AMTD Research - 29 March 2017

Asia corporate insurance brokers sector - Niche and beautiful

Corporate insurance brokerage in Asia: tremendous growth potential

Asia’s corporate insurance brokerage industry has tremendous growth potential, driven by the growth prospects of the underlying economy and further deepening of insurance penetration rate, in our view. The general insurance penetration rate in the developing Asian countries is currently low, ranging from 0.3% to 1.7%, compared to the 2.4%/4.1%/3.8%/1.9% in the four developed countries/cities in the region Australia, Korea, Hong Kong and Macau.

A sector with high ROE; profitability diverged in recent years

Insurance brokerage is an asset-light business with high ROE. In 2016, the major listed international insurance broking companies recorded average ROE of 19.2%. In the 2013-2016 period, the two biggest global brokers Marsh&Mclennan and Aon saw their margin and ROE/ROA expanding, whilst No. 3-5 players Willis Towers Watson, Arthur J. Gallagher and Jardine Lloyd Thompson all experienced decline in net margin and returns. We expect Marsh&Mclennan and Aon to continue outperforming in profitability in the long-term, due to higher operating efficiency achieved with a truly global reach.

Market consolidation trend and globalization ambitions

Currently competitive and fragmented, we believe consolidation is inevitable for the corporate insurance brokerage industry in Asia. Some locally based large brokers will emerge, and it is vital for those players with global ambitions to expand their international network in order to provide global risk solutions, and achieve geographical diversification and economies of scale. We illustrate this potential internationalization development path for Hong Kong-based broker AMTD on Page 10 of this report. On the other hand, smaller brokers focused on local niche markets should continue to thrive, enabled by third party technology providers.

InsurTech enables the sector for leapfrog growth

The advance of technology opens up new business opportunities in client segments that were deemed costly or impossible in the past; risks that were extremely difficult to price or even uninsurable could potentially be better analyzed and become insurable. In addition, new risks emerge along with new forms of business activities. Technology also allows significant efficiency enhancement to take place. The key for an insurance broker to outperform its peers, is to embrace the benefits of technology, recognize areas of opportunities and establish expertise, with differentiated services.

Insurance brokers should embrace technology and stay client focused

To benefit from InsurTech development, insurance brokers’ management need to commit to a top-down and bottom-up change to create an innovative culture, and balancing short-term profit and long-term viability. However, no matter how InsurTech evolves, the one indispensable element in insurance brokerage is the human touch in trust building and relationship management. Also, for big and complex insurance deals with corporate clients, especially in highly specialized industries, insurance brokerage experts will continue to play a vital role in negotiation, coordination and procurement. This has always been the core focus of large corporate insurance brokers, and should remain so in the future.

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