Recording steady expansion, the Mongolian insurance sector’s prospects are good despite the difficulties faced more generally in the economy. Premiums hit MNT93.9bn ($56.3m) in 2013, up from MNT79bn ($47.4m) in 2012 and MNT6.32bn ($3.8m) in 2003, according to the Financial Regulatory Commission (FRC). Other sector indicators, such as premiums per person, premiums per capita, capital and total compensation, also suggest that the country’s insurance companies are in relatively good shape and growing fast. In part, the success of Mongolian insurers is the result of the low base from which they are rising. As in many developing countries, awareness and penetration are low, so increases come easily. This alone allows the sector to show resilience in the face of challenges elsewhere in the economy. But the growth is also the result of effective strategies, best practices and good regulation.
Insurance has not, however, been immune to the troubles in the economy in general. While growth remains, it has slowed, and while metrics are looking good overall, some indicate that insurers are beginning to feel the strain. The loss ratio, for example, has jumped. It was up 7.1 percentage points 2013 over 2012, FCR data shows. Some insurers experienced worrying increases – Monre Daatgal’s was up 22.66%; Khan Daatgal, 19.40%; Nomin Daatgal, 18.93%; Mandal Insurance, 19.11; and Practical Daatgal, 15.33% – and this led to particularly high loss ratios for a few of the companies. Nomin Daatgal was highest, at 55.7%. According to industry executives, 2013 and 2014 have been challenging years for the sector across the board. While it is still growing, the insurance business is under pressure as the weak economy and new regulatory demands make it more difficult for underwriters to profit and expand. “Everyone will tell you, the market is growing but not as fast as it used to,” said B. Batbayar, business development executive at ARD Daatgal.
Mongolia’s insurance market has been developing for decades, though much of the time it has been poorly structured and did not offer real insurance products. While under Soviet influence, the country formed a gosstrakh, or state insurance administration, tasked with covering the risks of state companies and private entities. It had a separate legal structure and its own profit and loss statement, but what it offered was seen more as a tax that had to be paid rather than protection. The democratic revolution in 1990 brought with it a series of reforms. The Ministry of Finance took the lead at first, establishing a supervisor in 1990, undertaking licensing a few years later and setting minimum capital levels.
In the new millennium, considerable advances were made. A Law on Insurance was issued in 2004 and the FRC took over supervision of the sector when it was formed in 2006. Minimum capital levels have also been raised incrementally, from MNT500m ($300,000) to MNT5bn ($3m) over the decade through 2015.
A Free Market
With the exception of a short period when protectionist sentiment took hold, the market has been free and open. The Strategic Foreign Investment Law (SFIL), which had required parliamentary approval to buy a controlling stake in an insurer, was scrapped in late 2013, and foreign investors are again allowed to buy into the sector without restriction. Of the 17 insurance firms in the market, three had non-Mongolian shareholdings at the end of 2013 – Mongol Daatgal, ARD Daatgal and Gan Zam Daatgal – although ARD is now 100% locally owned.
Some restrictions do remain. A licence from the FRC is required to conduct insurance business in Mongolia or to act as an insurance intermediary. Shareholders (whether foreign or Mongolian) controlling more than 10% of an insurer are subject to additional regulations. They must inform the FRC when the 10% limit is broken, and they must notify the regulator when they sell shares. Holders of more than 10% of the shares must be deemed “fit and proper” by the FRC.
In addition to the insurers themselves, the sector had 20 brokers at the end of 2013, and their business has been particularly strong – income from fees more than doubled, from MNT607.8m ($326,000) to MNT1.45bn ($780,000), between 2012 and 2013. The FRC notes that the market continues to grow rapidly, with eight brokers receiving licences in the first half of 2014.
Mongolia has 14 loss assessors, a segment which has also been doing well. Their income more than doubled in a year – 2013 over 2012 – from MNT197.4m ($118,440) to MNT462.4m ($277,440).
The key measures of performance have been moving in the right direction. Coverage per person has jumped, increasing from MNT28,215 ($16.90) in 2012 to MNT32,378 ($19.40) in 2013. That figure is up from MNT8657 ($5.20) in 2011 and MNT2131 ($1.30) in 2003. Insurance premiums as percentage of GDP have also risen over the long term, from 0.32% in 2006 to 0.54% in 2013.
The sector is, however, far from mature. In recent years, the lack of a strong insurance culture and poor experiences on the part of consumers that have dealt with insurers have resulted in a dearth of enthusiasm in the market. Anecdotally, the situation has improved. Consumers say that the wait for claims payments has been reduced from months to days, and the companies themselves are focused on enhancing the experience of the customers. Still, a trust gap remains and this has an effect on demand. People, and some companies, continue to see insurance as a cost that generates no real value.
