The prospects and challenges to Mongolian insurance market

С 1990-х годов в Монголии изменилась социальная структура. Права на частную собственность начали реализовываться и материализовываться на другом уровне. Спустя 30 лет, вопрос защиты собственности вызывает беспокойство больше, чем когда-либо прежде.

Как и многие развивающиеся рынки, монгольский страховой рынок имеет свои собственные проблемы, и в данной статье мы рассмотрели перспективы этого рынка и предложили возможные пути их решения на основе текущей рыночной ситуации и основных показателей.

Ключевые слова: монгольский рынок страховых услуг, монгольский сектор страхования жизни, монгольский сектор страхования, не связанного с жизнью.

Mongolian insurance industry comparison to other countries

A development of a country's insurance industry is commo nly measured by insurance industry's premium income to gross domestic products of the corresponding year (insurance penetration) and insurance premium income per capita (insurance density).

This indicator shows that monies spent by people or companies on insurance and determined by the ratio of gross premium income to GDP.

We see from the Graph 1 that Taiwan shows the highest indicator of insurance penetration which is 3 times higher than the world average. And also, it has been well observed that the contribution from life insurance sector is considerable to these countries.

As of 2017, countries that have highest developed insurance sector, United Kingdom, USA, Japan and South Korea has one of the highest penetrations, ranging from 7.0 to 11.5%. According to the study from Swiss Re (Swiss Re Sigma No3/2018) Kazakhstan, Russia, Ukraine, Saudi Arabia and Tunis have low penetrations and feature of these countries is that non-life insurance premium dominates life insurance premium. This is the same case in respect of Mongolian market where life insurance sector have a very small impact both in terms of number of life insurance companies and overall premium contribution of this segment to the insurance industry.

Graph 1 Insurance penetration, 2017 Source: Swiss Re sigma No 3/2018

Furthermore the world average is 6.1% and it is higher for developed countries and lower for emerging countries. For Mongolia it is 0.6 which is 10 times lower than the world average, which makes us to place after Egypt (0.68) and before Bangladesh (0.55).

Generally, low insurance penetration means that the insurance industry has potential to grow further and it is not saturated yet.

Graph 2 Insurance premium per capita /Insurance density

By the end of 2017, insurance density of developed countries such as United Kingdom, USA and Switzerland ranges from USD3,800 to USD6,800 whilst Cayman Island shows the highest, USD 12,122 which is 18 times higher than the world average whilst for Mongolia, the indicator is 32 times lower than the world average.

For Mongolia, although the indicator has been growing each year, only from USD1 to USD2 is attributable to life insurance sector and the rest USD19 is from non-life insurance sector whilst the majority of premiums attributable to life insurance sector of Switzerland (USD6,811), United Kingdom (USD3,810) and Hong Kong (USD8,313). Mongolia and Egypt (USD16) are close in terms of insurance density indicator.

Prospect of and challenges to Mongolian insurance industry

Mongolian economic growth for 2017 and 2018 is 5.3% and 6.9% respectively and growth for insurance industry for the same period is 26% and 23% respectively. The industry shows real growth compared to economic growth.

It is considered that the foundation of Mongolian insurance industry was laid back in 1934 and that the start of market competition begun in 1990 when private insurance companies established. The insurance industry which had only one player in 1990 evolved to the industry which has 18 insurance and reinsurance companies and 2,506 professional participants (agents, insurance brokers and loss adjusters) as of 2018.

There are 15 non-life insurance companies, 1 life insurance company and 2 reinsurance companies currently in the market. The general statistic of the industry by the end of 2018 is:

- Total asset of (re)insurance companies: MNT339billion, 37% growth from 2017;

- Total written premium income: MNT 178billion, 24% growth from 2017;

- Total paid claims: MNT 58.2billion, 28% growth from 2017.

- In the last 10 years, total asset of insurance industry was increased 8 times. Mongol Daatgal LLC's asset has increased to 37.6billion and comprises 13.2% of total market asset.

In 2018, new page had opened to the insurance industry - two insurance companies (Mandal Daatgal and ARD Daatgal) went public and listed in Mongolian Stock Exchange. These companies had collected 7.5 billion and 7 billion respectively from capital market. Increased capital means increased risk bearing capability and decreased demand for reinsurance. In addition, the first private reinsurance company, Khubilai Re had received its license from Financial Regulatory Commission and this newly established company alone had contributed total asset of the market by 6% in 2018.

Some advantages of a company go public includes that better corporate governance, transparency in terms of financial statement.

As of 2018, top insurance companies that are leading the world by its nonbanking assets are all listed companies.

