On the cusp: regional integration in Asia

It’s 2015, the mid-point of the decade and a good time to start looking at major trends in Asian financial services over the next five to ten years. One of the major themes will be regional integration, which is another way of saying the development of cross-border markets. There are at least two important threads here: the ongoing internationalization of China’s currency, and the development of the ASEAN Economic Community (AEC) in Southeast Asia. RMB internalization is really about the loosening of China’s capital controls and its full-fledged integration into the world economy. And everyone seems to want a piece of this action, including near neighbors such as Singapore who are vying with Hong Kong to be the world’s financial gateway to China. The AEC is well on its way to becoming a reality in 2015, with far-reaching trade agreements designed to facilitate cross-border expansion of dozens of services industries, including financial sectors. While AEC is not grabbing global headlines the way China does, we see increasing interest in Southeast Asia among our FSI and technology vendor clients. From Celent’s point of view, both trends will open significant opportunities across financial services. In banking, common payments platforms and cross-border clearing. In capital markets, cross-border trading platforms for listed and even OTC products. In insurance, the continued development of regional markets. Financial institutions will be challenged to create new business models and technology strategies to extract the opportunities offered by regional integration. It’s the mid-point of the decade, and the beginning of something very big.

Opportunities for solution vendors in China?

China’s new insurance law will take effect on October 1 2009. The revised law strengthens protection for policyholders, the insured, and beneficiaries. However, it adds operational requirements for insurance companies. For example, the revised law adds a two-year incontestable rule to protect the insured party. It is a very common clause in Western countries, but not in China. The revised law also requires insurance companies to pay or decline a claim within 30 days; if more documentation from the claimant is needed, the insurance company has to inform the claimant about all the documents needed at one time. All these requirements aim to settle the problem of the “easy to apply, hard to claim” environment. I see end customers’ preferences are changing from investment type products to protection type products. A simpler claim environment is crucial for the development of China’s insurance industry. That’s why regulators emphasized claims when revising the insurance law. For insurance companies, I think this is a double-edged sword. Will “easy to claim” lead to “easy to defraud?” It reminds me of my conversation with a local insurance solution vendor. He said that China has a non-trust environment: people do not trust each other, so the risk management function in his company’s solution is very strong. Some of my thoughts are: insurance companies might need to upgrade claim solutions to make filing a claim easier; second, they might need to upgrade underwriting solutions and antifraud tools to strengthen their risk management function. Are these real requirements for insurance companies? I’ll continue to follow the market.

Playing it Safe vs. Creative Thinking

I recently saw an interesting article that seems quite appropriate for the times we live in. This article was based on a report published recently by Robert Half International, a staffing service. Condensed versions and commentary on this report have been available via a number of search engines in recent weeks. These days we are bombarded with stories of gloom and doom. Stock market prices are dropping, wealth is eroding, jobs are becoming scarce, unemployment is rising, and the future seems more complicated than it has ever been. We are inclined in times of uncertainty to turn inwards, start playing safe, protecting what is there in the hope that time will heal all and that things will go back to the good old days. The article (in abbreviated form) advocates exactly the opposite when it comes to business practices. “Playing it safe” is put forward as being one of the top three mistakes managers make in times like this. As the article suggests, “being boring” is not a strategy for survival because losing your competitive edge is a likely result. This does not suggest that risks should not be considered, but rather that innovation and creativity are still ways to gain ground. The second main mistake is to discount or discourage innovative thinking at all levels in an organization. Innovative thinking, the article suggests, is more likely to help an organization survive; many ideas can be put into the pool to not only assist the organization but also encourage a sense of joint survival among all employees. Rewarding such behavioral thinking is an added encouragement. This concept can only thrive in an environment where managers actively encourage this and do not feel threatened. Managers should therefore actively participate in this process. Here in China, we are not unaffected by the issues that have been making page one news all over the world. We have seen many businesses close and unemployment levels rise. We too have recently seen a large injection of government capital into the economy to both boost and revitalize industries. Creative thinking and behavior at management levels to avoid the sometimes obvious mistakes could be another path on the way to revival and survival.

