December 2015 A journey starts inauguration of the ASEAN Economic Community

Transcription

1 December 2015 A journey starts inauguration of the ASEAN Economic Community 01 Executive summary 02 Introduction 03 ASEAN today 09 Impact of the AEC on insurance 16 External trends and the AEC 20 Conclusion 22 Appendix

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3 Executive summary The ASEAN Economic Community comes into being in December The aims of the AEC include enhanced economic connectivity, with increased integration and cooperation across sectors. 1 Free flow of services within ASEAN will help grow the region s insurance sector as will trade agreements with non-asean countries. Early-stage integration in insurance will likely be bilateral agreements between ASEAN member states on simple products. And Singapore is set to become a central hub for the global insurance sector. The Association of Southeast Asian Nation (ASEAN) Economic Community (AEC) is to be formally inaugurated in December There has been some progress towards economic integration and cooperation among the ASEAN member states since the signing of a Preferential Trading Agreement in 1997, including harmonisation of product and safety standards, implementation of investment agreements and pilot projects to facilitate customs transit. The establishment of AEC is another step to closer ties, but progress to deeper integration and associated liberalisation of markets will likely take many years yet. Core aims of the AEC are to facilitate free flow of goods, services, investment and skilled labour among the ASEAN states, and also freer flow of capital. The free flow of services, including that of financial services, could have far-reaching implications for insurers. The ASEAN insurance sector has expanded significantly in recent years, despite economic headwinds: total insurance premiums are estimated to have risen by an annual average of 11.4% in the last 10 years. However, insurance penetration remains low, especially in the less-developed ASEAN member states. The creation of a framework of free flow of services should support continued expansion of the insurance sector. For example, it is expected that insurers will be allowed to provide cross-border services and establish a presence abroad. And, during the 1st ASEAN Finance Ministers and Central Bank Governors Meeting in Kuala Lumpur in March 2015, the member states reaffirmed their commitment to prioritising liberalisation and integration in the marine, aviation and transit (MAT) insurance, reinsurance and retrocession, and catastrophe insurance markets. 2 Another driver of insurance sector growth could be completion of trade deals like the Trans-Pacific Partnership (TPP) and the Regional Comprehensive Economic Partnership (RCEP). Such agreements compliment the vision of an integrated AEC, and they would boost merchandise trade with non-asean countries. The increased trade flows would benefit insurers in the region by generating more demand for marine, trade credit, business interruption and product liability insurance. Roll-out of China s One Belt One Road initiative should have similar impact. However, the integration and liberalisation of insurance activities across ASEAN will not happen overnight. For instance, current restrictions on insurers on one nation being able to establish a presence in another market are likely to remain effective, at least in the short term. The insurance market structures and regulatory regimes of the different ASEAN countries vary significantly, and this is just one of the challenges that the AEC will face in fostering closer intra-region industry ties. It is likely, therefore, that early stage liberalisation measures will take the shape of bilateral agreements between member states on simple insurance products and services. Nonetheless, formal inauguration of the AEC is an important milestone and presents opportunities for insurers. Those with experience in online sales/marketing and bancassurance can benefit the most from the liberalisation of cross-border supply. Meanwhile, more open markets could also bring in foreign competition, making product innovation more important, particularly for smaller insurers. Another outcome is that Singapore, given its status as an international financial centre with free flow of capital, financial expertise and infrastructure, is widely expected to become a hub for insurers from the region and the world. 1 The 47th ASEAN Economic Ministers (AEM) Meeting Joint Media Statement, ASEAN, 22 August 2015, 08%202015_3.pdf 2 These commitments are reiterated in the ASEAN Insurance Integration Framework, ASEAN, 1 March 2015, of%20achievements_final.pdf Swiss Re A journey starts inauguration of the ASEAN Economic Community 1

4 Introduction Three ASEAN Communities come into formal being in December The journey towards integration is just beginning. Of the three ASEAN Communities, the AEC will likely have most impact on insurance. This report updates key developments in the establishment of the AEC, and the implications thereof for the insurance sector. The ASEAN Economic Community When the Association of Southeast Asian Nations (ASEAN) project began almost half a century ago, few would have envisaged the rapid development and cooperation witnessed in recent years. On 31 December 2015, ASEAN reaches an important milestone with the official establishment of three ASEAN Communities: the ASEAN Economic Community (AEC), the ASEAN Political-Security Community (APSC), and the ASEAN Socio-Cultural Community (ASCC). Since the signing of a Preferential Trading Arrangement in 1977, ASEAN has worked to improve trade and investment flows across the region. The establishment of the ASEAN Communities will accelerate regional integration, bringing opportunities and challenges to businesses and communities alike. ASEAN leaders have said that 2015 is not a target date for full integration. Rather, the three communities will lay the groundwork for closer cooperation over time. Regional integration, especially in financial services (including insurance), will continue well beyond Of the three ASEAN Communities, the AEC is likely to have the most impact on insurance. The creation of a single market and production base will stimulate intra-regional trade, benefiting insurance business lines such as marine, aviation and transit (MAT). The freer flow of capital 3 will allow insurers to diversify their investments into new regional asset classes, while the free flow of investment is likely to stimulate cross-border M&A. The eventual liberalisation of insurance services in the forms of cross-border supply and commercial presence 4 could also have significant impact. At the 47th ASEAN Economic Ministers Meeting on 22 August 2015, of the 506 prioritised measures, 463 (or 91.5%) have been implemented. 5 This underlines the strong political will and regulatory momentum to complete the formal inauguration of the AEC at the end of This report updates our earlier publication Getting Together the ASEAN Economic Community, published in November The update will focus on the latest developments on integration and implications for the region s insurers. It also reviews the impact some key regional trade agreement and development initiatives, including the Trans-Pacific Partnership Agreement (TPP), the Regional Economic Comprehensive Partnership (RCEP) and the One-Belt One-Road (OBOR) plan spearheaded by China, will have on the AEC. 3 While the AEC has pledged to allow free flows of goods, services, investment and skilled labour, it has only committed to freer flow of capital. 4 Cross-border supply is defined to cover services flows from the territory of one country into the territory of another (eg, consultancy or architectural services transmitted via s). Commercial presence implies that a service supplier of one country establishes a territorial presence in another country to provide a service (eg, domestic subsidiaries of foreign banks or hotel chains). 5 The 47th ASEAN Economic Ministers (AEM) Meeting Joint Media Statement, op. cit. 2 Swiss Re A journey starts inauguration of the ASEAN Economic Community

