AEC offers insurers greater market access

MANILA, Philippines - The new trade bloc in the Association of Southeast Asian Nations (Asean) will ultimately provide insurers with opportunities for increased market access, Standard & Poor’s Ratings Services (S&P) said in a report.

“Most Asean Insurers Appear Ready To Handle Tougher Overall Conditions,” the S&P report said it does not expect the Asean Economic Community (AEC) to provide immediate market access.

But the report said the liberalized flow of goods and services would nevertheless provide opportunities for insurers that are able to service cross-border traders.

“Low insurance penetration and rapid economic growth in individual Asean markets offer the investment and growth opportunities investors and insurers seek,” said S&P’s credit analyst Philip Chung. “As global and regional industrial groups expand into developing nations to take advantage of lower costs, non-life insurance companies follow their clients into these economies.”

The report pointed out that the full financial integration in Asean will not occur any time soon. The countries are at very different stages of development, and insurers operate at varying levels of sophistication.

While local players may not necessarily welcome the intense competition that full integration will bring, the divergent regulatory frameworks among Asean countries further complicate efforts to achieve any significant integration.

“We believe national regulators will proceed with gradual financial liberalization and ensure that domestic insurers are strong enough to compete before they allow for full liberalization,” Chung said.

Asean insurers have experienced significant regulatory changes over the past few years.

While Indonesia, Malaysia, Philippines, Singapore, and Thailand adopted the risk-based capital solvency framework a number of years ago, Singapore and Thailand are enhancing their existing frameworks to be more risk-sensitive and bring them closer to international standards.

Strong regional economic growth has resulted in a corresponding rise in insurable asset values and increased catastrophe exposure for insurers.

“Insurance and reinsurance companies have taken measures to reduce their exposure to losses like those from the 2011 flood in Thailand, but a combination of outdated catastrophe models, un-modeled or insufficiently modeled risks, increasing capacity and competition, and weakening underwriting standards could lead to significant losses again.”

Companies that succumb to competitive pressure to grow excessively or have deficiencies in risk management will face a higher likelihood of negative rating actions,” Chung concluded.