In developing parts of the word, insurance carrier-size matters, but not in the way you might think. While large companies are making gains, smaller carriers are particularly thriving under the unique conditions those markets offer, a new A.M. Best report has discovered.

A.M. Best determined that small and medium-sized carriers excelled in both developed and developing markets compared to their larger peers. But they came out particularly on top in emerging markets.

The report found that emerging markets experienced compound annual growth rates of 12 percent to 20 percent versus 4 percent in mature markets. Not surprisingly, emerging markets have much more room to grow, with an insurance penetration of less than 4 percent (measured as the ratio of premiums to gross domestic product), compared to more than 7 percent in developed markets.

Why are smaller and medium-sized insurance companies are at a particular advantage in emerging markets? That’s because there is a much smaller gap in size between larger and smaller companies operating in those regions than developing ones, A.M. Best said.

“This creates an environment where no company is too small to accept a given risk, at least in the minds of insurance buyers,” A.M. Best wrote. “In terms of absolute size, the large companies in [Brazil, Russia, India and China] are comparable to medium-sized companies in developed markets, whereas the large companies in [Mexico, Indonesia, Nigeria and Turkey] and [the Middle East and North Africa] are of similar size to the small companies in the developed markets.”

What’s more, with emerging markets, each new insurance segment establishes another area in which virtually every company can compete on a level playing field, with very few markets requiring specialization, except for a handful of companies. That’s different than mature markets, A.M. Best said, “where smaller insurers tend to develop defensible niches of unique expertise.”

“The smaller an emerging market, the more intense the competition seems to be, as the gaps in size between the smallest and largest companies are narrower, and there is limited product or segment specialization resulting in all companies competing for all business,” the report added.

Significantly, smaller companies have clout as the main engines of growth in all of the markets A.M. Best looked at (though the mature markets were more niche-focused). But they are not invulnerable. A.M Best explained that smaller companies based in emerging markets that lack specialization are exposed “to greater financial volatility.”

Smaller companies in emerging markets are also more likely to have grown not far from their home regions. In mature markets, midsize and larger companies more typically have an international presence, A.M. Best said.

Other report details:

  • The average small company in emerging markets looked at in the study is 5 to 20 times smaller than the average top five companies in those markets. For developed markets, large insurers are nearly 40 times larger than their smaller rivals.
  • Compulsory coverage requirements in emerging markets has led to greater insurance penetration.
  • Claims ratios in emerging markets tend to be in similar groupings as those observed in developed markets, rather than several percentage points better as is typically believed.

A.M. Best looked at global non-life and life insurers looked at results from 2007 to 2012 in mature markets, Brazil, Russia, India and China; the Middle East and North Africa; and Mexico Indonesia, Nigeria and Turkey.

Source: A.M. Best