Written by Jihad Jhaveri – Head of Process
Following recent corporate actions that separated out its UK and US businesses, Prudential plc (Prudential) is now primarily focused on the fast-growing life insurance, health insurance and asset management markets in Asia and Africa (servicing over 18 million customers at present). We unpack the opportunities within their pan-Asian footprint, where the business has maintained a strong presence for almost a century – displaying clear competitive advantages that are allowing it to benefit from long-term structural market growth.
Competitive advantages decades in the making
Prudential’s Asian insurance operations were first launched in 1923 in India – targeting the tea industry – before expanding into Malaysia (1924), Singapore (1931) and Hong Kong (1964). Together with a strong agency presence in China and the Philippines in the 1920s, this business grew rapidly. The ensuing competitive advantages established in scale and distribution are proving diﬃcult for competitors to replicate. These include:
- a widely established pan-Asian footprint with significant scale, creating substantial cost advantages in relation to the servicing and development of new products and aiding considerably in the diversification of economic, political and regulatory risks per country.
- a massive tied agency force (660 000 people) that exclusively services Prudential and brought in 74% of new business profits in 2020. The recruitment, training and agent management capabilities developed over many years has led to excellent productivity outcomes by agents. Agency excellence is evident in the increasing number of Prudential MDRT1 members who were responsible for a disproportionately high percentage (40%) of Prudential’s 2021 premiums.
- long established bancassurance partnerships with banks in Asia (constituting 25% of new business profits in 2020) forming Prudential’s second largest distribution channel and providing it with valuable access to 26 000 bank branches on the continent. The mutually value-adding partnerships established with large pan-Asian banking group, Standard Chartered, and Singapore-based United Overseas Bank (UOB), have recently been renewed for an extended period with increased geographic and product scope.
1The Million Dollar Round Table is an elite, independent international organisation of very high premium-gathering financial advisors. It is currently the second largest organisation of its kind, with 12 000 members.
Symbiotic relationship between business lines
Health and Protection (H&P) insurance products are Prudential’s largest business line, mostly underpinned by critical illness cover that pays defined and limited amounts for specific illnesses and may also have additional mortality and disability benefits. The major financial risks faced by the business relate to its claims experience relative to its assumptions for morbidity and medical claims inflation. However, over time Prudential has successfully mitigated medical claims inflation risk by retaining rights to reprice products and by managing the overall limits for claims. Consequently, H&P products have provided good shareholder returns over a long period of time.
Other insurance products include unit-linked savings products, where the value of the policy is linked to the value of an underlying unitised investment, and participating savings products – essentially “smoothed”2 return investment products. These products are often packaged with H&P products and sold through the same distribution channels.
Prudential’s large Pan-Asian asset management business, Eastspring, derives the majority of its assets from the management of internal insurance funds and has also benefited strongly from growth in the life insurance business.
2Products (currently unique in Asia) that use a process inherited from the long standing and successful UK Prudential fund architecture to protect investors from the extreme short-term ups and downs of direct stock market investment.
Mind the gap
Prudential’s strategic focus on H&P insurance is due to the immense opportunity presented by i) very large existing healthcare protection cover gaps, ii) favourable demographic trends and iii) high economic growth across all key markets. The healthcare protection gap is both the self-financing costs borne by people and the estimated non-treatment costs resulting from unaﬀordability. The gap is currently very large across key Asian countries (chart below) because of low levels of state-sponsored healthcare and a low take-up of private health insurance products. 43% of total healthcare spend in Asia is therefore made up of out-of-pocket spend, versus 11% in the UK and 15% in the USA. As Asia is expected to have the largest global increase in its older population between now and 2050, it is anticipated that this gap will increase meaningfully.
Sizeable healthcare gaps in two of Prudential’s largest markets, Indonesia and Malaysia (majority Muslim countries), are partially due to cultural aversion to conventional insurance products. Prudential has recently tailored and launched Shariah-compliant (Takaful) insurance products in these markets, which should result in growth.