5 ASEAN today ASEAN has maintained strong growth over the past decade. Recent economic development and outlook The size of ASEAN economy was an estimated USD 2.5 trillion in 2015, equivalent to 3.3% of world gross domestic product (GDP). If considered as a single entity, it would be the seventh largest economy in the world. ASEAN s total population of 633 million spans 10 countries, and includes a sizeable middle class. The region has maintained strong economic growth over the past 10 years, including weathering the global financial crisis in and more recently, slowdown in China. Figure 1 Economic growth in ASEAN, % 6% Real GDP growth 4% 2% 0% Average 5.4% Average 5.4% Source: Oxford Economics; Swiss Re Economic Research & Consulting. A growing challenge for many ASEAN countries, however, are high debts in the corporate and household sectors Nevertheless, ASEAN face its own growth challenges. There has been a significant build-up of debt across many member states over the past years. After the financial crisis, many governments resorted to fiscal and monetary expansion to support economic growth against a global backdrop of record low interest rates. This encouraged increased borrowing by corporates, and also households (see Figure 2). Figure 2 Household debt in ASEAN 100% 80% Household debt as % of GDP 60% 40% 20% 0% Malaysia Thailand Singapore Indonesia Philippines Cambodia Source: S&P, Swiss Re Economic Research & Consulting. Swiss Re A journey starts inauguration of the ASEAN Economic Community 3

6 ASEAN today... and a prospective rise in debt-servicing costs. Interest rate rises in the US will have the additional effect of accelerating capital outflows from ASEAN. Figure 3 Exports to China as a % of total exports, 2014 For example, there has been a significant rise in household debt as a percent of GDP in Malaysia, Thailand and Singapore since 2008 alongside a boom in the residential property market. Given the imminent prospect of higher interest rates in the US, now there are increasing concerns about a likely rise in debt-servicing costs. The financial sector in ASEAN is generally strong and will be to absorb some corporate or household defaults, but even so, deleveraging will drag on economic growth. Developments in the global economy, such as the current slowdown in China which is likely to weaken regional trade and investment flows, are also causing concern. However, the negative impact of the slowdown in China on ASEAN is likely to be limited, given that Chinese banks are not yet a major source of funding for member states. And ASEAN is less exposed to China than East Asian markets like Japan, South Korea, Taiwan and Hong Kong (see Figure 3). A more serious threat is increased interest rates in the US. This is because of both the aforementioned rise in debt-servicing costs and, importantly, the increase in capital outflows from ASEAN (and other emerging markets) that higher US interest rates will likely generate. Hong Kong Taiwan South Korea Japan Philippines Singapore Malaysia Thailand Indonesia India 0% 10% 20% 30% 40% 50% 60% Source: CEIC, Swiss Re Economic Research & Consulting. The ASEAN economies are more resilient now than before. All told, the risk of financial instability and contagion among the ASEAN nations is viewed to be low. The economies are more robust today than before, such as in the time of the 1997 Asian financial crisis. This is because: The economies have a strong buffer in terms of high foreign reserves and generally improved external trade/current account balances. While overall debt has increased, ASEAN debt is mostly domestic, not external. Governments have become more sophisticated in handling external shocks. ASEAN currencies have depreciated significantly against the US dollar in 2015 (see Figure 4), reflecting a willingness to tolerate more volatility in foreign exchange rates and a confidence in limited exposure to foreign currency debts. At the same time, the depreciation allows ASEAN countries to maintain export competitiveness. 4 Swiss Re A journey starts inauguration of the ASEAN Economic Community

7 Figure 4 ASEAN currencies, Local currency per USD (1 Jan 2015 = 100) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov China India Indonesia Japan Philippines Singapore South Korea Thailand Malaysia Vietnam Source: CEIC, Swiss Re Economic Research & Consulting. Figure 5 ASEAN stock market indices, (1 Jan 2015 = 100) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov China India Indonesia Japan Philippines Singapore South Korea Thailand Malaysia Vietnam Source: CEIC, Swiss Re Economic Research & Consulting. Swiss Re A journey starts inauguration of the ASEAN Economic Community 5

