Emphasis 2016/3


Authors

Michael Freeman

Michael Freeman

Specializes in the Asia Pacific insurance market.

Willis Towers Watson, Tokyo

Magdalena Ramada

Magdalena Ramada

Specializes in emerging-market research.

Willis Towers Watson, Miami


Of 114 financial services corporations that belong to the Fortune Global 500, 32% are from Asia Pacific and account for 34% of the financial services industry’s revenue in the ranking.

The pace of growth of major multinational corporations (MNCs) in Asia Pacific is undeniable. Four years ago, 181 Asia Pacific-headquartered MNCs made the Fortune Global 500. It was the first time that these “Asian Trailblazers” outnumbered their peers headquartered in Europe and North America. In 2015, Asia Pacific-headquartered companies accounted for 40% of the Fortune Global 500, while European and North American MNCs comprised only 30% and 28%, respectively (Figure 1). For Asia Pacific MNCs, this represents significant growth from only 24% in 2006.

Figure 1. MNCs headquartered in Asia Pacific now form the largest group in the Fortune Global 500

Figure 1. MNCs headquartered in Asia Pacific now form the largest group in the Fortune Global 500

Source: 2015 Fortune Global 500 as referenced in the 2016 Willis Towers Watson Asian Trailblazers Study

Financial services corporations are helping lead the charge. Out of 114 financial services corporations that belong to the Fortune Global 500, 32% are from Asia Pacific and account for 34% of the financial services industry’s revenue in the ranking.

China is also helping Asia Pacific blaze this path: In 2012, it represented 38% of Asia Pacific’s MNCs in the ranking, stood at 48% in 2015 (Figure 2), and in 2016 it accounts for 54% of the financial services industry’s revenue in the ranking.

Figure 2. Asia Pacific MNCs in the Fortune Global 500 (2005, 2015)

Figure 2. Asia Pacific MNCs in the Fortune Global 500 (2005, 2015)

Source: The 2005 and 2015 Fortune Global 500 as referenced in the 2016 Willis Towers Watson Asian Trailblazers Study

This remarkable growth trend prompted Willis Towers Watson to conduct a 2012 study that examined the accelerating globalization of Asian MNCs. We coined the term “Asian Trailblazers” to capture the pioneering spirit and determination of these companies to venture beyond their local markets and successfully internationalize. In our 2016 Asian Trailblazers Study, Masters of Multitasking and Transformation, we sought to understand how Asian Trailblazers achieved and have maintained high levels of success, despite the risks associated with aggressive expansion strategies and a lag in experience and development in many organizational areas compared with their Western peers.

This article takes a closer look at the financial services industry and at the insights we’ve gathered on Asia Pacific-headquartered insurance companies.

Customer centricity and technology drive expansion

Most Asian Trailblazers quickly leapfrogged out of their comfort zones and expanded into other regions, but the financial services industry has favored intra-Asian activity. In the past five years, Asia Pacific’s insurance and banking MNCs have found Southeast Asia an especially attractive region for growth. Within the insurance industry this has also been the case, with 27 acquisitions targeting insurers in emerging Asia Pacific countries since 2011 (Figure 3). This is nearly three times the number of completed deals as in developed Asia Pacific markets, where only 10 deals were completed during the same time period. While the level of activity in emerging Asia Pacific countries has been higher, average deal size in developed Asia Pacific countries was well more than double the size of deals in emerging Asian economies. Still, in terms of total investment, the region capturing the most M&A dollars from Asia Pacific insurers has been the Americas.

Figure 3. Insurance cross-border mergers and acquisitions performed by Asia Pacific acquirers, by region (2011 – 2016)

Figure 3. Insurance cross-border mergers and acquisitions performed by Asia Pacific acquirers, by region (2011 – 2016)
Click to enlarge

Source: Willis Towers Watson with 2016 data from Mergermarket; average and total deal values based on latest available data

Financial institutions in Asia Pacific are now core service providers that complement finance with a focus on customers’ needs and services. The changes in the banking industry are due as much to its transformed approach to governance and its regional business approach as they are to internationalization.

Most innovative Asian Trailblazers in the banking industry have significantly expanded their customer bases in Asia Pacific by reaching the underserved and younger generations, coupling international expansion with technology, using new distribution channels and establishing strategic partnerships with retailers and telecommunication companies. Banks’ regional approach to their customer bases required them to take a Pan-Asian view to the design and deployment of products and services.

Some of these Asian Trailblazers, capitalizing heavily on the Asian migration to Western countries, decided to develop global frameworks that would enable financial transfers and delivery of services, irrespective of the customer’s location. In addition, given the young profile of the Southeast Asian population, financial institutions were forced to lead digital technology and mobile services innovation, investing more heavily in IT to help them better understand their customers (e.g., using big data and the Internet of Things) and introduce more sophisticated risk management tools.

