Business Outlook for ASEAN Country 2017 Thailand Insurance Symposium 2016 19 December 2016 Bangkok, Thailand Clarence Wong Chief Economist Asia
Agenda What are our top economic concerns? What does this mean to ASEAN? What will be the key insurance themes for ASEAN countries? 2
What are our top economic concerns? 3
Top economic risk map that could impact ASEAN Recession in the Euro area: Risks of policy errors, reform complacency, renewed conflicts in Ukraine, geopolitical risks and slowdown in China 20% Sharp growth slowdown in advanced markets due to fallout from Brexit, downside risks in emerging markets and political conflicts 15% 10% Oil price collapse a stabilising force Emerging market Contagion: risks include Fed normalisation, high external debts, low commodity prices etc 15% Medium-term inflation risks 15% 20% Chinese hard landing: Credit risks from a significant slowdown in the property sector are the greatest downside risk Source: Swiss Re Economic Research & Consulting 4
Ultra-low monetary policy continues in most advanced markets 16 14 12 10 Central bank rates, monthly data 8 6 4 2 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 EU United Kingdom United States Weak growth and downside risks are nudging central bankers to keep interest rates lower for longer The scale of negative policy rates has expanded (Euro Area, Denmark, Japan, Sweden and Switzerland) to represent nearly 25% of global GDP Half of the world s sovereign bonds carry negative interest rates* Note: Updated on 28/09/2016 Source: CEIC Interest rate risk * refers to bonds in the S&P Global Developed Sovereign Bond Index 5
Strong economic headwinds facing ASEAN Weak trade activities The expected recovery in trade has been slow and unsteady. This could reflect changes in the global value chain, weaker demand from emerging markets and low supply of credit. High debt leverage Economic growth in recent years has been supported by higher debt, both for households and corporations Against the backdrop of slowing trade/economic growth, rising interest rates, debt servicing will become more challenging Fed lift-off Pace has remained cautious due to heightened uncertainty over global economic outlook. Fed tightening will result in capital outflows from Asia and increased financial volatility. China hard-landing China is in the process of going through complex economic adjustments resulting in slower growth. Key concerns include policy errors, mis-communication, systemic financial risks and conflicting objectives. 6 6
ASEAN has maintained ~5% growth since financial crisis 6.1% Average real GDP growth rate 5.1% 5.6% 6.6% 5.6% 6.1% 6.6% 4.7% 2.7% Financial Crisis 5.4% 5.3% 7.9% 4.9% 5.9% 5.0% 4.5% 1.8% 4.5% 4.5% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Source: Swiss Re Economic Research & Consulting 7
but on the back of rising leverage 400% Credit to non-financial sector as % of GDP 300% 200% 100% 0% Japan Hong Kong China Singapore Korea Malaysia Thailand India Indonesia 2008 2009 2010 2011 2012 2013 2014 2015 Source: BIS, Swiss Re Economic Research & Consulting
Government deficit and leverage have also increased since the GFC 0% Government deficit as % of GDP 120% Government leverage: credit to general government sector as % of GDP 90% -2% 60% -4% 30% -6% 0% Vietnam Myanmar Malaysia Indonesia Thailand Laos Cambodia Philippines Singapore Singapore Philippines Malaysia Thailand Indonesia 2007 2015 2007 2015 Source: Oxford Economics, BIS, Swiss Re Economic Research & Consulting 9
What does this mean to ASEAN? 10
Interest and coupon payments are rising faster than corporate and household income 25% Debt service ratios of private non-financial sector 20% 15% 10% 5% 0% Hong Kong Korea China Japan Malaysia Thailand India Indonesia 1999 2009 2015 Source: Bank for International Settlement 11
Sensitivity of ASEAN to China trade channel ASEAN-5 China trade exposure* 350,000 16 300,000 14 250,000 200,000 12 10 8 150,000 100,000 6 4 50,000 2 0 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 0 USD million (LHS) Share of total trade (%, RHS) Note: *includes Indonesia, Malaysia, Philippines, Singapore and Thailand Source: CEIC 12
Sensitivity of ASEAN to China trade and other channels China has more impact on ASEAN exports than the US and EU (except for the Philippines) a 1ppt rise in growth in China will result in 1.5-2.5 ppt increase in ASEAN exports Channels of Spillovers from a Slowdown in China but ASEAN is still relatively less exposed to China compared to other Asian countries Note: AUS = Australia; IND = India; IDN = Indonesia, JPN = Japan; KOR = Korea; MYS = Malaysia; NZL = New Zealand; PHL = the Philippines; SGP = Singapore; THA = Thailand; TWN = Taiwan Province of China; VNM = Vietnam. Source: IMF 13
Limited contribution to growth from trade 8 Contribution to real GDP growth in ASEAN-5 markets 6 4 2 0 (2) 2012 2013 2014 2015 1H2016 Net exports Domestic demand Source: CEIC, Swiss Re Economic Research & Consulting 14
Elevated financial volatility coincides with falling crude oil, commodity prices and USD strength 140 Crude oil, copper and USD indices (1 Jan 2013=100) 300 Bond and stock volatility indices (1 Jan 2013 = 100) 120 250 100 200 80 60 150 40 100 20 50 Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Jan-2013 Jul-2013 Jan-2014 Jul-2014 Jan-2015 Jul-2015 Jan-2016 Jul-2016 Copper (LME) USD trade weighted index Crude oil (WTI) US treasury volatility index (MOVE) S&P volatility index (VIX) Source: Bloomberg, CEIC, Swiss Re Economic Research & Consulting 15
What will be the key insurance themes for ASEAN countries? 16