8 ASEAN today The business mix of the insurance sector differs across the region... Figure 6 ASEAN member states insurance premium mix, 2014 ASEAN insurance development and outlook In 2014, insurance premiums in ASEAN overall were USD 75.9 billion, of which 73% came from the life sector and 27% from non-life. Insurance penetration (premiums as a percentage of GDP) in the region was 3.0% of GDP, compared to an emerging market average of 2.5% and a global average of 5.4%. Premiums are estimated have increased further by 8.0% in real terms in The business mix of the insurance sector varies from one member state to the next. In the more developed ASEAN economies, life insurance contributes most of the premiums, while in the less developed countries, non-life tends to dominate (see Figure 6). 100% 80% 60% 40% 20% 0% Cambodia Laos Myanmar Brunei Vietnam Malaysia Indonesia Thailand ASEAN Philippines Singapore Non-life Life Source: Swiss Re Economic Research & Consulting. but overall, insurance premiums have been growing strongly in all the ASEAN markets. Figure 7 Nominal growth in insurance premiums, The insurance markets in ASEAN are all growing fast, irrespective of their stage of development. Over the last decade, premiums in the entire region grew by an average annual rate of 11.4%, compared to 13.6% in all emerging markets and 4.0% globally (see Figure 7). Within ASEAN, premiums grew fastest in Lao PDR, at an annual average of 23%, and slowest in Malaysia (8.4%). There is a positive correlation between insurance penetration and income, measured by per capita GDP (see Figure 8). Insurance penetration is very low in the less developed member states, but the anticipated sustained economic growth of the coming years will likely support demand and overall sector growth in the region. 30% 20% 10% 0% 10% ASEAN Emerging markets World Source: Swiss Re Economic Research & Consulting. 6 Swiss Re A journey starts inauguration of the ASEAN Economic Community

9 Figure 8 Insurance penetration (premiums as a % of GDP) and GDP per capita, % 7% 6% 5% 4% 3% Insurance penetration Thailand Malaysia Singapore 2% Philippines 1% Vietnam Indonesia Brunei Cambodia 0% Laos 1000 Myanmar GDP per capita 2014, USD, log scale Source: Swiss Re Economic Research & Consulting. The competitive environment also varies in each ASEAN market The competitive environment also differs by jurisdiction (see Table 1). At one extreme, Indonesia and the Philippines have the most fragmented insurance markets, while the less developed countries such as Lao PDR, Brunei Darussalam and Myanmar have mostly oligopolistic insurance sectors. Table 1 Insurance industry structure and regulation in ASEAN No. of players 1 Non-life Life Current regime Capital requirement & foreign ownership regulation Minimum capital requirements 2 Foreign equity participation 3 Brunei 6 3 Solvency margin BND 8m /USD 6m 100% Cambodia 6 5 Solvency margin SDR 4 10m /USD 14m 100% Indonesia Risk-based capital IDR 100bn/USD 7m 80% Laos 6 4 Solvency margin LAK 16bn/USD 2m 100% Malaysia Risk-based capital MYR 100m /USD 23m 70% Myanmar Solvency margin MMK 46bn/USD 36m Not specified Philippines Risk-based capital PHP 1bn/USD 21m 100% Singapore Risk-based capital SGD 10m/USD 7m 100% Thailand Risk-based capital THB 500m/USD 14m 49% Vietnam Solvency margin VND 600bn/USD 27m 100% Note: 1 Figures are as of year-end The minimum capital requirements apply to primary composite insurers (except Thailand and Vietnam, where requirements for life insurers are shown). 3 Foreign equity participation is not the only barrier to entry which restricts market access for foreign insurers. Regulations on foreign direct investment, tax and government s willingness to issue new licenses are also important. In Myanmar, foreign insurers can establish representative offices. 4 SDR = Special Drawing Rights. Source: National insurance regulators, AXCO, Swiss Re Economic Research & Consulting. Swiss Re A journey starts inauguration of the ASEAN Economic Community 7