Large parts of the healthcare gaps across Asia represent commercially viable insurance opportunities, with high levels of economic growth and urbanisation leading to a fast-growing Asian middle class. 54% of the four billion global middle class consumers reside in Asia, which will also comprise the vast majority of the expected 1.2 billion increase by 20303.
Prudential’s target market is skewed towards the aﬄuent consumer segments, where the demand for H&P products has been proven to be robust regardless of prevailing economic conditions. Although Asian governments are aligned with insurers in eﬀorts to decrease the healthcare gap, the highly regulated nature of this industry means that to successfully navigate complex regulatory risk across many diﬀerent jurisdictions is an additional competitive advantage.
3Brooking Institute: The rapid rise of the urban consumer class – December 2021.
Attacking the Chinese opportunity on two fronts
China’s low level of state-sponsored healthcare provision, coupled with its low insurance penetration rate (2.4%) and large, rapidly ageing population, points to an enormous and fast-growing healthcare protection gap (currently $805 billion pa) available. This represents an insurance opportunity within the high-net-worth Chinese segment that Prudential targets through its Hong Kong business, and the mass aﬄuent Chinese segment, targeted through its domestic Chinese joint venture with the state-owned China International Trust Investment Corporation (CITIC) group.
The long-standing domestic Hong Kong business targets both the domestic market and mainland China visitors (charted below). It is the second largest insurer in Hong Kong (17% market share), anchored around a highly productive agency force (31% of the country’s MDRT members) and a successful partnership with Standard Chartered Bank. With comparatively high incomes and greater existing insurance penetration, the Hong Kong domestic market for new business has a much higher weighting towards savings products (unit-linked and participating) and more complex, higher-benefit healthcare products. Importantly, the bulk of the Hong Kong business (60%) targets the substantial Chinese insurance growth opportunity.
A combination of high-speed rail links, cross border highways and air flights enabled 51 million Chinese visitors to Hong Kong in 2019 and, subsequently, a very strong demand for Prudential’s healthcare and investment products. The demand drivers include:
- the desire to diversify currency risk. Policies in Hong Kong can be denominated in hard currency while those in China are yuan-denominated.
- H&P policies sold in Hong Kong provide policy holders with access to high quality local and other overseas health services (superior to what is available in China itself).
- Hong Kong policies are more complex than those available within China and are appealing to high-net-worth individuals. The average case size of Prudential’s Chinese clients in Hong Kong is approximately 10 times higher than that of their domestic Chinese business.
Prudentials’ dedicated Hong Kong agency force has successfully navigated regulatory complexities related to selling products to Chinese clients. Physical presence is an onerous requirement as sales cannot be made virtually, therefore Prudential utilises video recording equipment for verification and overcoming marketing limitations (Hong Kong products cannot be marketed directly into mainland China). Since the onset of the COVID pandemic, the eﬀective shutdown of borders between Hong Kong and mainland China has meant that this large, fast-growing, high-margin source of profits has temporarily evaporated. In addition to pent up demand boosting sales, a normalisation of activity should materially boost the current levels of profitability, given their high operational leverage.
Within mainland China itself, Prudential and CITIC have successfully operated an insurance joint venture since 2000, delivering strong growth (23% pa) to date. This is considered the third largest insurer in China, with a 14% market share and an extensive bancassurance distribution presence and large (17 800 member) tied agency force. Prudential CITIC has a comparatively wide geographical presence but is more concentrated in densely-populated cities targeting the mass aﬄuent market.
Advantaged to grow for decades to come
As shown below, Prudential has successfully grown its Asian businesses over a long period, with strong competitive advantages in the diversification of its pan-Asian portfolio, the size and eﬀectiveness of its distribution force and its long-standing partnerships. Amid long-term structural growth prospects for its products, Prudential should continue to grow profitably, delivering substantial value to investors in the long term.