Almost two weeks into 2024 and the industry is beginning to slowly grasp the outlook that awaits insurance in this brand-new year. With renewals being a mostly successful affair following 2023, many are now looking towards individual regions to see how each would fare in 2024.
Last year marked some hefty developments for insurance in Asia, mostly carried by moves in Singapore and Hong Kong. However, if Clearwater Analytics’ most recent report is to be believed, the whole region is on the cusp of a wave of mergers and acquisitions activity that could mean grand opportunities for APAC carriers.
“Our assessment is that what's driving the M&A activity is an increased global awareness and excitement about what's happening in the insurance market over here in APAC,” Clearwater Analytics APAC insurance director Tom Marlatt said in conversation with Insurance Business Asia.
“Five years ago, I would say that the M&A wasn't quite as mature,” he said. “Now, we are reaching critical mass in that we have a lot of insurance customers reaching upper middle class or middle class, which means that we're seeing these insurance companies grow at a rapid rate. Just that growth in general creates a really great opportunity for M&A.
“What we saw in Europe and in the UK right up before and immediately after Solvency II when the regulation rolled out is a lot of insurance companies held a high balance of cash on their investment portfolios. This is partly because you always want to be on the right side of your liquidity ratio. That leads to an extra level of conservativeness that comes with new regulations, making sure you’re high on the liquidity side of things,” he said.
This environment creates what Marlatt calls “dry powder” – capital which can be repurposed back into the market, leading to venture capital (VC) or M&A activity.
“If you're looking to grow as an insurance company, your steady true growth perspectives are that organic growth where you can see a nice curve,” Marlatt said. “M&A allows insurance companies to accelerate and see almost a step change in growth. While they might be able to grow in a nice even curve, a step change in growth creates a whole new dynamic and allows them to provide more value to the customers in other lines of business or in other regions.”
For Asia, the appetite, ease of acquisition, and companies’ valuations may have something to do with the current environment, Marlatt said, and this trend is certainly not without precedent.
“If you go back and look at the US trends for M&A when it reached its peak, for insurance companies a high point was in about 2000, then, I think it was 2012 to 2013. Then, if you look at when UK hit their high peak for M&A, it was about 2017 to 2018 – a five-year gap between these two regions. Take that over to Asia, we're rolling into 2024, and you can see that we've got another five-year gap. So, we almost see a trend of five years, moving from west to east in terms of the adoption of that M&A cycle,” he said.
2023 was a year for more stringent regulations, not just for ESG but also for institutions considered too big to fail. A notable development was with Singapore, which named four insurers as “systemically important” under the DSII framework, and a trend which Marlatt thinks will become more prevalent in the region.
“In my opinion, one of the benefits for this regulation being adopted by other regions is that it creates a level playing field for companies to be able to be measured and to be reviewed from the balance sheet perspective. Companies that are doing well want transparency, they want to make sure that their customers feel safe, and their customers feel that they have the ability to go forward as a company,” Marlatt said.
These regulations, when applied to Asia, will also provide clients the transparency into insurers they are working with, Marlatt said. While these may prove to be challenging, given more stringent requirements and stricter guidelines, he is confident that everyone involved will end up benefitting in the end.
“The insurance companies benefit, because they have to have better transparency to be able to report, which means clarity and timeliness on the data that they're reviewing. The clients benefit from being able to see better products that are released into the marketplace from insurance companies. The governing bodies benefit from being able to identify trends across those large insurance companies. So, it's a win all the way across the board, and that’s why I think we'll see more countries adopting the regulation,” he said.
The regulatory climate is also a lot more different now, and Marlatt recalls his experience in the US and Europe, specifically in the transition to Solvency II and regulatory reporting in the United States.
“We are transitioning from a world where data wasn't readily available, into a world where data has become more readily available,” he said. “Your ability to take that data and slice it and cut it in different ways was becoming less cost-prohibitive. One of the barriers to entry for Solvency II, for example, was the ability for insurers who invested in funds to be able to get that look through into their funds and identify what their true exposure was.
“So, I think one of the things that may be translating over to this region, and one of the things that's been a challenge for the smaller countries is that access to data and the infrastructure to be able to pass data from third party vendors to customers from insurance companies, and then also to the regulators. So, I think regulators need to put a framework in place for them to be able to ingest that data and know what they're going to do to analyse it,” Marlatt said.
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