10 ASEAN today including in regulatory terms. There are differences on the regulatory side also. There are differences in licensing requirements, foreign ownership limitations, and minimum paid-up capital and solvency requirements, among others. During the past year, regulations have continued to evolve to improve solvency standards, enhance customer protection and further liberalise insurance markets (see Table 2). Table 2 Insurance regulatory developments in ASEAN Market ASEAN Indonesia Malaysia The Philippines Key regulatory developments ASEAN finance ministers and central bank governors have agreed marine, aviation and goods in international transit insurance as possible priority areas for insurance liberalisation. In December 2014, the Financial Services Authority of Indonesia, Otoritas Jasa Keuangan (OJK) issued a letter asking insurers to improve their own retention and utilize local reinsurance capacity, with the aim of reducing the balance of payments deficits in reinsurance. Insurers are required to place 100% of the treaty business on motor, personal accident, health, suretyship, credit, marine cargo and life to local reinsurers. In September 2015, the OJK temporarily lowered insurers required solvency margin as part of a stimulus policy package to help local industry weather the impact of volatile currency and capital markets. In October 2015, OJK and President Joko Widodo approved the establishment of Indonesia Re. The aim is to create a large-scale national reinsurance company that can help secure the capacity of domestic retention from going overseas. In October 2015, Bank Negara Malaysia said a more market-driven pricing structure will be introduced for motor and fire insurance. This will also pave the way for the development of products that can be more responsive to consumer and business needs in the two largest non-life business lines in Malaysia. In March 2015, the Insurance Commission issued a new set of regulations on mergers and acquisitions to enhance the legal framework for insurance M&A, and bring in increased protection for policyholders. The Department of Finance has issued a new fit and proper rule for directors of re/insurance companies as part of the government s efforts to improve corporate governance and build a strong and stable financial system. Singapore In July 2015, the Financial Advisers (Amendment) Bill 2015 and the Insurance (Amendment) Bill 2015 were passed in Parliament. The bills require life insurers to participate in a Web aggregator and limits up-front commissions and spreads the total commissions paid on a life policy over a specified period. Thailand Vietnam In March 2015, the Office of Insurance Commission issued the Life and Non-Life Insurance Act, which includes new provisions on foreign ownership to make it easier for permission of majority ownership of insurers to be granted. The State Bank of Vietnam and Ministry of Finance published a set of regulations on bancassurance which came into force on September The definition of agency activities has been eased so that more banks can be classified as insurance agents to earn commissions for client referral work. The Ministry of Finance is encouraging non-life insurers to list on the stock exchange to improve transparency, business conduct, gain consumer confidence and attract investment from domestic and foreign investors. In September 2015, the Ministry of Finance of Vietnam issued a draft government decree outlining the implementation of mandatory construction insurance for large projects. Source: Factiva, National insurance regulators, Swiss Re Economic Research & Consulting. 8 Swiss Re A journey starts inauguration of the ASEAN Economic Community

11 Impact of the AEC on insurance The free flow of financial services, when implemented, will have significant impact on insurance in ASEAN. The free flow of goods, investments and freer flow of capital will have a more indirect impact. A cornerstone of the AEC is the creation of a single market and production base comprising five core elements: (1) free flow of goods; (2) free flow of services; (3) free flow of investment; (4) freer flow of capital; and (5) free flow of skilled labour. The free flow of services, including financial services, will have the most impact on insurance, for instance, by allowing insurers to provide cross-border services and set up fully-owned operations in fellow ASEAN member states. The other liberalisation measures will also impact insurance, in some cases indirectly. For instance, free flow of goods is expected to boost both intra- and extra- regional trade, which in turn could increase demand for a number of non-life insurance products. At the same time, the free flow of investment and freer flow of capital could enhance insurers risk-adjusted investment returns by offering a more open and competitive investment regime. And, while the free flow of skilled labour is unlikely to have material impact in the short-term, 6 in the longer term it could promote diffusion of knowledge and standardisation of professional standards across the insurance sector in the ASEAN region. Financial liberalisation is expected to remain challenging although important progress was made with endorsement of the ASEAN Banking Integration Framework in December Free flow of services: transforming the ASEAN insurance sector The AEC Blueprint from 2008 prioritised removal of trade restrictions in five services sectors: air transport, e-asean (including e-commerce, information infrastructure), healthcare, tourism and logistics. 7 In these sectors, some of the restrictions on crossborder services provision have been removed (see section on Different ways of supplying cross-border services ). Progress on liberalisation in financial services has been more difficult to achieve. ASEAN leaders have repeatedly stated that liberalisation here needs to take into consideration the different stage of economic and financial sector development of their markets. At the same time, the heightened volatility of global financial markets and concerns about systemic risks add support to a gradualist approach. Hence liberalisation in financial services, especially in the less developed countries, is expected to be slow and gradual. 8 The ASEAN minus X formula, by which countries ready to liberalise can proceed, will likely be applied. Others can join later. This flexible approach will give countries time to prepare their financial sectors for liberalisation, without holding back other member states ready to move ahead. An important milestone was reached when the ASEAN Banking Integration Framework (ABIF) was concluded and endorsed by the ASEAN Central Bank Governors in December This includes the concept of Qualified ASEAN Banks (QAB) which have the potential for a meaningful presence across ASEAN countries. Following finalisation of the ABIF, any two ASEAN countries may enter into reciprocal bilateral agreements to provide QAB with greater market access. This can set the precedence for similar liberalisation in the insurance sector. 6 According to the AEC Blueprint, workers in eight industries will be able to move freely across borders after the establishment of the AEC. These professions are: doctors, dentists, nurses, engineers, architects, accountants, surveyors and tourism service providers. 7 ASEAN Economic Community Blueprint, ASEAN, January 2008, archive/ pdf 8 Summary of Achievements of ASEAN Financial Integration, ASEAN, March org/images/2015/march1/joint_statement/annex%20i-summary%20of%20achievements_final.pdf Swiss Re A journey starts inauguration of the ASEAN Economic Community 9

