Mongolian insurance sector set to consolidate
The insurance sector in Mongolia is heading for consolidation with higher capital requirements likely to squeeze out smaller operators in a crowded market. However larger firms can look forward to solid growth prospects as penetration rates remain low and product awareness is on the rise.
The expected narrowing of the number of insurers--most likely through a series of mergers or buyouts--is set to benefit the remaining firms. At the same time, for well-capitalised local insurers there may be opportunities to partner with multinational operators.
Expansion from a low base
Insurance is slated as one of the key segments for growth in Mongolia’s financial services industry. Insurers are being lured by the scope for expansion, given the country’s rapid transformation in the past 20 years and the economic spin-offs from a growing mining industry; as well as the fact it is an open market--a rarity in Asia.
According to the World Bank, the Mongolian insurance industry registered a CAGR of 26.7% during the review period (2008−2012). At the same time, the introduction of compulsory motor insurance two years ago will result in a 30% expansion in the size of the motor insurance category, according to a report by business consultancy Timetric.
Despite the positive outlook, penetration rates remain extremely low--at around 0.54% –while growth in many non-compulsory segments has been slow. The sector is small in terms of its contribution to the economy, and is a relatively modest component of the broader financial industry, representing 5% of GDP, with the insurance sector’s input being 1% of the sector as a whole, B. Nyambaa, head of the debt management department at the Ministry of Finance, said in April.
Life and health packages are starting to gain some market acceptance, though for the latter, the tradition of the state providing for citizens’ medical needs has meant expansion is coming from a very low base. As the number of privately operated health facilities grows, however, so may the opportunities for health insurance offerings.
Groundwork needs to be laid to raise awareness and shape policies to appeal to local clients according to National Life’s G. Mongolkhuu, CEO of the only life insurance company operating in Mongolia. “Pensions and investment/savings products are a real area of opportunity for the Mongolian insurance sector,” G. Mongolkhuu told OBG. “However, companies need to develop products that are specifically designed with the local market in mind; simply copying and pasting from more developed markets will not work.”
The industry also has to tackle other issues such as shortage of skills and lack of data on insurance policies or the uptake of products. “The insurance sector needs to focus on improving its risk management techniques and the actuarial skills of its human resources,” Tenger Insurance CEO A. Batzorig told OBG. Other sector players have called for a dedicated institute, which would analyse statistics and supply information to the insurance sector.
Policy of growth
The fledgling market boasts 17 insurance firms--compared to just 13 banks--a situation that has kept profit margins tight. Of the 17 firms, all but one offer a range of policy options across the product spectrum.
According to the sector’s governing agency, the Financial Regulatory Committee (FRC), Mongolia’s insurers posted combined profits of MNT2bn-3bn ($1.07m-$1.6m) in 2013, while paying out MNT6bn ($3.2m) to policy holders. The sector had gross revenues of MNT93bn ($49.7m) last year, a figure that should increase as product acceptance grows.
However, the constricted nature of the sector is limiting new players from entering the market, according to D. Bolormaa, the CEO of Bodi Daatgal – the second largest insurer in terms of premiums – with many of the smaller companies already struggling to keep afloat. This is leading to price-cutting, which is weakening the sector as a whole, she told OBG.
“The insurance sector is too crowded, and smaller players are, as a result, charging irresponsibly low rates in an effort to compete,” said D. Bolormaa. “This is dangerous for the system as whole, as they do not understand the risks involved and may not be able to meet all of their commitments.”
This may, however, drive a period of consolidation next year, led by the FRC, Bolormaa said, referring to the watchdog's move to increase the minimum capital requirements for companies.
Tightening market conditions brought on by a slowdown in the economy could also trigger a consolidation. Though the sector is forecast to expand this year and into 2015, a cooling of the domestic economy may be a drag on demand for insurance products. While GDP growth stood at 10% this summer, it remains well behind the government's forecast of 14.7% for the year, and continuing weakness in commodity prices and reduced prospects for China, one of Mongolia’s main markets, could see the growth rate easing.
International doors opening
Despite the overcrowded environment, international insurers are looking to get a foothold in the nascent market, which does not have any restrictions on foreign investment.
The French multinational insurer, AXA, announced in September a partnership deal with Bodi that will see it provide reinsurance services to the Mongolian firm while also providing corporate solutions assistance and research and development support.
If local insurers team up with larger overseas players, it will enable them to provide coverage for the mining and construction sectors, the driving forces of the economy.
The relatively small domestic insurance sector is not yet well enough capitalised to provide adequate coverage for Mongolia's flagship industries. As a result, many of the foreign firms in these industries have policies carried by international companies, with their premiums paid offshore.