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Rites of passage: Australia and New Zealand are often viewed as the gateway to larger markets in Asia, but insurers have to overcome problems in those countries first. (Globalization: Cover Story).

Article Excerpt
Asia--particularly the Pacific Rim--is considered one of the most promising potential markets for global insurers, particularly those based in the United States and Europe, where market penetration is higher. With its huge population and steadily climbing standards of living, the Pacific Rim beckons the world's leading insurers with the possibility of years' worth of business growth.

From the perspective of many in the business, Australia and New Zealand are the gateway to that Asian market. As outposts of the former British Empire, with stable traditions of contract law and a sense that business is the driver of culture, Australia and New Zealand seem a logical step between the United States, United Kingdom and Europe to Singapore, Malaysia, Hong Kong and China.

"There are a lot of synergies between Australia and Asia," said Selina Man, A.M. Best Co.'s Australia/New Zealand regional manager. "Australia's biggest trade partners are China and Japan. You find a lot of knowledge of Asian markets in Australia and New Zealand."

Man said that, in terms of regulating the financial markets, Australia is much closer to the United States and the United Kingdom in its well-established regulatory institutions with extensive supervisory authority, whereas New Zealand, with a population of one-fifth that of Australia, is the only country not to have a standard insurance regulatory agency. Instead, it has the Ratings and Inspections Act, which requires all non-life insurers to obtain ratings from two officially approved global rating agencies, thereby indirectly implementing global standards of disclosure and accountability.

Australia and New Zealand are both leading members of the International Association of Insurance Supervisors and are strong supporters of transparency and rigorous risk-based capital standards for insurers and banks, Man added.

Hugh Morris, lecturer in insurance and risk management and insurance programs coordinator at the University of Technology in Sydney, said 54 companies, representing 33% of admitted general insurers in Australia who are active in the domestic and corporate markets, are directly foreign owned. "A substantial number of these insurers use Australia-and to a lesser extent New Zealand--as a regional center from which to direct Pacific Rim activities, for market development, underwriting or claims management," he said.

Foreign insurers tend to come and go in Australia, but overall the foreign share of the market Down Under is fairly high, said Darryl Roberts, general manager with the Australian Prudential Regulation Authority; the government's financial-services regulator. "Over the past year, we have seen a foreign withdrawal from long-tail liability lines--including public liability, medical indemnity and professional indemnity-and some foreign entry into personal lines and niche or specialist commercial lines," he said.

Three foreign insurers--Royal & Sun Alliance, GGU and Allianz--are among the six largest insurers in Australia, and are in diversified lines, but new foreign entrants generally have a niche focus, Roberts said. Foreign insurers-particularly those based in the United Kingdom-have a long history of doing business in Australia, and in the past 30 years more insurers from the United States and continental Europe have built up a presence.

Mergers Increase Market Share

"Consolidation in recent years has seen the foreign market share grow to an extent-though it has often been one foreign entity buying another," said Roberts. "We would not be surprised to see some divestments or withdrawals due to capital or funding...