The regulators have been active in the monitoring and supervision of the insurers. According to the FRC, a number of new measures were taken or prepared in 2013. These include three amendments to rules and regulations for the sector, improving contracts, requiring faster claims processing and calling for better protection of policyholders. The regulator also strengthened rules regarding the use of foreign companies not locally registered to insure local risk. The main problem these days, the regulator says, is the lack of capacity. The FRC currently has 17 people covering the insurance sector, and they are challenged to keep up with the workload.
The major innovation of late has been the introduction of mandatory insurance for drivers. The Law on the Driver’s Insurance came into effect in 2012. It requires all drivers (with a few exceptions) to buy liability insurance and sets the premiums and claims payouts for the coverage. The law established a fund used to make payments in cases where a collision occurs with an uninsured driver; in cases where a driver cannot be identified; and in situations where the insurer fails. The premiums range from MNT12,500 ($7.50) for motorcycles to MNT33,000 ($19.80) for small cars and MNT42,500 ($25.50) for larger cars.
Insurance executives say that this fixed premium structure – with the rates built into the law – make it difficult for insurers. It is not possible to adjust rates or to get them adjusted. “The price is in the law,” said Ts. Purevjav, director of policy planning division at the FRC. “That is the main reason for the losses.”
Compulsory insurance got off to a slow start. Not all drivers bought a policy as required under the law, and police were hesitant in taking action against uninsured drivers. At the end of 2013 some 416,600 compulsory auto insurance agreements were signed against 652,716 registered vehicles. After the initial excitement following the introduction of the programme, enthusiasm has tapered off. In terms of total premiums collected, driver’s mandatory insurance is number two, but growth stopped in 2013 (down 1% on the year). Drivers have complained that coverage is limited, that claims were slow in being paid and that sometimes the companies have failed to honour the contracts.
However, overall, the experience has been a positive one for the sector. Insurance executives report that the compulsory nature of the product has increased awareness about insurance in general, adding that many of the insured at first simply did not understand how insurance contracts work and have over time become more familiar with what is covered. Insurance firms too have improved a good deal and are becoming more adept at handling and paying claims. Mongol Daatgal, for example, allows clients to upload photos of their collisions and submit them via smartphone for claims.
The main problem for compulsory insurance is one of profitability. While the premium income from that line of business has been flat in year two, payouts have exploded, especially as insurers have been focused on scrupulously honouring their contracts and properly compensating their clients. In 2013 compensation for mandatory coverage more than doubled from MNT4.79bn ($2.9m) to MNT10.56bn ($6.3m).
However, insurers say that it is important to remain active in the line despite the challenges. The market is huge in terms of the customer base, and can lead to strong brand recognition and possible additional business with auto liability customers. Adjustments are being made; insurance companies are becoming more selective in terms of which customers to take on. Overall, the experiment is seen as such a success that the FRC is actively considering making a number of other types of risk cover mandatory. It has started the process of requiring notaries to buy insurance, for example.
“People are becoming more comfortable with insurance products as a result of the law mandating driver’s liability insurance. I expect other products, such as professional indemnity and employer’s liability insurance, to also become compulsory in the coming years,” D. Chuluuntsetseg, CEO of ARD Daatgal, told OBG.
Market of Potential
Insurers say that while the insurance business has been difficult, it has great potential. The economic downturn has hurt, especially as demand from mining-related companies has dropped. But the sector is evolving quickly. Mongolians are also better educated in terms of their personal insurance needs. In particular, they have seen the need for health insurance and are starting to see insurance as a form of savings. “There are significant opportunities in health insurance, especially policies that cover operations performed abroad. Each year, Mongolians spend over MNT10bn ($6m) on overseas treatments,” A. Batzorig, former CEO of Tenger Insurance, told OBG.
Health insurance fee income grew 57% in 2013 over 2012, while pension insurance was up 64%. This represents an important shift. Insurance companies had previously been focused more on corporate business, as corporations were likely to be required by their boards to carry insurance. They were also seen as better able to pay the premiums. Now, individual clients are seen as a source of growth in the future. In absolute terms, some individual business lines remain relatively small. Health insurance accounts for just 0.5% of all insurance in terms of fees collected in 2013 and less than half a percent in terms of claims paid (while driver’s compulsory insurance is more than 17% of total fees collected), according to the FRC. Nevertheless, health insurance is growing fast and is an area of great potential as the people of Mongolia become wealthier and more conscious of the need to have personal risks covered. Mongol Daatgal is targeting a rise in individual business from 50% to 60% of its total business.