In the last two years, this trend has also become apparent in Asia Pacific-headquartered insurance companies. As they began partnering with banks, insurers recognized a technology lag and started to catch up, so that many interesting insurance players in the region have now created a better consumer experience using digital technology. Some have even partnered to launch Internet ventures such as Zhong An, the first online-only Chinese insurance company, created by Ping An, Tencent and Alibaba. In spring 2016, Ping An and AIA Group Ltd. became members of R3 — a consortium exploring the use of blockchain in the financial services industry — and were the only insurers to have joined this consortium as of August 2016.

The trailblazing also includes activity-tracking programs and products. AIA has a regional partnership with Discovery Limited to provide AIA Vitality (a wellness program that includes the use of wearables and connected devices, and fosters life insurance products that reward behavioral change) in several Asia Pacific countries. And three years ago, Taikang Life Insurance Company started to explore how to reward its customers for using wearable devices that track their physical activities. It partnered with a Chinese start-up to use a cryptocurrency — a digital, encrypted currency — although no life product with these characteristics was actually launched.

Last year, even smaller insurers in China rode the high-tech wave when they partnered with telematics service providers and launched groundbreaking initiatives in China’s usage-based insurance market, which links insurance premiums to miles driven and other customer driving behaviors.

China’s balancing act: growth and governance

Twenty Chinese financial services industry giants are in the Fortune Global 500, and their US$1.4 trillion in revenues constitute 22% of all revenues generated by financial services industry companies in the ranking and 65% of revenues generated by Asia Pacific-headquartered corporations.

M&A has made these companies global, and their main motivations to expand reflect the desire for a global footprint as well as the Chinese government’s strong urging.

Although they lacked many of the push reasons for international expansion that their Japanese and Korean counterparts faced, the 2008 global financial crisis in North America and Europe provided Chinese acquirers with many interesting targets for opportunistic acquisitions.

During this period of strong expansion, many of these Chinese companies faced post-merger integration issues and had a hard time dealing with cultural differences and language barriers. After their M&A sprees, many of these corporations faced corporate governance challenges, and inadequate and obsolete HR systems.

Chinese banks and insurers commonly manage governance by allowing their units abroad much autonomy while relying on local CFOs, who report to headquarters. In traditional Chinese MNCs — many of which are state-owned enterprises — senior positions are mostly occupied by men, and local executives of foreign branches are Chinese expatriates or part of the Chinese migration. This potentially narrows the attraction and retention of foreign talent, given gender and ethnic glass ceilings.

The results of our 2016 Asian Trailblazers Study show that many of these companies are now seeking advice to adapt their corporate cultures and global governance processes to enable globalization. With the most recent slowdown in China, many of these corporations have had to rethink their expansion plans, seeking M&A transactions that are more strategic than opportunistic. They are also looking to better integrate their foreign units, operate more efficiently and reduce costs through global HR policies and standards.

India’s banks and insurers expand globally but slowly

India’s first wave of foreign direct investments (FDIs) in the mid-1990s had no financial services participants. A decade later, during a second wave of internationalization, many Indian banks — the State Bank of India included — announced that they wanted to become MNCs and were adapting governance structures to enable that transformation. In 2016, only seven major India-headquartered banks can be considered MNCs, and while Asia Pacific financial services MNCs account for 39% of the Forbes Global 2000 list’s market value, only 4% stem from Indian MNCs.

There are many reasons India’s banks and insurers haven’t gone global. Most of India’s large financial institutions are state-owned and have traditionally focused on the strong banking needs in rural India and the large size of the country’s underserved and unbanked population. Additionally, India’s banks received a strong government mandate to go abroad only three years ago, much more recently than Chinese banks, which have enjoyed at least a decade of very strong support from their government.

India’s regulations also heavily restrict the entry of foreign financial institutions, and other countries have reciprocated. Most insurers in India are joint ventures with foreign insurance MNCs, given that Indian regulation establishes that foreign companies that are looking for a joint venture in India can have only up to 49% ownership of the local company. Also, most of India’s banks don’t meet the more stringent regulatory capital requirements of Western countries, creating a barrier to entry. Over the past five years, rating agencies have also highlighted weaknesses that include asset quality, capitalization and profitability.

Finally, Indian banks’ international expansion has been more strategic and follows the geographic footsteps of Indian MNCs, which are perceived as the banks’ main customers abroad, and their latest wave of FDIs.

