Small insurance companies drive much of the growth in both mature and emerging markets, according to A.M. Best.

In its “For Insurers in Emerging Markets, Size Matters” report, the global credit rating agency analyzes the performance of large, medium, and small carriers in emerging markets and how they compare with insurers in developed markets.

A.M. Best studied more than 1,900 insurers across four geographical groupings, examining results from 2007-2012 to compare market dynamics, drivers of profitability and balance sheet composition for companies in each region. The regions studied are:

  • Mature/developed markets: France, Germany and the United Kingdom
  • BRIC: Brazil, Russia, India and China
  • MENA:  the Middle East and North Africa
  • MINT: Mexico, Indonesia, Nigeria and Turkey.

Market opportunities and growth

Carriers’ annual growth rates in emerging markets are increasing faster than those in mature ones, the report says, at a rate of 12% to 20%, whereas insurers in developed markets grow at 4%. Emerging markets are starting at a lower base of insurance penetration (less than 4%), and therefore have greater untapped potential relative to the size of their economies, the report says. Also driving growth in these areas? New legislation that stipulates compulsory coverages.

Throughout the three emerging markets, a smaller gap exists between the size of larger and smaller companies. The average small company is 5 to 20 times smaller (by average gross written premium in U.S. dollars) than the average top 5 companies, but in developed markets, the gap is nearly 40 times smaller.

This creates an environment—in emerging markets—where no company is too small to accept a given risk, at least in the minds of insurance buyers, the report authors say. In mature markets, the smaller carriers operate in specialized niches, whereas companies in emerging markets compete in all segments, regardless of size.

Emerging markets also show strong economic resilience. “While the global economic crisis produced an outright shrinkage in gross written premium in the mature markets, the effect in the emerging markets was only a temporary slowdown in the rate of expansion,” says Vasilis Katsipis, general manager, market development – MENA, South & Central Asia, report researcher and writer. “In the MENA region, growth weathered not only the economic slowdown but the social and political upheaval of the Arab Spring.”

Profitability drivers

Overall, the large BRIC companies are comparable to medium-size carriers in developed markets, but the large firms in MINT and MENA markets are of similar size to the small firms in mature markets.

Notable differences exist between emerging and developed markets when comparing the relationship between size and performance. Due to specialization, smaller carriers in mature markets exhibit strong claims ratios that have improved over time. The report hypothesizes that this is because these carriers have a lean cost base and use reinsurance more extensively. Large companies also have good claims ratios—when there is low frequency of large claims or no catastrophic activity. When there are large losses, however, these carriers have higher combined ratios (the sum of incurred losses and operating expenses as measured as a percentage of premium).

World map in gray with emerging markets in blue SS Itan1409

(Photo: Itan1409/Shutterstock)

In emerging markets, claims ratios at smaller insurers are similar to those in developed markets, and because companies in these areas lack specialization, no company segment has a lower claims ratio than others.

Their combined ratios are far lower than those in mature markets, however, and larger companies have an advantage over the remaining insurers, the report finds, because of scale and reinsurance.

In terms of reinsurance purchasing, retention ratios vary widely and are driven by market and company size. Mature and BRIC firms have the highest retention ratios, between 80% to 85%. The MINT markets retain about 70% and the MENA region has climbed from about 60% to 65% between 2007 and 2012.

Smaller insurers rely more on reinsurance, and their retention ratios run 5 to 10 percentage points lower than those of larger companies. “The volatility in retention ratios in emerging markets is a result of market conditions, opportunistic buying and in a few cases, changing business mix,” the report says. “At the same time, smaller companies’ more extensive use of proportional reinsurance and the resulting levels of high reinsurance commissions can  help them to narrow the gap in profitability with larger insurers.”


Emerging market carriers take more aggressive approaches to investment strategies, hold more cash and have lower levels of fixed-income securities than those in mature markets, with the exception of the MINT group. As such, companies in emerging markets have less liquid investment portfolios than those in developed markets.

These insurers also hold less debt and have leverage ratios (calculated as debt/adjusted capital and surplus) of less than 10%. Carriers in developed markets have seen a downward trend in leverage ratios, but it stands at 17%.

On the other hand, operating leverage is much higher in emerging markets, A.M. Best finds, especially among larger companies. “The end result is that all markets have similar levels of balance sheet leverage, although the type of leverage differs, with emerging-market companies deriving this from reinsurance and insurance creditors, whereas developed-market insurers derive it from external borrowing.”