What are the primary challenges to new market entrants?
Insurance & Reinsurance
Portugal has a mature insurance market that covers the majority of insurance and reinsurance lines. Foreign investment in the Portuguese insurance market, notably in existing insurance undertakings, has increased during the past few years and there are currently a few insurance undertakings with a high market share. Notwithstanding the aforementioned, the Portuguese insurance market is envisaged to continue growing as insurance indexes show that the local market is below average for EU standards.
Furthermore, newcomers to the local market may take advantage of technology-related opportunities and may benefit from being more agile as to respond to customers’ needs which are constantly changing, more rapidly than ever before.
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 requirement for dual authorisations (as both an AFSL holder and a general or life insurer) to carry on insurance business in Australia is one of the key challenges for new market entrants looking to establish operations as an insurance company in the Australian market. New market entrants generally need to use a significant amount of resources due to the onerous requirements which they must demonstrate to both regulators that they satisfy, as outlined below.
Applicants for a general or life insurance authorisation from APRA must demonstrate that they can comply with the prudential requirements outlined in APRA's Prudential Standards including extensive requirements as to capital adequacy, risk management and internal control systems and governance from the start of their authorisation. In order to apply for an AFSL with ASIC, applicants must provide core proof documents including a business description, proofs for each responsible manager and organisational competence, along with financial statements and proofs for financial resources.
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 insurers that collectively hold more than 50 per cent of the market share in most areas.
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 ascertaining compliance with the regulation can pose a challenge to new market entrants.
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.
Despite Turkey’s growth potential in recent years, there are certain unique challenges especially in insurance market, such as strict regulations and sudden changes in legislation. The Undersecretariat plays an active role supervision of insurance companies, and the new entrants have to carefully consider its requirements.
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 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.
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.
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. 2017 and 2018 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.
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.
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.
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.
New entrants may seek a niche or else have strong financial support. The actors are mainly international insurers and one local insurer related to a local financial group. There are a few domestic insurers which rely mainly on international support and reinsurance, and their risk retention is minimal.
Massive insurance requires distribution channels and so alliances with retail or banks may be necessary for success.
In respect of large risks, such as mining, forestry, or fishing, reinsurance facilities are indispensable in order to avoid levels of capitalization in excess of the size of this 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.
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. In this regard, please note that IRDAI has released the Reinsurance Exposure Draft which proposes to revise the order of preference of cession and describe the new 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.
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.
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.
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.
From a commercial point of view, the excess of capacity is the main challenge.
From the legal point of view, it is essential to become aware of the Spanish insurance
regulations, which may differ from the regulations of other countries. Conducting business in
Spain exactly in the same manner as in other counties may be a fatal mistake.
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.