Graph 3 Total asset of insurance industry

Source: Swiss Re sigma No 3/2018

(1) Allianz SE (Germany), (2) AXA S.A (France), (3) Prudential Financial Inc (United States), (4) Japan Post Insurance Company (Japan), (5) Metlife Inc (United States), (6) Berkshire Hathaway Inc (United States), (7) Nippon Life Insurance Company (Japan)

Graph 4 Total written premium /billion tugriks/

The above graph shows us that in the last 10 years, two events noticeably influenced industry's performance. These are, Law on Driver's Compulsory Third Party Liability which was enacted in 2012 and construction of Oyu Tolgoi's mining. Before 2012, there were no compulsory insurances in Mongolia and insurance activity was low as drivers were only insured their automobiles on voluntary basis, let alone liability insurance. The first law on compulsory insurance is considered that it introduced benefit of insurance to Mongolians extensively, as drivers and their family members were able to avoid financial hardship due to their negligence. The next section will show its impact to insurance industry in more detail: insurance market compulsory driver

To see from the Graph 5, both the most sold and the product which has one of the least claims ratios is Property insurance. As mentioned above, upon the enactment of the compulsory law, Driver's compulsory third party liability insurance is now the second most income-deriving product in market level. If we would look into below section of the graph, we could see that there are products from life insurance market. As mentioned above, there is only one insurance company operating in this market and its performance is not sufficient in comparison to non-life insurance market.

In the last 10 years, ratio of reinsurance premium paid to total premium income has been increased from 20% to 30%. By the end of 2018, the amount paid (MNT 54.5 billion) as reinsurance expense to overseas entities is close to total claims paid (MNT58.2 billion).

Graph 5. Premium income and paid claims (by line of business)

Source: Swiss Re sigma No 3/2018

Regarding regulatory strategy, it has been Financial Regulatory Commission's (FRC) preference to limit insurance industry's cash outflow to overseas. With this point in mind, FRC supports the idea of establishing national reinsurance company. The very first state owned reinsurance company (Agri Re) received their license in 2015 however as the name suggests, this company's operation is currently limited to agricultural business. FRC granted second license to Khubilai Re, the first private reinsurance company in 2018.

Reinsurance shows risk bearing capability of insurance companies and inversely related to capital size. Reinsurance demand for a well capitalized insurance company will be lower than those of under-capitalized competitor company. It is possible to reduce reinsurance expense by adding capitals to insurance companies.

Graph 6 Total claims paid and reinsurance

Nevertheless, it is impracticable to absolutely limit reinsurance purchased from overseas companies as the nature of reinsurance is to transfer and disperse risk from insurance company. If we would take natural risks at geographical level, it cannot be absorbed 100% in local market as it will not disperse any risk geographically which is especially crucial point when it comes to natural catastrophe. In other words, transferring risk as a way of reinsurance to reinsurance company which operates and receives business from different territorial scope, it would help decreasing risk accumulation.

There are 2 big fire losses where insurance companies received reinsurance recovery from overseas reinsurers namely, fire loss during construction of a hotel and factory fire loss happened in 2017. Both are considered that one of the market's highest claims and reinsurance helped respective insurance companies to pay these claims without financial hardship.

Conclusion

In the last 5 years, whilst total assets of insurance market has been increased 2.6 times and gross premium income has been increased 2 times, claims ratio has been fluctuated between 20-50%. This can mean two things: firstly, claims payment is insufficient or premium rate is being set at higher level. Secondly, the industry data which is provided by FRC is not clear as to it contains outstanding losses. Note that it is common that claims ratio can be as high as 80% in developed countries.

In conclusion, Mongolian insurance market has:

- Lopsided composition: Non-life insurance GWP accounts for 99.0% and the life insurance GWP accounts for 1% only)

- Low loss ratio: In recent years, the loss ratio (paid loss to GWP) ranges from 20% to 50% thus it suggests that there is room to develop insurance service as well as improving claims paying level. It is also observed that the data quality should be improved;

- Low penetration: Penetration rate of 0.5% means that insurance industry has lot to do and there are lots of business space which is not insured;

- Where the amount of value at risk in overall economy and available capital of insurance market which is to receive risks transferred from economy is not comparable, trying to halt reinsurance premium flow from local economy to overseas countries are like trying to stop flood water. Reinsurance premium flows to market where there is capacity. Instead, it might be preferable for FRC to take steps to attract investment to local insurance market. Increased capacity means decreased reinsurance demand;

- It is appreciated that from 2018 insurance companies are actively engaging to capital markets. In addition to it, it will be good to have increased flexibility of having option (from FRC) to place its assets to capital market and increase investment return;

- To reach one of the objectives of using reinsurance, insurance companies may wish to use Reciprocity concept through which they can swap similar insurance portfolios with other (re)insurance companies operating in another territory to disperse and manage catastrophe risks;

- Another means which can decrease reinsurance demand is to support coinsurance by which we mean to use unused capacity in the local market. In this case, it is necessary for law enacting parties, authorities to set appropriate law and policies.

References

1. George E. Rejda, Michael J. Mcnamara, Principles of Risk management and Insurance, Twelfth edition, 2012.

2. Mike Spice, Reinsurance, 2014.

3. Burmaa G, Commercial insurance, 2018.

4. Swiss Re sigma No 3/2018.

5. Financial Regulatory Commission, Combined report for insurance industry, 2018.

6. https://www.1212.mn/stat.aspx?LIST_ID=976_L05&year=2017 accessed on 10 March 2018.

7. https://www.1212.mn/stat.aspx?LIST_ID=976_L05&year=2018 accessed on 10 March 2018.

8. https://www.insurancebusinessmag.com/asia/guides/these-are-the-top-25- largest-insurance-companies-in-the-world-123334.aspx_accessed on 9 March 2018

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