What are the primary challenges to new market entrants?
Insurance & Reinsurance (3rd edition)
There are at least three major challenges:
- to establish an efficient and extensive sales channel, and in Brazil, bank assurance prevails for the so-called "mass insurance";
- to seek a business focus or a niche, where expertise or technical expertise can be a competitive advantage; and
- to seek partnerships with other players, specialized in other lines of business, in order to meet different customer demands.
In the past few years, due to the reform of CBIRC, the establishment of new insurers has step into a sluggish.
From January 2017 to March 2019, no approval on preparation of insurers are newly granted. 2018 has seen 7 entrants including Yellow Rive Property & Casualty Insurance Co., Ltd., Taiping Science and Technology Insurance Co., Ltd., Beijing Life Insurance Co., Ltd., Panda Life Insurance Co., Ltd., Ruihua Health Insurance Co., Ltd., Haibao Life Insurance Co., Ltd., Guofu Life Insurance Co., Ltd. However, those are all insurance companies who acquired the authorization of preparation before 2017.
In March 2019, CBIRC recovered its approval on preparation of the new entrants and allowed the preparation of the first foreign life pension insurance company, HengAn Standard Life Insurance Co., Ltd.
Generally, the Danish insurance market is well-functioning and there are no real formal challenges to new market entrants. However, there is a quite high level of competition in the Danish insurance market even though it is dominated by relatively few large in-surers that collectively hold more than 50 per cent of the market share in most areas. Even though there is a good level of competition on the Danish Market, many new market entrants may have great trouble competing with the largest insurers on the market.
In addition to competition challenges, the Danish insurance market is also a highly regulated market. Especially in the light of the EU Solvency II Directive, the costs of as-certaining compliance with the regulation can pose a challenge to new market en-trants. However, insurance business (and business in general) is to an increasingly ex-tent being transferred into the cloud. As a consequence, the distribution of insurances has changed, which has indeed made it easier for new entrants to appear on the insur-ance market.
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.
The FSC, for several decades, has refrained from issuing new licences to insurers seeking a status quo with the current roster of insurers. However, in 2016, the FSC issued three new limited licences to Allianz Global Corporate & Specialty, Asia Capital Re, and Pacific Life Re to spur competition within the marketplace.
The regulatory regime in South Korea still presents challenges for new entrants involving issues of data protection and privacy in relation to customer personal information, restrictions on distribution channels, insurer accounting methodologies requiring greater capital and reserves as well as difficulties in adjusting premiums. Notwithstanding, there is potential for new licences for other monoline insurers including reinsurers as there will be a need for the shifting or sharing of risks and liabilities given the increased capitalisation and reserving requirements under IFRS 17 and the Korea Insurance Capital Standards implementation set for 2022.
To enhance the market access to insurance as well as to diversify the offering of products. In Peru, it is needed to create a stronger insurance culture, and to promote the offering of innovative products that have been already tested in further developed markets.
Other major but currently untapped markets are micro-insurance and insurance for environmental damage.
The primary obstacles to new market entrants are linked to the market landscape and the legal and regulatory framework that govern the writing of insurance in France.
The French insurance market is a mature and competitive market. A limited number of large actors, that have consolidated through successions of mergers and acquisitions, dominate the market and would constitute significant competition for possible new entrants.
From a regulatory perspective, new market entrants must also consider ever-growing EU regulations (regarding inter alia solvency requirements and access conditions), as well as the fact that the sale of insurance contracts in France is highly-regulated – factors that new market entrants would have to consider, as they naturally generate significant internal compliance costs.
The German insurance market is a highly developed, regulated and mature market. Accordingly, competition is intense and consolidation is to be expected. At the same time, in many business lines, the market has been soft resulting in low premiums in many lines. In addition, the continuing low interest rate environment is challenging and exerting pressure on capital investments and, in particular, life insurers. A number of life insurance and other carriers are considering run off solutions, and are under increasing public scrutiny and political pressure.
