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Making the most of opportunities in emerging markets

News 17th January 2022

Making the most of opportunities in emerging markets

A version of this article by Manoj Kumar, MNK Re’s Group Chief Executive and Managing Director, was first published in a January edition of Insurance Day

After one of the most disruptive and challenging years, it may at first be difficult to see what there is to be optimistic about.  But there are the green shoots of recovery and the pandemic may well have helped to act as catalyst in recognising the value of innovation and the need from governments and regulators to look at old problems in new ways.

The emerging markets, where we undertake a significant proportion of our activity, are a case in point.  These economies have been hit especially hard not only by the Covid-19 pandemic, but also additional inflationary pressures on many of their key industries and sectors, as well as the potentially dire consequences of climate change.

Over the last 12 months we’ve expanded into Africa and Latin American markets and have further plans for expansion in 2022 into North America and the far East.  We’ve done that with confidence. Looking at the trends that we’ve seen developing over the course of the year, there is reason to be optimistic about the role that insurance can play in aiding economies around the world, not only with their recovery but even more crucially in building their resilience. 

Even with all these serious pressures, growth forecasts have remained robust.  Latin America is still expecting to be the fastest growing insurance market in the world and the African market is also expected to outpace North America and Europe. 

What we’re seeing across our emerging market activity is that there has been a strong recovery in specialty line premiums, driven by rates hardening in commercial lines. This, alongside increased risk awareness, large insurance protection gaps and low insurance penetration, promises to bring to high levels of growth. After China, emerging economies are expected to maintain a growth rate of 4.9% next year, with advanced markets following after with more moderate gains of 3%.

Recovery increasingly needs to focus on resilience

Soaring costs to combat the spread of COVID-19 have drained resources from many domestic economies. As these markets begin to recover from the pandemic, we expect to see a growing demand for more innovative products and solutions from the insurance sector, to make up for this shortfall in government spending, to meet the challenges posed by ever complex risks.

Climate risk is an obvious area where we can make a difference.  We’ve been working with clients and governments to look at alternative risk solutions, such as index insurance and parametric products, which could really make a difference to the recovery and resilience challenge.  This also has knock on effects for classes of businesses such as agriculture and energy which could also benefit from these innovations.  It certainly feels like there has been some good progress here, with regulators in emerging markets starting to see the benefits of this approach, South Africa being a notable example.

The pandemic has also been a major catalyst for the switch to digital.  That in turn has resulted in a significant and increased interest in cyber related cover, which is expected to increasingly become a mass market product in the years ahead. Countries are investing more than ever in IT infrastructure, there’s rising smartphone and internet penetration as well as increasing amounts of data shifting to cloud technology.    The Latin American cybersecurity market, for example, is expected to grow by over 10% in the next five years, offering major opportunities.

Emerging markets need tailored solutions

To serve these markets successfully, what’s also become increasingly clear is that there needs to be much more tailoring of products for emerging markets.  This is something at the core of what we’ve been doing at MNK Re. 

We very much take a partnership approach, collectively leveraging the local, regional and international relationships we all have for the benefit of the client. This really has the power to open new markets.  We’ve had some encouraging success by focusing on partnerships with local intermediaries, which has enabled us to bring a strong value proposition to the table, allowing our local broking partners, who would not otherwise have the capacity or ability, to offer their clients specialised premium covers.   Leveraging our international relationships in this way means that clients in emerging markets will get the same opportunities as those in advanced markets.

Tech will also play a huge role in the emerging markets but again needs a tailored approach.  Insurtechs can bring a new and exciting solution to part of the value chain, but they need to work with established partners to overcome some of the barriers they face and to get scale. This is starting to get more recognition and support from regulators in South Africa. The Intergovernmental Fintech Working Group set out this year a vision for the country’s fintech sector, in which the Group highlighted role fintech partnerships can play in providing accessible and appropriate financial products, especially insurance, at scale.

Developing the regulatory structures to support innovation

Regulators also need to take a new approach, embracing innovation as part of their regulatory outlook.

Several African countries are strengthening and updating their regulatory frameworks and a number of key countries have some form of regulatory sandbox. South Africa is taking seriously the role of index insurance through a new subsidy scheme and we expect its sandbox to release the results of a pilot project mid-way through 2022.

The adoption of more risk-based regulatory frameworks across Latin America is also aiding the development of more innovative collaborations and technology-based solutions.  Mexico’s Ley Fintech laws are increasingly taking effect, and Brazil implemented Open Banking regulations earlier this year, with other countries expected to follow suit.  As a result, the fintech sector is seeing major growth which is very encouraging and opens up new possibilities

This past year has seen the insurance industry adapt at pace. In response to increasing climate risks and continued pandemic-related market volatility, the sector has shown flexibility and openness to innovation, and this has brought with it a rebound in growth after 2020’s contraction. We are optimistic that we can play a full part in opening up new markets and helping them recover post-pandemic.

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