India’s insurance market was liberalized only in 2000, and its largest local insurer is still the state-owned Life Insurance Corporation of India (LIC), which has held the monopoly for life insurance since it was founded in 1956. Despite its very large size, LIC never expanded abroad and remains a domestic company with representative offices overseas that mainly target the nonresident Indian segments.

Indeed, no India-headquartered life insurers have a significant international presence. It is interesting to note, though, that Indian telecommunications MNC Bharti Airtel is partnering with MicroEnsure, an insurer specializing in microinsurance, to offer microinsurance in Africa and conceivably in Asia’s emerging markets.

Asian MNCs were late to the Indian market, with the first Asian insurers entering only in 2009. Even so, the Indian life insurance market is attractive for Asian insurers, as witnessed by the latest, largest two joint ventures between Nippon Life and Reliance, and Mitsui Sumitomo Insurance and Max India (soon to merge with HDFC Standard Life), both deals of more than three times embedded value.

If ever there were a case for going global

Japan’s insurance market is very mature and highly consolidated, and has experienced slower growth in the past 10 years, making it a classic example of when it is beneficial to go global. In fact, Japanese insurers, banks and many other industries expanded globally early on. This push has been intensified by pressure on Japanese insurers to lower increasing loss ratios driven by more consumer awareness and competition. For life insurers, low or negative interest rates have been among the strongest push motives to seek both growth and sustainable profitability outside Japan’s domestic market. Location affects the strategy for global expansion: In Asia Pacific, Japanese financial services companies consistently build a strong regional brand, but in the West, there is greater reliance on the acquired U.S. or European brand.

Similar drivers are influencing Korea’s largest insurers to develop an overseas expansion strategy. To date, acquisitions in nearby Asian markets have been favored, a trend that is likely to continue.

Japanese life and non-life insurers made large, complex acquisitions last year in both emerging Asia and developed Western markets. In the last five years, many Japanese life insurers have sought growth in Asia’s most populated markets — China, India and Indonesia — as well as in countries with young populations, such as Thailand and the Philippines. But in 2015, a number of Japanese insurers refocused on opportunities in the larger, developed markets of Europe and the U.S.

In the non-life insurance market, Japan’s three main players account for 90% of premiums. All three have successfully established global footprints through expansions that started over 50 years ago. Initially, these insurers, as well as Japan’s largest financial services groups, followed Japanese manufacturing, automotive and high-tech MNCs in their overseas geographic expansion and provided them with financial services.

Despite a long history of globalization, most of these Japanese MNCs still struggle with delayed post-merger integration and the people aspects of M&A, such as managing cultural differences and generating a corporate culture that allows multicultural leaders to attract and retain foreign talent at the senior management level. Korean companies also face these challenges.

Recent acquisitions highlight that Japanese financial services institutions, in particular non-life insurers, face global governance challenges similar to those of other Japanese MNCs. Some allow foreign units more authority combined with regular audits, while others have defined global policies that every unit has to follow. Most plan greater governance and risk modeling consistency in the near future and an overall framework seeking to oversee compliance, enterprise risk management and risk models in a unified way.

Poised for more globalization-fueled growth

It is no surprise that Asia Pacific-headquartered financial services companies are growing the breadth of their global businesses. This expansion is truly global, with Asia Pacific MNCs exploring and executing acquisitions in both geographically adjacent markets in Asia and in the markets of the Americas and Europe. This expansion provides Asian MNCs with new opportunities to provide both capital and management expertise to their new operations and generates new challenges in developing the relevant cultural fit and corporate governance structures to achieve effective synergies in operations. Asian Trailblazers will continue to create new opportunities for their stakeholders, led by a new and emerging generation of Asia-based global business leaders.

About the Willis Towers Watson 2016 Asian Trailblazers Study

The Willis Towers Watson 2016 Asian Trailblazers Study was conducted between March and September 2015 and incorporates:

  • 52 one-hour interviews with Asia Pacific MNC experts, whose expertise and area of work cover many Asia Pacific countries — Australia, China, Hong Kong, India, Japan, Malaysia, the Philippines, Singapore, South Korea, Taiwan and Thailand — and multiple lines of business
  • Data on financials, globalization strategy and organizational structure from public and paid databases, as well as press releases and MNCs’ annual reports
  • Firm-specific case studies compiled from interviews with a select number of Asian MNCs
  • Analysis of Willis Towers Watson proprietary data and global surveys was conducted by using sample cuts that were specific to Asian MNCs

For full survey details, please visit www.willistowerswatson.com/AsianTrailblazers2016.

For comments or questions, call or email
Michael Freeman at +813 3581 6589,
michael.freeman@willistowerswatson.com; or
Magdalena Ramada at +1 305 301 5439,
magda.ramada@willistowerswatson.com.