance and reinsurance and it has the infrastructure and professional expertise to rival any other global insurance hub. However, the past few years have seen extensive market consolidation in the pursuit of growth in an environment where rates have been falling, especially in competitive commercial lines. The soft market has resulted in low premium income in many lines and the ongoing low interest rate environment has made the operating environment challenging for any new market entrants.
The political and commercial uncertainty introduced following the EU referendum has meant that new market entrants do not have the same degree of certainty in relation to the breadth of market they can operate in as was the case before the Brexit vote. Many new entrants looking to benefit from access to European markets may consider other jurisdictions than the UK until there is greater clarity about the outcome of the UK Government’s plans to leave the European Union.
In addition to market challenges, the UK is one of the most highly regulated markets. The cost of compliance can pose a significant challenge to new entrants, particularly in the light of the highly sophisticated Solvency II supervisory regime.
On a more positive side, the use of cloud-based systems which can leverage scalability and flexibility and access to new data sources and appeal to a new customer base means that new market entrants may present an appealing proposition for new capital providers.
Lloyd’s of London can offer an attractive platform for new business entrants as there are a number of approaches through which new business can be written before a traditional syndicate is established. The Lloyd’s market has access to all major insurance markets and participants can benefit from the extensive licence network.
Actors wanting to break into the Swedish insurance market will face several challenges, where the two biggest hurdles to a successful market entry probably will be compliance and competition. Insurance regulation is an ever-growing plethora of legislation, and seems to be growing faster now than ever, with both national and EU-wide rules and regulations continuously being implemented. The competition is also very tough, as the Swedish market is saturated with a few, large actors sharing the vast majority of the market.
Germany has a long-established and therefore mature insurance market that covers all product lines in life, general insurance and reinsurance and has the infrastructure and professional expertise to rival any other global insurance hub. New market entrants have to consider differences in the legal environment relating to inter alia employment, data protection and unfair competition law.
The Norwegian insurance market is considered well-functioning and on paper there are no substantial challenges to new market entrants. The last few years have seen a number of new insurers establishing themselves in the market. The main challenge for new market players have traditionally been distribution. Most Norwegian insurance companies are bank-owned and these distribute their products through the bank office network, which traditionally has given them a huge advantage particularly in rural Norway. As more and more of the bank offices are being shut down and the more and more of the business is being transferred to the cloud, we have also seen a shift in distribution of insurances as well, which have made it easier for new players to penetrate the insurance market.
As it has been explained, Mexico has lifted any limitations to foreign investment and any foreign investor may access the Mexican insurance market. Therefore, there are no legal or regulatory barriers of entry to new market entrants.
Notwithstanding the foregoing, new market entrants challenges include a market subject to traditional distribution channels dependent on traditional brokers to place business or in very high costs involved in developing a salesforce; low market penetration and a lack of insurance culture; high operating costs due to excessive regulatory burdens; and a large and diverse country subject to different risk exposure and needs.
The UAE insurance market is currently conflicted in two divergent aspects. On one hand, there is a currently some over-capacity in the licensed insurance market, which has led to an unsustainable pricing structure which has thereby created solvency risks to some insurers.
This has resulted in the IA essentially indicating that it will not grant any new insurance company licenses until the capacity issue is resolved. Any new market entrant wishing to write business in onshore UAE should thus consider other options, including engaging in reinsurance, entering into a strategic alliance with an existing licensee, or the outright acquisition of an existing license, to the extent that it can overcome the hurdles imposed by the requirement of maintaining 75% local ownership.
On the other hand, the market penetration rate is significantly below what it should be for a wealthy and rapidly developing nation. This presents opportunity for those market participants who believe that they offer a proposition that can be successful in such a growth-oriented and wealthy underpenetrated market, but one that is not without its challenges.
Primary challenges to new insurers entering the market include increased capital requirements for certain lines of business (e.g., variable annuities with guarantees) as well as potentially high regulatory compliance costs.
The comparably moderate economic growth and the historically low interest rate environment pose a challenge for many insurance undertakings. More stringent regulatory requirements imposed in the aftermath of the financial crisis put further pressure on market participants. In particular, the implementation of Solvency II will require insurance undertakings to adopt their equity capital resources and reporting systems. These issues will similarly pose challenges to new market entrants.