Moreover, new market entrants will need to be ready to cope with existing and future regulation. The last years have seen a number of major developments affecting the insurance market, such as the European General Data Protection Regulation, the Insurance Distribution Directive, Brexit and new regulatory initiatives for collective redress mechanisms, to name a few.
Israel is a small country, but with substantial awareness of insurance. There are about 7 existing Insurers and in addition several Lloyds cover holders. The competition is therefore fierce. The Commissioner is encouraging new fully digital companies will be added to the competition.
In addition, the insurance market is highly regulated. Such level of regulation imposes on Insurers a substantial financial burden to comply with all the regulations.
Currently, there are a number of digital platforms looking for opportunities to expand their service offering, including into the Australian insurance market. At the moment, this is largely a positive for the insurance industry as it is creating new opportunities for distribution. However, if these players seek authorisation as insurers and issue their own products, this is likely to create even more competition in an already very competitive market.
One significant issue that has emerged with consolidation in the industry is the challenge of integrating legacy systems. The cost of replacing or integrating existing systems and technology is substantial. Those insurers that are able to adapt their systems, and make use of technology and insurtech to deliver insurance services in a more cost effective and consumer-friendly manner, will gain market share and potentially be attractive targets for acquisition.
Italy offers a great opportunity to well-informed and prudent Insurers. In general, foreign insurers, especially the ones from Common Law traditions countries, enter the market with their home experience and pretend to apply their own wording, which, more often than not, make little or no sense in a Civil Law country as Italy.
Beside this cultural gap, the other problem that new market entrants experience is that they must meet unrealistic budgets set by someone who has little or no knowledge of the market. This situation lead to underwrite bad risks that are available because no one on the national market wants to insure them.
A third and last challenge the new entrants face is that more of than then not they refuse the fact that “when in Rome, you do as the Romans do”. Therefore, impatience and lack of trust might undermine the excellent opportunities of business presented by the Italian Market, and that is especially true for very specific and complex class of business as Medical Malpractice or the Financial Institutions.
Obtaining required license from the FSA is the primary challenges to new market entrants. As it may take long time to complete the license procedure, new market entrants are better to commence the discussion with the FSA 1.5-2 years before the launch of business.
The Polish insurance market is highly regulated. Some segments of insurance activity are even overregulated. The insurance regulations are dispersed in a number of legal acts, and overlap in a number of cases, which makes it difficult to apply them.
The legal environment is rapidly changing. The implementation of the new regulations, including those based on EU laws (such as IDD, General Data Protection Regulation, PSD II), will be quite challenging in the coming months.
On the investment side, one of the challenges for new market entrants may be the relatively low financial awareness of the majority of Polish society. This leads to a low level of insurance sales and, in turn, prevents insurers from applying lower prices. Nevertheless, in some segments, strong price competition can be observed.
At the same time, despite these challenges, the Polish market is relatively secure for insurers. Most of them have survived the financial crisis quite well. According to a market analysis all companies, including new entrants, need to look for new niches and increase the quality of their products as well as focus on customer needs. Therefore, there is room for development.
The main challenges that the insurance market will have to face can be summarised in two, fundamentally. The substantial change in supervision -given by the incorporation of a new institutionality and model-, on the one hand, and on the other, adjusting to the challenges presented by technological innovations, both in the dimesnión of cyber risks and Insurtech.
In the near term, the new integrated supervision model based on principles.
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 UK has a long-established and therefore mature insurance market that covers all product lines in life, general insurance and reinsurance and it has an infrastructure and depth of professional expertise rivalling 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. Potential new entrants looking to benefit from access to European markets may now consider jurisdictions other than the UK until there is greater clarity about the outcome of the UK Government’s plans to leave the EU.
In addition to market challenges, the UK is a highly regulated market. 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, there have been a large number of Insurtech developments which offer insurers access to new data sources and a new customer base and may present an appealing proposition for new capital providers.