Talking with an Insurance CIO in China

I visited the CIO of one of the top five life insurance companies in China recently, and he gave me many insights on IT management. I think his advice could help global vendors understand Chinese insurance companies better, and so I’ve decided to share them here. IT as the Fire Department Most insurance companies in China are still growing, with branches opening, new products coming out, and various promotion activities, so there are always many business requirements or problems. Though IT knows there are strategic initiatives they could be thinking about, they sometimes have to put out the fire first. In China, the IT department basically supports business expansion. They may not have time to think much about adjustments and innovation. Their attitude regarding emerging technology remains prudent. This lines up with the results of the recent Celent CIO survey for emerging technologies, with most CIOs in China choosing “no interest” when asked about the degree to which their companies have embraced emerging technologies or practices such as social networking, wikis, and SaaS. Business Volume Usually, if sales goals have not been met at the end of each year, the sales management department will launch a large promotion program. This promotion will help drive a huge increase in new business, putting pressure on systems and meaning more IT resources are needed to support business processing. Alternatively, if the sales goals have been reached before the end of the year, then the sales department will issue a large promotion program for the start of the new year. The top salespeople have this magic ability to control the time when customers hand in applications, and, in this case, control when business pressure will be the focus of IT resources. If global vendors choose to enter China, the first thing they should think about is volume. China has a population of 1.3 billion, and the business volume in one province at a large China company may already be very large. With companies expanding, future volume could be several times larger. CIO’s Internal Role Good IT management can create a positive image for the IT department inside the company. For example, when a project is going online, application processing might have to stop for one day. Sometimes IT departments will choose the holidays, and (thinking that they don’t need to inform the business department in advance) will give notice very close to the holidays. But it’s possible the business department has already undertaken some competitive activity, or they had planned to accept applications during the holiday; in this case, the business department will be very unhappy with the IT department. In order to give the business department a good impression, the IT department needs to inform the business about new projects far in advance, explain the effects of a project clearly, and provide updates. After setting precedents like this, the IT department can get more cooperation and support from the business department for new initiatives. Although insurance companies in China are becoming increasingly aware that information technology is an effective tool for increasing core competitiveness, “IT drives business” is still not practical in China. The IT department is just a supporting department in most companies. The CIO’s role should be somewhat like internal public relations for the department, creating a positive image for IT, advertising new projects to the business departments, and getting their interest and support.

Micro-insurance — Thinking innovatively in targeting the uninsured

On a recent trip to South Africa, I was interested to see some innovative ideas targeted at the uninsured, currently around 90% of the population. South Africa, along with other emerging economies, face many structural challenges impeding the broad adoption of insurance. Remote areas of the country have poor road and communication infrastructure. Almost two-thirds of the population have no bank account. Accessibility to financial services is low as is the understanding of the value of such offerings. In a bid to rectify this, the government put in place targets back in 2003 for the financial services industry. The banking sector had to introduce a low cost bank account, now in place, and the insurers had to commit to massively increasing accessibility to insurance. The low cost bank account, called Mzanzi, is standard debit-card based account attracting no service fees. The insurers have accepted the challenge and plan to increase current penetration rates by 180% over the next five or so years.

In my conversations with South African insurers, it’s clear that whilst committed to these targets, tapping into the previously uninsured market remains immensely challenging. The innovation is mostly occurring in the area of products and premium collection. Tying product requirements to the needs of the uninsured is a sure-fire way of garnering interest. House, motor policies have little relevance for those who own none of these assets. However, household contents policies, funeral policies and term life are of interest.

One of the constraints for insurers has been and still is the collection of premiums. With many people not having bank accounts, credit/debit payments or direct debits are just not possible. Mobile phones are being used in one or two cases to purchase insurance. Voucher cards, paid for by cash upfront, offering term life insurance can be bought at supermarkets and other consumer outlets.

Technology can play a role in supporting this small but growing market. Low-cost policy administration and claims systems can form the heart beat of such an operation supported by a flexible product configuration tool. There is little need for broker/agent or consumer portal technology. Products in these markets such as shack insurance, life insurance for a month, or crop insurance may seem unusual but can be supported through the use of modern packaged tools. One of the more unusual product characteristics is the method of premium collection. For example, premium paid upfront, or monthly, or paid via a mobile phone account (or other third party collector). This flexibility needs to be supported a modern product configuration tool.

In South Africa, as in some other emerging countries, tapping the previously uninsured is a government enforced social objective and this has focused insurer’s attention on this challenging area. Micro-insurance is unchartered territory and as such it’s not possible for insurers to look to established markets for best practices. Successful insurers in these markets will continue to innovate in areas of product design and premium collection and this analyst will be keeping an eye on how this market evolves.

The Potential Growth Segment of Rural China

Being a Celent insurance analyst based in China, I sometimes meet with Celent customers who visit Beijing and share my insights on China insurance market growth and technology development. Many customers are interested in the potential market size, the competitiveness of the market, and the progress of technology. But recently, when I meet Celent customers in Beijing, they ask me a new question: will the insurance industry in China continue its high growth? Consumer confidence is down because of the global financial crisis and the many countries in recession. Thus China’s exports are decreasing quickly, and because this influences other industries, we’re seeing China’s economic development slow down. Facing this, the Chinese government decided to stimulate internal investment and consumption. Since China has a population of 1.3 billion, it is a big market for its own products. At present, the rural areas in China are underdeveloped, and rural incomes are much lower. Some government policies are aimed to increase rural people’s income. So in the not too distant future, the rural area could be a large potential market for many industries, including insurance. The insurance premium from rural areas is very low. The market is dominated by a few large insurance companies and is still not highly competitive. The products being sold in rural areas are not specialized for rural people and thus couldn’t arouse their interest. The distribution channel is still dominated by sales agents. In June 2008, China insurance regulators started the micro-insurance experiment. To participate in the experiment, companies must develop simple products targeting low income people in rural areas, with payouts of RMB 10,000 Yuan to RMB 50,000 Yuan, low premiums, simple underwriting rules, and a simple claims process. The regulation also promotes the use of multichannel distribution and new technologies such as wireless solutions. By entering into the rural area, in the beginning, insurance companies may only get a very low premium from each client. However, as a mid-term to long-term investment, the rural area is a huge potential market for insurers, and future, rapid growth could still be expected.