12 Impact of the AEC on insurance There are four modes of services supply across border. Different ways of supplying cross-border services The General Agreement on Trade in Services (GATS), a treaty of the World Trade Organisation (WTO), came into force in January 1995 after the Uruguay Round negotiations. The GATS distinguishes between four modes of supply of services: Mode 1 cross-border supply; Mode 2 consumption abroad; Mode 3 commercial presence; and Mode 4 movement of natural persons. 9 Figure 9 The different mode of services supply Country X Country Y Service crosses border Mode 1 Supplier A Consumer B Cross-border supply Consumer crosses border Mode 2 Supplier A B Consumer B Consumption abroad Supplier A establishes a commercial Mode 3 Supplier A presence in Country Y A Consumer B Commercial presence Service supplied by sending a person Mode 4 Supplier A from Supplier A to Country Y Consumer B Movement of natural persons Source: WTO, Swiss Re Economic Research & Consulting. Table 3 Definition and status quo of each mode of service supply in ASEAN insurance sector Mode of service supply Definition Status quo in ASEAN Mode 1 cross-border supply Mode 2 consumption abroad Mode 3 commercial presence Mode 4 movement of natural persons Service provided by supplier A flows from Country X into Country Y for local consumer B (eg, consultancy or architectural services transmitted via s). Consumer B crosses the border from Country Y to Country X to obtain a service from supplier A (eg, medical tourism). Supplier A establishes a presence in Country Y to provide a service to local consumer B (eg, domestic subsidiaries of foreign banks or hotel chains). An employee representing Supplier A enters Country Y to supply a service to local Consumer B (eg, accountants, doctors or teachers). Generally not allowed but with exceptions (eg, cross-border insurance services for Vietnamese enterprises with foreign investments, or to foreigners working in Vietnam). Generally allowed, and particularly popular in health insurance (eg, Indonesians and Malaysians going to Singapore to buy health/medical insurance). Generally allowed, but subject to foreign ownership rules, and these could be more restrictive than the country s WTO commitments and national licensing requirements. For example, Thailand has a de facto moratorium on new insurance licenses. Overseas (including ASEAN) insurers wishing to enter Thailand have to wait for an invitation from the regulator before they can apply for a license. Generally not allowed. Source: WTO, Swiss Re Economic Research & Consulting. 9 A natural person is defined as a living human being, as opposed to a legal person which may be a private (company) or public (government) entity. 10 Swiss Re A journey starts inauguration of the ASEAN Economic Community

13 Three priority re/insurance sectors have been identified for liberalisation. According to the AEC Blueprint, member states had identified the insurance subsectors that would be subject to liberalisation by 2015 (see Table 4). Following the 1st ASEAN Finance Ministers and Central Bank Governors Meeting in Kuala Lumpur in March 2015, in addition to reaffirming their commitment to achieving the goals of the AEC in 2015, member states agreed to prioritise the liberalisation of cross-border supply of: (1) marine, aviation and goods in internationals transit (MAT) insurance; (2) reinsurance and retrocession business; and (3) catastrophe insurance. Policymakers believe liberalisation in these areas will reap immediate benefits in terms of trade and investment, and strength regional resilience to natural catastrophes. 10 Table 4 Insurance services sub-sectors identified for liberalisation by 2015 Insurance sub-sectors Primary life insurance Primary non-life insurance Reinsurance and retrocession Insurance intermediation Services auxiliary to insurance Member countries committed to liberalisation Indonesia, the Philippines Brunei, Cambodia, Indonesia, Malaysia, the Philippines, Singapore and Vietnam Cambodia, Malaysia, Indonesia, the Philippines, Singapore and Vietnam Cambodia, Malaysia, Indonesia, the Philippines, Singapore and Vietnam Brunei, Cambodia, Indonesia, Malaysia, the Philippines, Singapore and Vietnam Source: Annex 1, ASEAN Economic Community Blueprint, the ASEAN Secretariat, But there is still much uncertainty over the timing and extent of insurance liberalisation in ASEAN. Mode 4-type liberalisation in service supply is unlikely anytime soon. The announcement has given some indication of thinking with respect to integration in insurance, but when and how liberalisation will take place remains unclear. 11 While Mode 2 (consumption abroad) and Mode 3 (commercial presence) of services supply are de facto already allowed, albeit with certain exceptions, much uncertainty remains over Mode 1 (cross-border). And it is Mode 1 that could to usher in significant opportunities for insurers. In all likelihood, the liberalisation process will be gradual. Liberalisation will probably first take the form of bilateral agreements for simple insurance products and services (eg, MAT), these gradually extending to multilateral agreements. As noted in our 2014 report, 12 Mode 4 (movement of natural persons) of service supply, is unlikely to be a focus in the first stages of liberalisation. The differences in insurance qualification standards and language across the ASEAN nations remain too substantial, making mutual recognition arrangements (MRAs) highly unlikely. 10 See ASEAN Insurance Integration Framework, op. cit. 11 See ASEAN Services Integration Report, ASEAN Secretariat and the World Bank, 2015, for more details on existing restrictive insurance policies in different ASEAN member states images/2015/november/asean-services-integration-report/asean%20services%20integration%20 Report.pdf 12 Getting together the ASEAN Economic Community, Swiss Re Economic Research & Consulting, November Swiss Re A journey starts inauguration of the ASEAN Economic Community 11

