Brokers Target Emerging Markets
Brokerages in emerging markets will collectively account for more than 23 percent of the global market in commercial nonlife insurance by 2016, according to a recent study by Finaccord.
The pace of growth in countries such as India, Argentina, and China will outpace that of North America and Europe for the next three years, the study found.
“Insurance exposure growth in the U.S. has been only moderate over the last few years,” said Greg Dickerson, analyst, Fitch Ratings. “Western Europe has had its own financial problems.
“The big brokers, like Aon, Marsh and Willis, already have tremendous market penetration in these areas. It’s hard to fight for a bigger piece of the pie when there’s a lack of acquisition targets. It has been a challenge for brokers to find new business.
“In emerging markets,” he said, “it’s easier to win a larger portion of a rapidly growing pie.”
Another factor is that emerging markets are “seeing the emergence of a middle class,” said Meyer Shields, an analyst with Keefe, Bruyette and Woods, an investment bank and broker-dealer that specializes in the financial services sector. “There’s a need for greater insurance penetration because they have more things that need protected. This can be a source of faster earnings growth for brokers.”
Bernd Bergmann, a consultant at Finaccord, said emerging markets offer some unique challenges.
“For example,” he said, “there could be a boom in niche-specialized products. The reality is that local brokers may have lower levels of expertise in these areas.”
In addition, he said, liability segments such as D&O, environmental, and cyber security may be especially ripe for growth.
However, growth comes with its own set of hurdles, such as diverse regulatory issues.
China’s insurance regulations, Berman said, are based on province, so expansion may be slower there. “India’s regulatory situation can be erratic as well.”
Another potential challenge, Shields said, is that “underwriters may lack historical data to underwrite new risks.”
Working with larger brokerages, he said, may allow brokers to seek the expertise they need in formulating new coverage for complex risks. “They can refer to someone within the company who has handled something similar.”
Although Aon, Marsh, and Willis already have platforms in many of the rapidly growing areas, Dickerson said, “it’s always expensive to expand into new territories.”
“There’s an integration risk with buying companies,” he said. “There may be cultural differences with foreign governments and clients. You have to invest time in relationship building.”
Bergman added that even large brokerages might have to work harder to achieve growth “organically” in some countries.
Despite the substantial challenges, Bergmann said the situation is a positive one for brokers looking to increase business.
“Global insurance needs are growing fast,” he said. “This can be a tremendous opportunity for brokers.”