The IRDAI has notified the IRDAI (Branch Offices of Foreign Reinsurers (excluding Lloyd's) Regulations 2015 and the Lloyd’s India Regulations, 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. In this regard, please note that IRDAI has issued the IRDAI (Re-insurance) Regulations, 2018 that has revised the order of preference of cession and described anew hierarchy between various entities with which an insurer can place its reinsurance business.
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.
Further, the IRDAI has recently issued an exposure draft IRDAI (Linked Insurance Products) Regulations 2018 and the IRDAI (Non-Linked Products) Regulations 2018 which define the revised norms vis-à-vis the design and issuance of linked and non-linked life insurance policies by life insurers in India.
IRDAI has also issued a Circular on “Moving towards ‘Risk Based Supervision of the Insurance Sector” of 3rd October 2018 which stipulates that the IRDAI is in the process of adopting risk based supervisory framework for holistic supervision of insurance sector in India. The IRDAI has set up an implementation committee to suggest the implementation approach for risk based supervision and to achieve smooth transition. Insurers and insurance intermediaries have been directed to initiate steps to lay greater focus on identification of risk and to build a framework that enables internal assessment of such risks and corresponding control mechanism to mitigate risks within the organization culture.
Significant and frequent changes being proposed in the insurance regulatory space and the complex insurance regulatory framework, also poses a challenge for new players seeking to enter the Indian insurance market.
The UAE market has developed in a considerably short period of time and the classes of business and products which are written reflect business in any sophisticated market. That being said the market suffers from the cyclical nature of the insurance market; for example softening of rates caused by competition, liquidity flows in terms of remittance of insurance premiums. In addition, whilst new products are being developed in connection with "electronic/connectivity" risks globally, the penetration in the UAE market is less marked, despite there being significant and quantifiable losses.
Challenges to new market entrants are comparable with other EU jurisdictions and include the complex legal and regulatory framework and the existence of a mature and highly competitive market.
Among the primary challenges to forming new insurance companies is complying with numerous and burdensome laws and regulations of up to 50 states where a new insurer would like to write business. Other challenges include raising and maintaining sufficient capital and surplus requirements as well as competing against well-established and trusted competitors.
As discussed in our response to question 5 above, foreign ownership of the insurance business is subject to an 80% cap (unless grandfathered), and, as discussed in response to question 12 above, there is a single presence policy.
The limitation of foreign ownership means that new entrants must find a suitable local partner, which can be challenging. Given that nominee arrangements are prohibited under Indonesian law, the local partner must be a party that intends to invest in an insurance company.
Once an insurance company has been established, it has to deal with various issues such as financial illiteracy and competition in the market. Although the Indonesian market is considered huge, most of the population, particularly those living in the rural areas, are financially illiterate. The majority of Indonesians living in rural areas do not understand the role of insurance and therefore do not value its importance. Therefore, selling insurance products may be very challenging, particularly in these rural areas. On the other hand, those living in large urban areas with higher than average disposable income would be more likely to have already purchased insurance products from the many existing companies. As a consequence, for new market entrants, it is often difficult to effectively market insurance products in an extremely competitive market.
The primary challenge to new market entrants is obtaining a licence from the OIC which, due to the OIC’s current policy, has not been granted since 1995. A new market entrant may have to consider other options such as acquiring shares in an existing insurance company, subject to the requirement to maintain 75% local ownership.
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.
(Re)insurers seeking to establish an undertaking in Ireland are expected to meet certain authorisation standards. Among these is the expectation that a (re)insurer’s “substance” and “hearts and minds” will be maintained in Ireland. To satisfy the Central Bank’s substance requirements, (re)insurers will need to demonstrate that 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. However, the Central Bank may permit a degree of “dual-hatting” of key personnel on a temporary basis, if it has been sufficiently demonstrated to the Central Bank how the role will transition into a full-time position as business need increases.