Insurance having gone through phases of development in Asia Phase 1: monopolistic market structure, entry barriers, price/product regulations Phase 2: liberalisation, deregulation and globalisation Phase 3: economic/income growth, solvency reforms, personal lines 480 360 Nonlife premiums (USD b) Life & health premiums (USD b) International insurers entering EM Asia markets India opened insurance sector to private and foreign companies Global financial crisis 240 ASEAN Framework Agreement on Services signed in 1995 China entered WTO in Dec 2001 120 Asia financial crisis 0 40% Nonlife premiums real growth Life & health premiums real growth 20% 0% -20% 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Source: Swiss Re Economic Research & Consulting 17
Many emerging Asian markets have low insurance penetration but are poised to achieve fast growth 4% Early movers Middle market Growers Slow growth Non-life insurance penetration (premiums as a % of GDP) South Korea 3% Penetration growth South Africa Japan Morocco Thailand 2% Kenya China Malaysia Singapore Hong Kong Mozambique 1% Cote d Ivoire Brunei India Angola Vietnam Indonesia Ethiopia Ghana Philippines Cambodia Bangladesh Nigeria 0% 0.45 4.5 45 GDP per capita in 1000 USD Income growth log scale Asia Middle East Africa Taiwan Source: Swiss Re Economic Research & Consulting. 18
Fundamentals remain strong middle income class and urbanisation 100% 80% The number of middle-income households is expected to rapidly increase in Asia Pacific, especially in India and China 18 14 USD trillion Urbanisation-led infrastructure spending is expected to be the highest in China during 2013-2023 (USD trillion) Commercial floor space construction Water & waste-water management Energy sector Transportation 60% 9 40% 20% 5 0% 2009 2020 2030 North America Europe Central & South America Asia Pacific Sub-Saharan Africa Middle East & North Africa 0 China India Indonesia Middle East & Africa Latin America Other Emerging markets Source: OECD, McKinsey Institute
One-Belt-One-Road 20
Demographic changes and healthcare needs Old age support ratio (population aged 15-64 over population aged 65+) Government funding and out-of-pocket expenditure are the main financing channels for healthcare expenditure 16 100% 14 12 80% 10 8 60% 6 40% 4 2 20% 0 Japan South Korea Singapore Hong Kong China Thailand Australia Vietnam Indonesia World Malaysia India Philippines 0% Government fund Social fund Private insurance 2011 2030 2050 out-of-pocket other private fund Source: WHO World Health Statistics, United Nations Population Division
Technologies will have an impact on the whole of society and thus shift risk pools and create new opportunities. World's largest transportation company owns no vehicles - Largest accommodation provider owns no real estate - Largest phone company owns no telco infra - World's most valuable retailer has no inventory - Most popular media owner creates no content - Fastest growing banks have no actual money - World's largest movie house owns no cinemas - Largest software vendors don't write the apps - What will be the insurance headline? Source: Tech Crunch, The Battle Is For The Customer Interface, Insurance and the Connected World, Strategy Meets Action
Digital Technology Adaption Curve Media Retail Telecom, Insurance and Banking Impact of digitalisation Energy Consumer Packaged Goods Automotive Logistics Health Care Data protection and privacy Are consumers comfortable with insurers access to information on usage/ behavior Non-traditional players are entering across the value chain Several major disruptions have occurred Point on digitalisation journey Disruptive moves (e.g. by pure online players) have affected these industries, but the final outcome is still to be determined Source: BCG, How to jump start a digital transformation, 2015 Effect of digitalisation is still unknown and disruptive changes remain to be seen; these industries are very similar in their overall level of digitalisation 23
In ASEAN, mortality protection gap increased by an annual average of 9% over the past decade to USD 3.5 trillion 350% 18% 250% 12% 150% 6% 50% 0% Vietnam Thailand Malaysia Singapore Philippines Indonesia ASEAN Mortality protection gap in 2014 (USD bn), LHS Avg annual increase in mortality protection gap (2004-2014), RHS Note: mortality protection gap is defined as the difference between the protection needed (10x of average annual salary) and the protection in place (including net financial assets/savings and relevant life insurance) to maintain dependents in living standards following the death of the primary breadwinner. Source: Swiss Re Economic Research & Consulting 24
Uninsured Nat Cat losses have been particularly large in Thailand, Indonesia, Philippines and Myanmar Accumulative nat cat losses, USD bn (2004-2015) Uninsured Nat Cat losses Insured Nat Cat losses Thailand Indonesia Philippines Myanmar Vietnam Malaysia Cambodia Laos Singapore (40) (30) (20) (10) - 10 20 30 40 Insured losses Uninsured losses Source: Swiss Re Economic Research & Consulting 25
ASEAN Economic Community ASEAN in 2030 AEC 1 could create USD280 bn to USD615 bn in annual economic value USD 7 trillion in infrastructure investment opportunities Consuming class 2 doubling to 163 mn households Urbanisation: More than 90 mn people are expected to move to cities 1. AEC stands for ASEAN Economic Community 2. Consuming class refers to those with income exceeding the level at which they can begin to make significant discretionary purchases. Source: Southeast Asia at the crossroads: Three path to prosperity, Nov 2014, Mckinsey&Company. 26
Concluding remarks Growth in ASEAN is increasingly constrained by 1) weak trade outlook; 2) limited room for further debt accumulation; and 3) already low interest rates Regional markets will nonetheless continue to pursue fiscal expansion to support growth Longer term, structural and economic reforms are key to success Regardless of when the Fed actually lifts off, the impact is already felt in ASEAN The next phase of growth deleveraging but not a financial crisis What these mean to the insurance industry? 27
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