The Association of Southeast Asian Nations (ASEAN) passed an important milestone towards a deeper integration of its economies when the ASEAN Economic Community (AEC) was formally inaugurated in December 2015. Started in 2007 with the AEC Blueprint, the official roadmap works towards the economic integration of the 10 member countries, namely Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
ASEAN leaders have strong expectations for the region’s economic integration. In 2015, the ASEAN countries had a total population of 640 million and it is expected to exceed 700 million by 2030.
If ASEAN was a single country, with a combined GDP amounted to US$2.6 trillion in 2015, it would be the world’s 7th largest economy, ahead of India.
It is projected to rank as the 4th largest economy by 2050, based on a forecast by research company IHS.
The AEC Blueprint
AEC is based on four interrelated pillars: a) Establishing a single market and production base with five core elements, freer flow of goods, services, investments, capital and skilled people to create b) a competitive economic region based on c) equitable economic development, d) fully integrated into the global economy, in the spirit that while some join first, others will join later.
Fundamentally, AEC aims to transform ASEAN into a single region with the free flow of services, goods, skilled services, investment and capital. It is however worth noting that the implementation of AEC is subject to domestic national policies and regulations.
The first pillar of the Blueprint stipulates the establishment of a single market with the freedom of services in cross-border trade. It basically covers four modes of supply, namely:
- Mode 1 – Cross-border supply
- Mode 2 – Consumption abroad
- Mode 3 – Commercial presence
- Mode 4 – Presence of natural persons
There should be no restrictions for Mode 1 (cross-border trade) and Mode 2 (consumption abroad), with exceptions due to valid regulatory reasons. For modes 3 and 4, it is expected to be progressive liberalisation.
It was pointed out by one ASEAN leader that the services sector made up 40- 60 per cent of Asean’s GDP, and this was expected to rise further following the continuous development of regional countries.
The Insurance Industry
There were five insurance sub-sectors of ASEAN member countries identified and a commitment by member states to target liberalisation by Dec 2015.
Seven nations are ready to adopt liberalisation measures in insurance but the remaining three, Laos, Myanmar and Thailand, have yet to produce specific plans to implement regional commitments as of now.
Insurance integration is addressed through the ASEAN Insurance Integration Framework (AIIF), a platform to guide the progressive liberalisation of the sector. Signed in 2015, the AIIF foresees that by late 2016, Marine, Aviation and Goods in International Transit (MAT) insurance will be liberalised and offered across ASEAN borders (except for Indonesia and Myanmar), resulting in a lower cost of insuring cross border business and helping to spur intra-ASEAN-trade.
The liberalisation of catastrophe insurance and reinsurance is scheduled to follow by 2021. ASEAN insurance supervisors wish to accompany the liberalisation process through tighter regulation, assuring the markets that the principles of the International Association of Insurance Supervisors (IAIS) are adhered to.
4 modes of supply of delivery services in insurance industry
Cross-border supply
Example: An insurer based in Vietnam issuing policies to policy holders in Thailand.
Thailand domestic residents can purchase insurance cross-border from a foreign- located insurance company if services are provided electronically. Offshore insurance firms are allowed to solicit business through advertising in Thailand.
In a broad context, a non-admitted foreign insurer is not allowed to offer insurance in the domestic markets of Malaysia, Indonesia and Singapore. Similarly, the soliciting and advertising of insurance policies by a foreign insurer is currently not allowed.
Consumption abroad
Example: A policy holder based in Indonesia travelling to Malaysia to buy a policy from insurer domiciled in Malaysia.
In Indonesia, an unlicensed foreign insurer is not allowed to advertise in the local market, however an Indonesian resident travelling outside the country may purchase insurance for the duration they are residing overseas.
Thailand domestic residents can purchase insurance from a foreign insurance company while abroad. Similarly, consumption of insurance services abroad is allowed for Malaysia residents.
Commercial presence
Example: An insurer based in Singapore issuing policies in Philippines through its local entity in Philippines.
