Interview: Simeon Preston

What steps can the insurance industry take to improve penetration and density levels?

SIMEON PRESTON: In the initial phase of market development, customers will need strong inducements and incentives to participate in long-term savings and protection. On the supply side, product offerings must be simple and clear, with propositions ensuring full customer understanding at the time of purchase and an appreciation of the value of what is being purchased. On the demand side, there must be some positive financial incentive to invest precious cash savings in a long-term savings product. To this end, Asian legislators have typically granted income tax deductions to life policyholders on their contributions to long-term savings and protection schemes.

Explaining those insurance products to consumers is equally important. Asian markets are host to a variety of distribution models, which tend to evolve in tandem with the development of the financial system and evolving consumer sophistication.

What further measures need to be taken so the insurance industry can act as a natural stabiliser to the banking segment?

PRESTON: For many individuals in Asia, life insurance is the first financial product that they purchase. With limited access to bank branches, or the means to qualify for credit, people take out small life insurance policies that allow them to begin saving regularly in a disciplined manner. This remains true in much of emerging Asia today. In many rural regions in markets such as China, India and Indonesia, the local life insurance agent is often the main or even sole source of financial expertise and advice. In addition, in some instances, life insurance offers the opportunity to participate in capital markets growth through equity-based investment portfolios and real estate. As well as long-term savings, any plan for insurance industry development needs to consider protection insurance. Rising affluence creates a desire among individuals to protect personal assets already accumulated, and encourages people to begin providing for dependents as well as for themselves.

In many parts of Asia dependents include ageing parents and extended family members, as well as children and grandchildren, so the financial responsibility on any one breadwinner can be considerable. Privately purchased insurance offers an alternative safety net for individuals able to purchase some basic level of protection alongside their savings. As the insurance sector expands, the potential strain on state welfare systems is considerably reduced — particularly for health care and support for the elderly.

How can regulators work to further encourage the growth of small and medium-sized enterprises (SMEs) in Myanmar?

PRESTON: Life insurers offer positive net flows, depth and stability to financial markets, and thus complement the short-term nature of bank lending. The long-term nature of the investment process, through the action of the capital markets, benefits the local economy, which in Myanmar is dominated by SMEs. Thus, life insurers become a leading source of capital for local companies looking to raise equity or debt. The life segment plays a significant underwriting role in the issuance of primary funds and also has the liquidity from positive net premium flows to support secondary offerings. Moreover, life funds’ assets and liabilities are held in local currency, eliminating the dependence on foreign currency-denominated borrowing. This has been a very common feature of capital raising for less-developed markets and was a contributing cause of the 1997-98 Asian financial crisis. Companies are able to make use of long-term financing from life insurers to invest in fixed-asset projects well into the future because of the long-term payback expected from life insurance financing.