Insurers ignore calls to merge

Business Asia, August 2, 1999 by Nick Edwards

Asia's weak and overcrowded insurance market is crying out for mass mergers, but potential white knights of the region have turned a deaf ear to repeated calls for help from financial authorities.

Regulators want companies to join forces to defend domestic markets - potentially some of the world's most attractive, despite two years of economic anguish - under long-term competitive attack from Western insurers.

But the mostly family-owned insurers are unwilling to get into bed with one another, while groups with the potential to create major financial services players in the region have their own problems and priorities.

"Overall, there are very few local players which have the capability or the ambition to create a major regional presence in Asia's life and non-life insurance markets," said Daniel Adamec, Hong Kong-based principal of McKinsey & Co.

Asia has some 850 indigenous insurers, all eager for a share of the region's US$620 billion in annual premium that grew at 3.8 per cent in real terms in 1997. The bulk of premiums, though, are in just two markets - Japan, the world's second biggest at US$490 billion, and South Korea, worth US$57 billion.

Analysts say most of Asia's fledgling insurance markets could support about 25 domestic players each at best.

The most likely outcome for hundreds of small firms will be closure or compulsory merger, ordered by regulators to create a healthier industry.

Meanwhile, bigger players in the more mature markets, the most likely buyers inside Asia, have to deal with historic under-reserving, mispriced products and capital erosion that McKinsey estimates will need at least US$35 billion to put right.

In Japan, where two life insurers have failed in as many years and more might follow, firms must deal with the problems of policies that pay out more than they earn, bad assets and fierce competition when the market fully deregulates in 2001. South Korea's life insurers have long been seen as insolvent.

Seven are up for international auction - so far without takers - while the country's conglomerates have been slow to move after the government lifted a ban on them buying life firms.

One reason why so few Asian insurance deals have materialised could be that companies are not at the stage of business maturity that requires them.

By the time acquisition becomes an option in the West, every drop of efficiency has usually been wrung out of a company.

With nothing else to give and the need for either greater distribution, a broader spread of risk or better asset management, insurers merge to achieve that scale.