14 Impact of the AEC on insurance Regulatory harmonisation is key to greater integration of the insurance sector in ASEAN. The current regulatory environment in ASEAN is fragmented, though some convergences have been observed. However, much work remains to be done. AEC and insurance regulation: impacts and challenges ASEAN s regulators will play a key role in facilitating liberalisation and greater integration of the region s insurance markets. The insurance regulatory setting is currently highly fragmented. For instance, capital and solvency requirements vary from one jurisdiction to the next and, while many ASEAN countries have transitioned to a risk-based capital (RBC) framework in recent years in line with international trends, the less-developed still follow a Solvency I-type methodology. Insurers using RBC methodology tend to be better capitalised than those on Solvency I, and are well positioned to reap the opportunities stemming from market liberalisation. Those still following a Solvency I approach will likely need to prop up their capital reserves to satisfy RBC requirements. This could potentially lead to more capital raising and M&A transactions. In addition to capital and solvency requirements, a host of other issues need to be addressed for greater liberalisation and integration of the ASEAN insurance industry. For instance, a cross-border consumer protection framework will need to be devised, commission regimes harmonised, and mechanisms to ensure financial penalties are enforceable across the region set up. A supranational regulatory entity with regional oversight could be an option, but this has not has yet been suggested and in any case, would take years to establish. More likely is that the first stage of liberalisation and integration in the insurance sector will take the shape of bilateral agreements between ASEAN states of similar or quasi-similar level of regulatory sophistication. Reduced tariffs and non-trade barriers are key to achieving free flow of goods. Increased trade benefits insurance. Intra-ASEAN trade will likely grow as the AEC takes shape but NTB are key huddles. Free flow of goods: new opportunities arising from a boost in trade The creation of a single market for goods is one of the most important aspects of ASEAN economic integration. The removal of tariffs and non-tariff barriers (NTB) for goods traded within the region will improve the region s production capacity and help ASEAN become an important link in the global supply chain. Increased trade in goods has positive implications for the insurance sector. Data from 1997 to 2013 point to a strong positive correlation between the volume of trade (measured by the sum of imports and exports) and insurance premiums from marine insurance in the six largest insurance markets in ASEAN (Indonesia, Malaysia, the Philippines, Singapore, Thailand and Vietnam). Intra-ASEAN trade is expected to increase markedly as the AEC takes shape over the coming years. At present, intra-region trade accounts for just 25% of total trade. In the short-term, countries already dependent on trade (eg, Singapore and Malaysia) are expected to benefit most. Over the longer term, the less-developed countries will benefit from increased trade also, as they catch up economically and leverage their competitive advantages in labour and natural resources. However, while tariff barriers have been reduced, a plethora of NTB remain, adversely affecting the free flow of goods within ASEAN. Many trade bodies say these NTB constitute the largest obstacle to increased intra-regional trade. Assuming the NTB are gradually removed over the coming years, business lines such as marine (and, to a lesser extent, aviation and transport insurance) and trade credit insurance will benefit from the likely subsequent increase in trade in goods. And, if regional trade deals such as the Trans-Pacific Partnership Agreement (TPP) and the Regional Economic Comprehensive Partnership (RCEP) materialise, ASEAN exports to advanced markets like the US, Japan and South Korea should rise notably. This could generate extra demand for product liability insurance as manufacturers and exporters seek protection against litigation actions that may arise from the consumption of faulty products in those export markets. 12 Swiss Re A journey starts inauguration of the ASEAN Economic Community

15 Demand for business interruption insurance will likely increase. In a region prone to natural disasters, demand for business interruption and contingent business interruption insurance will also likely increase as ASEAN works towards establishing itself as an important link in the global supply chain. Demand for motor insurance is also set to increase substantially in the coming years, as urbanisation rates and middle-class wealth across the region continue to increase. ASEAN is already an attractive destination for investors. Free flow of investments: better returns for insurers? Attracting a strong and sustainable flow of investment is essential if ASEAN is to maintain a high rate of economic growth. Individual member states are already an attractive destination for investment, but data reveals the distribution of inflows to be highly uneven. Singapore, Malaysia, Indonesia and Thailand attracted 85% of the inflows in period 2003 to But only 1% of total inflows went to the less developed economies such as Lao PDR and Cambodia. Figure 10 Split of foreign direct investment (FDI) inflows into ASEAN countries ( cumulative) Brunei (1%) Cambodia (1%) Indonesia (13 %) Laos (0%) Malaysia (10 %) Myanmar (2%) Philippines (3%) Singapore (51%) Thailand (11%) Vietnam (8%) Source: ASEAN Statistical Yearbook 2014, the ASEAN Secretariat, But there are still restrictions of foreign investment in insurance. Volatility in capital inflows will likely increase in the near term. The lack of capital account convertibility, restrictive FDI regulations and an uncertain business and legal environment help explain the small investment flows to less developed ASEAN states. However, restrictive FDI regulations are not the preserve of the less developed countries. All ASEAN member states with the exception of Singapore have FDI regulations in place, to varying levels of restrictiveness. To date, only six out of the 10 ASEAN countries allow international insurers to run fullyowned operations within their jurisdiction. Others restrict access to parts of their insurance and reinsurance markets, and others only allow foreign insurer participation through a joint-venture with a local partner. Until rules governing FDI are harmonised, ASEAN leaders will likely face difficulties in creating a more open and competitive region-wide destination for foreign investors. And, with an interest rate rise in the US imminent, foreign investors may be tempted to pare back their investments in emerging markets, including in ASEAN, to focus instead on greater returns at home. At the same time, slowdown in China could spill into neighbouring economies of the Asia Pacific region, of which ASEAN is a part, and this would further provoke investors to review their exposure to the region. Swiss Re A journey starts inauguration of the ASEAN Economic Community 13

