Asia Analysis: Cambodia's slow insurance journey

Cambodia's nascent insurance market offers significant opportunities as the country's economy develops apace after suffering from years of political upheaval.

While general insurance sector has grown at a compound annual rate of 20% for the past five years, gross written premiums still totalled only $61.6m in 2015, according to figures from the Insurance Association of Cambodia.

Insurance penetration rates remain low and the market is not yet crowded, while legislation looks set to drive the take up of a variety of protection products.

Cambodia's political history and financial culture means the insurance market is less developed than that of many of its neighbours.

Immature market
Although there has been an insurance sector in the country since the 1950s, it was disrupted by the Khmer Rouge regime in 1975, and did not resume activity until the 1990s.

A fully functioning general insurance market only began in 2000 with the passing of the Insurance Law.

As recently as 2005, when the trade body the Insurance Association of Cambodia was established, there were only three general insurers and one reinsurer operating in the country. Life insurance only became available in 2012.

Today there are still just seven general insurers operating in Cambodia.

Unsurprisingly, given its relatively recent development, general insurance penetration rates remain low at just 0.4% of GDP, significantly below that of more developed countries in the region, such as Singapore.

Dr Antoine Fontaine, practice leader of the insurance, labour, tax and regulatory reform practices at Phnom Penh-based law firm Bun & Associates, says: "The Cambodian insurance industry has substantial potential for growth and is expected to continue to grow over the next decade to become a $200m (£160m) industry by 2023."

Sumit Narayanan, EY's Asean insurance leader, believes the opportunities in Cambodia aren't in the low take up of insurance but rather in the continued development of the country's economy from a relatively low base of a per capita GDP of $1,159.

GDP growth in Cambodia has been above 7% per annum since 2011, with GDP totaling $18.05bn in 2015 according to the World Bank, and it is forecast to continue expanding at a similar rate in the years ahead. The country has a large agriculture sector, a growing influx of tourists and a manufacturing sector with garments making up around 80% of its exports.

The IAC says as the insurance market develops cover is moving away from offering protection for one-off projects to writing significantly more annually renewable business.

In the past, premiums for most commercial lines were derived from businesses with a foreign interest, but this too is also changing as the local population comes to understand the benefits of insurance cover.

Property insurance is the largest line of business, accounting for nearly 40% of premiums in 2015, having grown at a compound annual rate of 31% a year since 2010, according to the IAC.

Motor insurance is next largest at 15%, followed by medical at 14%, with personal accident, engineering, and marine, aviation and transport accounting for a smaller share.

A 2014 insurance law introducing mandatory motor vehicle insurance is expected to boost penetration rates for this product.

Fontaine says: "Insurance is also a rather new concept for most of Cambodian people, and there has been low demand for insurance products in the past due to lack of education and limited financial capacity of the population.

"However, the insurance market is getting more and more attention in the past few years thanks to the income growth and the rise of an educated middle-class population."

But despite the opportunities, which also incudes microinsurance, such an underdeveloped insurance market brings with it significant challenges.

Fontaine points out that the low level of market development makes it difficult for insurers to achieve economies of scale due to the relatively low level of premiums.

He says: "Another challenge is to identify product trends that would apply and the difficulty of introducing relevant products that reflect the needs and conditions of the targeted populations."

Narayanan points out that there is also a significant talent gap in Cambodia, with no qualified actuaries in the country.

"As such, companies currently have to rely on expatriates and foreigners in order to bridge the gap, which presents expense challenges," he says.

Regulatory framework
Meanwhile, the regulator, the Ministry of Economy and Finance, is continuing to introduce new insurance regulations to support the development of the industry, and has set out a strategic plan for the period 2011 to 2020.

Narayanan says: "Insurers will have to invest more to change their business models and processes to meet new regulations, and increase the quality of professionalism and risk management in the coming years."

Fontaine adds: "Cambodia is one of the Asean countries to have the lowest regulatory capacity in insurance. It is still in the process of creating a dedicated insurance regulator and effective regulatory regime.

"However, in light of Asean regional integration, Cambodia has committed to partially liberalise its non-life, reinsurance and insurance intermediation subsectors, in order to ensure the implementation of a carefully sequenced liberalisation of market access to foreign competition in the region."

Distribution channels are also likely to be an issue, with the majority of insurance products currently distributed through the traditional channels of agents and brokers.

But Fontaine says: "As financial inclusion improves, other distribution arrangements are spreading, such as mobile service provider; low level of bancassurance penetration."

Foreign investment
The potential opportunities Cambodia offers have caught the eye of foreign insurers, with Thailand's second largest insurer Dhipaya Insurance planning to start operating in the country next year after entering Laos in 2015.

Narayanan says: "Foreign ownership regulations are relatively liberal, and as it stands there is currently a mix of 100% foreign owned insurers, local-foreign joint ventures, as well as 100% locally owned insurers."

Fontaine adds that a foreign insurer may not conduct business in Cambodia without establishing a locally-incorporated company, while cross-border trade in insurance services is not permitted, except in reinsurance; in addition the temporary transfer of staff into local business units from abroad is restricted by annual labour market quotas.

Another issue is that 75% of reserve funds must be invested in the country, but due to the relative youth of the stock market, investment options for insurers in Cambodia remain very limited in practice.

Meanwhile Narayanan thinks foreign insurers entering the market could potentially pose challenges to its profitability through increasing price competition.

He says: "As the Cambodian insurance market grows in line with economic development, it is attracting interest from both domestic and international players.

"We have already seen publicly reported interest from various Asian insurers to enter the market in the near future and we can expect this to increase."

However despite these challenges, the under-developed nature of the market is still appealing.

Narayanan says: "Relative to other Asean markets, such as Singapore, Indonesia, Malaysia and Thailand, insurers, customer preferences, brand values and distribution channels are less entrenched.

"As such, we see significant opportunities for insurers who are interested to build market share and grow in tandem with the economic development of the country, and have a longer term focus."

Fontaine agrees: "To me, there is still a big potential to fill the vacuum both for individuals and businesses."

Insurers and brokers will be hoping Cambodia's government continues reforms to help grow the industry.