Member countries agreed that foreign equity participation of at least 70% is allowed. Malaysia allows up to 70% for insurance companies but having no limit on insurance intermediaries. Indonesia allows up to 80% for both insurance companies and intermediaries.
Singapore is the most liberal state, up to 100% foreign equity participation is allowed.
In contrast, Thailand has a more conservative approach, the maximum equity permitted is 25%, however, it can be increased to 49%, if the Office of Insurance Commission deems it appropriate.
Presence of natural persons
Example: An insurer based in Malaysia managing the business through an employee working in Brunei.
This is confined to the movement of professionals only, while unskilled labour is excluded. In a broad context, the expatriates working in the member countries will need to meet the requirements of immigration and expatriate policy. A complex and lengthy process is still seen in some of the member countries.
Opportunities
The integration of insurance markets is viewed as particularly important. Whilst the region is vulnerable to the impact of natural catastrophes, its insurance penetration rate of 3.4% is at merely half of the global average (6.2%, according to Swiss Re’s Sigma). One of AEC’s goals is to increase resilience to external shocks, such natural disasters. This opens to more regional collaborations and co-operations, and enhance regional insurance/reinsurance CAT protection.
Meanwhile, the frequency and severity of natural catastrophes as well as the values at risk are on the rise. As exposures exceed the underwriting capacity of the individual ASEAN countries, insurance integration is a means to close that gap by pooling capacity and broadening distribution. Insurers from member countries will benefit from diversification of insured risks and will have access to a bigger scale of economy with a diversify and availability for investing assets.
More competitions from member countries will also encourage product innovation. Ultimately, customer will have a wider choice of products to choose from.
Challenges
Liberalisation of financial services is still subject to national policy. There is already evidence of protectionism which hinders market liberalisation in some countries.
Foreign players dominating the domestic market will create more unhelpful competition for domestic player. However, we believe that understanding customers’ needs is the key to capturing market share on a sustainable basis.
Going forward
The liberalisation path remains challenging. Currently there is no formalised institution to drive and implement agreed policies, it is based on the spirit of ASEAN countries to agree on coordinating their efforts to liberalise and reform their respective local markets to prepare for AEC.
There needs to be a single entity to take ownership of this to push forward, execute policy, and facilitate the implementation of the liberalisation – to keep track and promote each stage of development of each country.
There is more work to be done, according to some surveys, as the awareness among stakeholders is generally low and there is no consensus on the relevant economic cooperation measures.
It therefore requires promotion of awareness and benefits from grassroots and business, running campaigns through the media, roadshows and other platforms to encourage a better understanding and appreciation of the economic values of AEC.
For meaningful implementation, it is critical to enhance public-private cooperation and strengthening regional cooperation certainly helps business to flourish. Continuous engagement from the private sector sharing experience, views, feedback, raise issues/concerns is another important platform to meet any challenges that may arise.
Some harmonisation of regulatory standards, market practices, disclosure and licensing processes are important to facilitate the implementation process to become more efficient and effective.
In fact, the varying levels of development and sophistication of financial markets across the ASEAN region should help bring about much needed domestic reform, eventually contributing to a better regional financial liberalisation, and greater financial stability and consumer protection in the region.
The launch of the AEC initiative is a great achievement for everyone in this region. This represents opportunities for ASEAN insurance to tap into the motor, marine and aviation markets that were identified as the early lines for a greater regional cooperation of private sectors.
We think that the AEC will definitely contribute to the growth of insurance in ASEAN. Insurance companies and their intermediaries can already formulate clear strategy to prepare for the future to seize the opportunities offered when the right time arrives.
We see the AEC initiative having benefits in the long run. Creating stronger regional markets by having cross-border insurance, regional capacity building towards a better financial resilience against the natural calamities, ultimately bringing alternatives of choice and value to consumers. While for insurers, it boosts efficiency, provides better services and innovation, helping to achieve a better living place for the community in this region.
Lastly, the liberalised sector is expected to improve the allocation of capital, lower its cost and increase the region’s resilience to external shocks as it deepens and broadens financial markets and facilitates access to capital markets, insurance and banking.