However, Austria still remains a country with low insurance density. Whereas, in 2015, the EU average rate of insurance penetration, i.e. gross written premiums in comparison to GDP, was at 7.41 percent, Austria’s rate of insurance density was 5.1 percent, falling 0.1 percent from the previous year. Hence, the Austrian insurance market still provides room for new market entrants.
The Chilean insurance market has a very structured and regulated system, where only duly authorised entities may carry out the insurance business. However, to the extent that an interested party complies with all relevant requirements set forth by insurance laws and regulations, the Insurance Regulator should grant it the relevant authorisation, as this authority may only refuse to grant such authorisation by a well-founded resolution with sufficient grounds.
For direct insurers entering the Swiss market, in our view, the main challenge is on sales, in particular if the business predominantly focusses on consumers. Recruiting may be another challenge, since even though the Swiss market provides numerous highly skilled individuals, the competition among the insurance companies to hire these individuals is very strong. Product adaptations to Swiss law are, of course, a challenge too.
Increase insurance penetration in the market and diversify existing products. In our environment we need to strengthen the culture of insurance, and promote the offer of innovative products, proven in more developed markets than the Peruvian. Another large market, untapped to date, is micro-insurance and coverage for environmental damage.
The IRDAI has notified the IRDAI (Branch Offices of Foreign Reinsurers (excluding Lloyd's) Regulations 2015 and the IRDAI (Lloyd’s India) Regulations 2016, thereby permitting foreign reinsurers to set up in India. However, at the same time, the IRDAI has mandated Indian insurers follow the order of preference for cessions while placing reinsurance business. Under the order of preference of cessions, the General Insurance Corporation of India, ie, the Indian reinsurer, has been granted the first right to refusal. This is a concern for foreign reinsurance players who have entered India or are considering an entry into India.
Indian insurers and insurance intermediaries are required to be Indian owned and controlled at all times. While the IRDAI has issued specific guidelines prescribing benchmarks for Indian ownership and control, the exact nature and scope of “Indian owned and controlled” is subjective and thus varies on a case by case basis. Lack of clarity on some of these points creates a challenge for foreign players who are seeking to invest and participate in the management of Indian insurance companies and insurance intermediaries.
Furthermore, with significant and frequent changes having taken place in the last few years in the insurance regulatory space, the insurance market is in a state of flux. This state of flux, combined with the complex insurance regulatory framework, also poses a challenge for new players seeking to enter the Indian insurance market.
Apart from a rigorous regulatory framework, challenges to new market entrants include:
- Strong competition from local and international insurers and reinsurers with an established presence in Singapore in a relatively smaller market vis-à-vis neighbouring countries in Asia;
- Low penetration rates for various classes of insurance, such as life insurance; and
- Attraction and retention of specialist talent.
There are at least three major challenges: (1) to establish an efficient and extensive sales channel, and in Brazil, bank assurance prevails for the so-called "mass insurance"; (2) to seek a business focus or a niche, where expertise or technical expertise can be a competitive advantage; (c) to seek partnerships with other players, specialized in other lines of business, in order to meet different customer demands.
Israel is a small country, but with substantial awareness of insurance. There are about 10 existing Insurers and in addition several Lloyds cover holders. The competition is therefore fierce.
The Belgian insurance market is an overcrowded, mature and competitive market. The sector faces a high pressure on cost. Several insurers active in Belgium announced at the end of 2016 their intention to let go staff, or even to stop their activities in Belgium.
France is the second insurance market in the EU and is a mature insurance market that covers all product lines in life, general insurance and reinsurance businesses.
The French insurance market offers opportunities to new comers such as insurance comparison websites and to companies promoting technology-based innovation applied to the insurance sector. In this specific respect, the ACPR has set-up a “FinTech” team (“Pôle FinTech”) in order to better understand the FinTech’s functioning and purposes and to adapt to them, when possible, the regulatory environment and constraints applicable to their businesses.
Canada is a mature and relatively conservative, risk-adverse market with seasoned competitors. The group life insurance and health benefits market is dominated by a handful of very large life insurers while the non-life market is increasingly subject to consolidation. New market entrants also have the initial hurdle of having to confirm their practices to 13 separate provincial and territorial regulatory schemes as well as federal rules governing foreign insurers.