When investing, it's important to look at the gritty details of each company both individually, and in comparison to competitors. It's also important to look at the big picture of the broader market that a company operates in, and that's the basis of this article.
It can be difficult for ordinary investors to get access to 'big picture' reports on global markets like insurance without spending thousands of dollars but, fortunately, major accounting firm Ernst & Young has released one for us for free. It can be found online with a quick search for '2015 Global insurance outlook.'
First, some statistics – purely on the insurance business.
| % of Gross Written Premium by region in 2015 | North America | Europe | ANZ | Emerging Markets |
| QBE Insurance Group Ltd (ASX: QBE) | 36% | 31% | 22% | 11% |
| Suncorp Group Ltd (ASX: SUN) | – | – | 100% | – |
| Insurance Australia Group Ltd (ASX: IAG) | – | – | 97% | 3% |
One common theme for all regions (except Emerging Markets) in EY's report was continuous 'churn', where customer loyalty levels are very low and continuous policy changing eats into company returns.
Getting more specific, the ANZ (Australia and New Zealand) region – which features very prominently in the above table – is expected to have its struggles. According to Ernst & Young, changes in interest rates are expected to impact insurance portfolio price and returns, while volatility in asset prices (such as downward pressure on house prices) is expected to restrain growth in premiums.
Additionally, Australia's real GDP growth of 2.9% in 2015 is among the lowest in the region, leading to a dull growth outlook. New Zealand's is slightly higher at 3.5%, but still in the bottom half of Asia-Pacific economies.
The rest of Asia, or 'emerging markets' in the above table has enormous theoretical potential, although it will be very difficult to capitalise on due to low standards of living, limited financial literacy in some areas as well as cultural differences in spending habits to overcome. Nevertheless, businesses that can successfully enter the region have a lot of opportunities – successfully being the key word. IAG recently pulled the pin on its Chinese expansion after consultation with shareholders, in order to focus on ANZ and 'our other Asian markets.'
For Europe, the challenges are similar to Australia, including mediocre economic growth as well as intense competition and the increased commoditisation of insurance products. Ernst & Young believes it is becoming increasingly difficult to differentiate insurance products, and the increased use of customer data and personalisation, as well as system innovation and improved digital offerings, will be required to succeed in the industry.
The outlook is markedly better in the USA, where the life insurance business is making a comeback and returns have been on par with pre-GFC levels for several years now. Insurance is already all about the digital offering, with a majority of customers preferring to engage with the insurer digitally rather than in person. The outlook on property/casualty insurance remains mixed and suffers from high competition, churn, and weaker pricing like many other regions.
All in all, insurer QBE looks to be in the best position of the businesses above, thanks to its exposure to the recovering US and blossoming Asia-Pacific region. The outlook for Insurance Australia Group and Suncorp doesn't look as bright, thanks to weak economic conditions in Australia and New Zealand. Of course, Suncorp also has its bank operations, while IAG is hoping to grow elsewhere in Asia (just not China) but ultimately, the only company of the three I would consider buying today is QBE.