The general industry numbers suggest that the sector has strong potential. Insurance penetration and density are both low when compared with other developing countries and neighbours. At 0.54%, FRC figures show, the penetration rate is much lower than that in Thailand (5.5% in 2013 according to Swiss Re), China (3%), Indonesia (2.1%), South Korea (11.9%), Vietnam (1.4%), the Philippines (1.9%) and even Kazakhstan (0.8%). In the West, the rates tend to be higher: 7.5% in the US, 11.5% in the UK and 9% in France.
The situation is much the same in terms of density. Against Mongolia’s $17.50, most other peers and neighbours are higher: Vietnam, $23; the Philippines, $54; Indonesia, $77; Kazakhstan, $101; Malaysia, $518; and South Korea, $2895. But Mongolia has considerable upside as it catches up with other developing countries and ultimately with the developed world.
Reinsurance has evolved considerably over the past few years. While in 2012 and 2013 that the market was served by only one international reinsurer, at least three are now active in the market (AXA – which has teamed up with Bodi – Hanover Re and Munich Re) and rates are becoming more competitive as a result of this growth. The FRC says that many more have been looking for business, including Chinese insurers.
Some restructuring has occurred. ARD Daatgal became 100% locally owned when its foreign shareholder, Venture One Netherlands, was bought by EIT Holdings, a local firm with stakes in a range of financial entities including Monet Capital and Tenger Financial Group, which owns half of XacBank and all of XacLeasing and Tenger Insurance. In 2014 the new Golomt Financial Group bought a stake in Mandal Insurance, formerly part of Mongolia Growth Group.
Bancassurance has played a major role in the sector’s development. Khan Bank, with its 514 branches, is a key player. It has worked with Mongol Daatgal, Mandal Insurance, ARD Daatgal and Practical Daatgal. In late 2014 it initiated a two-month bancassurance campaign to push six insurance products. Some insurance firms have started to rely more heavily on bancassurance. According to Batbayar, ARD Daatgal is reconsidering its branch network in rural areas and starting to see bank branches as good places to distribute policies in the more remote parts. As well as reducing expenses, partnering with banks offers other benefits, including that banks are trusted institutions and bank employees understand financial products. While their knowledge may not be specialised, they are good at selling products and answering questions.
Mongol Daatgal notes that operational expenses can be as much as 50% of revenues, well above international norms. Bancassurance can potentially reduce the ratio by making use of existing infrastructure.
Some offerings are becoming fairly advanced. In 2012 Mongol Daatgal, for example, teamed up with SOS International to provide international evacuation services. The company is also working to increase branch numbers to access more rural customers, is allowing for online claims and has a telephone support line for customers that is open every day of the week around the clock. According to comments in the press, Mongol Daatgal is aiming for a five-day turnaround on claims, but claimants say it is faster in many cases. The firm also worked with PwC Advisory in 2013 to ensure its books and operations meet international standards.
Life insurance is evolving rapidly. While only one company is active in the sector, it has grown considerably and insurance executives say that it has tremendous potential. The capital of National Life Daatgal rose from MNT4.68bn ($2.6m) in 2012 to MNT5.63bn ($3.4m) in 2013. Premiums broke MNT1bn ($600,000) for the first time in 2013, rising from MNT795.3m ($477,180) in 2012 to MNT1.02bn ($612,000) the next year. The main challenge for the sector is the fact that life insurance does not receive tax advantages, and in a high interest rate environment, where bank deposits pay double digits, life insurance is not seen as a good savings product – fewer than 10% of National Life’s policies are endowment or pension policies.
Insurers say the regulators should get behind life insurance by improving the tax status of life policies and also by making it clear that non-life companies cannot intrude on the business. At this point, life insurance does not technically exist as a product in Mongolia; the distinction made is between general insurance and long-term insurance, in which policies are written for a term of longer that one year. This creates the possibility of general insurers selling life products, and insurers say it would be better if a clearer line were drawn.
While growth has slowed, and profitability in certain lines has been low, Mongolia’s insurance sector is expanding and evolving at the same time. Industry players are getting better at what they do, while clients are beginning to better understand the products on offer. The regulator and insurers agree the sector would benefit from consolidation, from the current 17 firms to four or five, but the FRC says it will not at this point be encouraging mergers. It will allow market forces to take their course and rationalise the business. This, along with reforms in compulsory lines, should help improve rates and profitability as the sector develops.
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