16 Impact of the AEC on insurance Promoting insurance investment will be key for overall economic growth in ASEAN. ASEAN leaders have agreed on a set of measures to enhance the appeal of ASEAN as an investment destination. The AEC Blueprint outlines steps taken to improve investor protection, progressively liberalise investment regimes, harmonise regulations and streamline the investment application process to create a more transparent, consistent and predictable framework. These measures, if enacted, will help insurers better execute their asset-liability management strategies and reduce risk of currency and duration mismatch. The availability of more investment instruments could also help insurers achieve better returns due to increased market competition and efficiency. A wider selection of investment funds could also increase the appeal of investment-linked products. Capital market development varies significantly across the ASEAN countries. Liberalisation of the capital markets will be orderly and gradual. A more liquid capital market would reduce transaction and capital costs. The Asian Bond Markets Initiative and ASEAN Trading Link are intended to accelerate regional capital market integration. Freer flow of capital broader and deeper regional capital markets The free flow of capital, alongside the free flow of goods, services and investment, is essential to create a single market. The capital markets of the different ASEAN states are at different stages of development. Singapore is the most financially open market and Myanmar the most closed. There are capital restrictions in Lao PDR and Vietnam. Recognising these key differences, ASEAN leaders have agreed that capital market liberalisation should be orderly and gradual, and should be consistent with a country s national agenda and readiness of its economy. For the less developed countries, safeguards will be put in place to ensure macroeconomic stability and minimise systemic risk when restrictions on capital flows are removed or relaxed. Specific measures have yet to be announced. A more liberal regime could stimulate the development and integration of ASEAN s capital markets, and underpin the AEC s aspiration for free flow of investment. It would increase the liquidity and depth of the region s equity and bond markets, cut transaction costs and enable insurers to raise capital in a more cost-effective manner. Several measures to these ends, though not directly under the AEC framework, have been announced. Examples include the Asian Bond Markets Initiative (ABMI) and the ASEAN Trading Link. The ABMI was launched in 2005 with the aim of developing the local currency bond markets in ASEAN+3 countries (ASEAN, China, Japan and South Korea). The ASEAN Trading Link is designed to strengthen cooperation between stock exchanges and make the region s equities a more attractive investment asset. 14 Swiss Re A journey starts inauguration of the ASEAN Economic Community

17 Professionals in eight designated industries will be able to move more freely across borders in search for work... but immigration controls will remain in place for other professionals and unskilled labour. Free movement for insurance professionals is unlikely in the near future. Free flow of skilled labour limited impact on insurance, for now To a certain extent, free movement of trade and investment pre-suppose the free movement of individuals within ASEAN. Under the free flow of skilled labour element of the AEC, member states agree to increase the mobility of skilled labour in eight professions (doctors, dentists, nurses, engineers, architects, accountants, surveyors and tourism service providers). Restrictions on visas and work permits for professionals in these sectors will be eased, and there will be MRAs so that the qualifications gained in one country are recognised in the others. Similar to the flow of capital, the flow of labour will not be completely free and controls will remain in place for other professionals and unskilled labour. It is highly unlikely that ASEAN citizens will be able to live and work in another member state country without work permit or visa requirements any time in the near future. The vastly different size, economic structure and stages of development make it impractical and politically unviable for ASEAN governments to fully open up their borders in the same way as has been done in the European Union. Another concern for governments is the threat of brain drain, when educated or professional people emigrate from less to more developed countries in search of better jobs and lives, in turn holding back development in those less developed economies. There has been no announcement of any plan with regard to the free movement of professionals in the insurance sector. The differences in culture, customer behaviours, languages and qualifications make it unlikely that insurance professionals such as agents would be allowed to move across ASEAN freely to look for work. For now, companies with skill shortages (eg, actuaries in Indonesia), will need to import labour using conventional channels such as sponsoring foreign workers for visa and work permit applications. Swiss Re A journey starts inauguration of the ASEAN Economic Community 15

18 External trends and the AEC The TPP has been hailed as the most ambitious trade deal to date. Four ASEAN states are signatory to the TPP, and a few others have expressed interest in joining. Growth in the non-signatory countries could be adversely impacted by virtue of exclusion from the TPP. The boost in trade will benefit many insurance lines but the TPP could also generate increased competition for insurers. There is also uncertainty over the ratification of TPP in each country. Impact of the TPP on the AEC In October 2015, twelve Pacific Rim countries announced they had reached a deal on the Trans-Pacific Partnership (TPP), capping the end of seven years of negotiations led by the Obama administration. Hailed as the most ambitious trade pact signed to date, the agreement aims to stimulate trade among the 12 signatory countries by cutting barriers to trade in goods and services. The TPP also sets out labour and environmental standards, a framework for the protection of intellectual property rights, and rules governing competition policy and investment protection. The 12 signatories to the TPP are Australia, Canada, Chile, Japan, Mexico, New Zealand, Peru and the US, and four ASEAN countries: Brunei, Malaysia, Singapore and Vietnam. Together the TPP countries represent 40% of world GDP and around 25% of global trade. Indonesia, the Philippines and Thailand have expressed interest in also joining the TPP. The reduction in trade barriers is expected to provide a strong impetus to trade among the signatories, ASEAN countries included. It is estimated that Vietnam s GDP could be boosted by as much as 14% by 2025 as a result of the TPP, and Malaysia is forecast to see GDP increase by more than 2%. Brunei and Singapore are expected to witness a more modest uplift of % in output. 13 Conversely, growth in non-tpp signatory ASEAN countries is likely to be adversely impacted as a result of lost trading opportunities stemming from their exclusion. For instance, it is estimated their restricted access to the markets of TPP members relative to the access terms of the TPP signatories to each others markets, will cost Thailand up to 0.3% of GDP by 2025, while the Philippines and Indonesia will lose out to the extent of 0.1% of GDP. 14 In the four ASEAN countries signatory to the TPP, the boost in trade will translate into significant opportunities for insurers as demand for transport cover rises as external trade volumes increase. Insurers may witness increasing demand for trade credit insurance products too. Demand for liability insurance will also increase, as exporters seek to protect their businesses against the high costs involved in litigation cases in markets like the US. However, the TPP is also expected to bring challenges to ASEAN insurers, mostly in the form of increased competition. With countries signatory to the TPP committed to doing away with discriminatory regulations and to ensuring a level-playing field for all service providers within the TPP union, large insurance groups will likely seek to establish or reinforce their presence in ASEAN, attracted by the persistently low insurance penetration levels and substantial growth opportunities. Non-ASEAN insurers might also turn to M&A as a way to gain quick access to these markets. In the meantime, an outstanding prerequisite to implementation is that the TPP will be ratified by the legislature in each of the signatory countries. And there are some doubts that this will happen. The TPP has been met with strong opposition in some quarters, often simply because the negotiations were shrouded in secrecy. Indeed, the final document of the agreement has yet to be released. Some health organisations are fiercely opposed to the deal because it involves imposing stringent intellectual property right protections on pharmaceutical drugs, which would deprive many poor countries of access to cheaper generic drugs. And in the more advanced economies, labour groups have called for the deal to be rejected, saying it will lead to job losses as manufacturers move production to countries where labour is cheaper. 13 Here comes the TPP ASEAN Perspectives, HSBC Global Research, 30 October Ibid. 16 Swiss Re A journey starts inauguration of the ASEAN Economic Community

19 Table 5 Timeline and the latest development of TPP Year Event 2005 Four-party free trade agreement concluded by Singapore, New Zealand, Brunei and Chile (known as the Pacific Four). This was the predecessor of the TPP US entered into TPP negotiations with the four countries; Australia, Peru, Vietnam also joined later that year Malaysia joined the TPP Canada and Mexico joined the TPP Japan joined the TPP. Recent/upcoming events June 2015 Late July 2015 October 2015 From October 2015 The fast-track of TPP was passed in the US Congress. Trade ministers and negotiators of the participating countries did not reach an agreement in the latest round of talks that took place in Hawaii. A final agreement among trade ministers from 12 countries was concluded on 5 October. Contents of the TPP deal to undergo public review, and will need to be ratified by the respective legislative body of each signatory country and onwards Once ratified in all participating countries, the TPP deal will be signed and entered into effect. Source: Factiva, Office of the US Trade Representative. RCEP: an Asian response to TPP? The signing of the TPP has given renewed impetus to negotiations on the RCEP. All ASEAN states are involved in the RCEP. The four that are in both the TPP and RCEP stand to benefit most. The recent signature of the TPP agreement is expected to give new impetus to another free trade agreement, the Regional Comprehensive Economic Partnership (RCEP). China has been leading the charge on the RCEP, a free-trade agreement that covers goods, services and investment. At the conclusion of the tenth round of negotiations in October 2015, members committed to conclude talks by the end of 2015 with a concrete agreement. The RCEP talks involve all 10 ASEAN countries Lao PDR, Myanmar, Indonesia, the Philippines, Thailand, Cambodia, Brunei, Malaysia, Singapore and Vietnam as well as six regional trading partners: China, South Korea, India, Japan, Australia and New Zealand. If signed, the agreement would create an economic zone with 47% of the world s population (3.4 billion people) and 30% of global GDP. As with the TPP, the agreement will lead to increased trade and so opportunities for insurers active in property and liability insurance, and trade-related business. Four of the ASEAN countries Brunei, Malaysia, Singapore and Vietnam have also already signed up to the TPP, and stand to benefit most from the increased access to markets that the TPP and RCEP together would provide. However, a note of caution from the Asian Development Bank (ADB): as the TPP and RCEP involve two distinct groups of countries within ASEAN, they could interrupt intra-regional economic cooperation, two central pillars of the AEC project What next for the Trans-Pacific Partnership? Asia Pathways, 28 October 2015, Swiss Re A journey starts inauguration of the ASEAN Economic Community 17