LIBERALIZATION OF MYANMAR INSURANCE MARKET: OPPORTUNITIES FOR REINSURERS

Abstract;

Recently, Insurance Business Regulatory Board (IBRB), body under Ministry of Planning, Finance & Industry, the Republic of Union of Myanmar has issued ‘Reinsurance Directive’ which will be effective from 01 Oct 2020.  Thus, Myanmar has formally opened its gates to foreign insurance players which shall not only contribute in the economy of the country but also bring treasure of experience & talent in insurance industry of the country. An attempt has been made to study the provisions of the directive and its aftermath on the insurance industry of Myanmar. Before moving to the discussion on the Reinsurance Directive, it is important to understand the dynamics of the country.

Keywords:  Myanmar, insurance industry, reinsurer, reinsurance directive

Introduction

Myanmar also known as Burma is situated in western part of South Asia and strategically located between India & China with major ocean shipping lanes. It has been renamed as Union of Myanmar in 1989 from Union of Burma. Its capital earlier known as English name Rangoon has been renamed as Yangon.  Now Nay Pyi Taw (Naypyidaw) is proclaimed as capital of Myanmar since 2006. Burmese is the official language spoken by around 80% of the population. Myanmar is country in transition with huge potential for growth. Since its opening in 2011 and first democratic elections in 2015, trying to come out from shadows of authoritarian rule, economic mismanagement.

It shares its border with China in North & Northeast, Laos to the East, Thailand to the Southeast, Bangladesh to the West & India to the Northwest.  Andaman & Bay of Bengal to its south having coastline of approximately 1930 Kilometers. ArakanYona mountain range lies between India & Myanmar.

It is disaster prone country exposed to floods, cyclones, earthquakes and droughts. It is located in seismically active region of the Eurasian tectonic plate and one of three most affected countries (others are Puerto Rico & Honduras) by climate change during 1999-2018 (Global Climate Risk Index 2020)

In terms of area, it is 40^th largest country in the world and has population of approximately 54.34 million (2019). Country can be classified into to lower & upper Myanmar.  Lower Myanmar is mostly covered with tropical forests and coastal areas.  This region is rich in minerals and valuable forests such as teak forests.   Upper Myanmar is the considered heartland of the country. The central region has highly fertile region formed by Irrawaddy river (Ayeyarwady) delta.  Irrawaddy river runs for about 2100Kms from Northern Myanmar to Bay of Bengal. Not far from Equator & on the Tropic of Cancer make Myanmar a tropical country with influence of monsoon. Myanmar has three seasons, the cool, relatively dry from late October to mid-February, the hot, dry season from mid-February to mid-May), and the rainy southwest monsoon (mid-May to late October).

Myanmar has rich ethnic diversity.  Although it has no official region but around 88% population follows Theravada Buddhism.  Most of the population live in villages.  It is estimated that around 70% people live in villages and 30% in urban areas.

It has been divided in to seven provinces largely based on ethnicity and seven administrative divisions.  These states and divisions are further divided in townships, urban wards and villages. As most of the population lives in rural areas, infrastructure, transportation and health care remains challenging task before government.

Economy

The currency of Myanmar is Kyat and economy is dominantly agrarian. Agriculture is the largest contributor to GDP (more than 35% in 2014) and employs more than 65% of the population which indicates that economy is primitive stage and need to shift from agrarian to industrialization further to service sector for rapid growth.  Around 24.80 % of population live below the national poverty line (Asian Development Bank, 2020) but considerable decline in poverty from 48% in 2005. Being rich source of natural gas, petroleum sector is likely to play a leading role in generating economic growth.

Limited infrastructure still remains a major obstacle in economic growth – for instance, only 37% of the population have access to electricity (World Bank 2017).

Myanmar presently has many challenges before it takes off on the path of rapid growth.  It has been ranked 165/190 in ease of doing business 2020 indicative of failing business environment.  Such issues need immediate appraisal and quick fixes. Although it is home to abundant minerals, huge potential for tourism and youthful population, availability of low-cost labor are strengths of the Myanmar and shall boost the economy of the country.

According to Global Infrastructure Outlook report (2018), Myanmar’s positive economic trajectory will be challenged for immediate need of massive infrastructure. The country needs an estimated $112 billion worth of infrastructure.

Myanmar has a urgent need for foreign direct investment (FDI) and require investment in power-sector. Now FDI has started flowing in and actual FDI inflows rose from an average of US$394 million per quarter in 2017/18 to a quarterly average of US$671 million in 2018/19. Singapore followed by China and Hong Kong remains Myanmar’s largest foreign investor. India has been a long-term partner and strong pillar in the development of the region.  Trilateral expressway India-Myanmar-Thailand is already in progress and shall be operational by 2021.

Insurance Industry in Myanmar

Insurance business in Myanmar is operated in controlled environment regulated by government. Till few years ago, private insurance companies and other foreign insurance companies were not allowed to transact direct insurance business.

When Myanmar got independence in 1948, many foreign insurance companies were into insurance business. In 1950, the Burma National Insurance Company which later became Myanmar Insurance was founded. The market for foreign and private firms slowly withered. Under the 1959 Life Prohibition Act, life insurance companies were forbidden to operate a new business. Also, the Compulsory Reinsurance Act in 1961 made the compulsory cession of 30% of non-life insurance business to Union Insurance Board. In 1963 foreign insurance companies were nationalized. By late 1980s, the insurance system entirely monopolized under the State-Owned Economic Enterprises Law.  The Insurance Business law and the Insurance Business Rules were codified in 1996 and in 1997. The Insurance Business Regulatory Board (IBRB), a body under the Ministry of Finance and Revenue was established in accordance with the provisions of Insurance Business Law, 1996 in 2011 which later on reorganized on 14 Jun 2016. The chairman of the IBRB is Deputy Minister.

Insurance was opened up to local private operators in 2012. Twelve private insurers were granted in-principle licenses by Myanmar Insurance Business Regulatory Board (IBRB) in September 2012. Five insurers officially launched and begun their operations in June 2013. Although private companies were allowed to transact insurance business for limited lines of business and around 12 insurance segments were allowed to Myanmar Insurance. After insurance sector liberalization, the insurance sector has witnessed consistent growth and by the end of 1st financial year, 31 March 2014, four companies emerged as the market leaders in terms of written premiums and performance graded by IBRB. These were Aung Thitsar Oo Insurance; First National Insurance, Grand Guardian Insurance and IKBZ Insurance.

Just 0.01% people amounting to premium of US$13 million have life insurance. While third-party insurance is mandatory for vehicles, only 10 percent of the country’s roughly 600,000 cars had any additional cover in 2016. A country with having population of around 54.34 million it is estimated that only 2 million people have any kind of insurance cover.

The total number of insureds rose from 4.2 million in June 2018 to 4.9 million in June 2019. The value of insurance premiums from private sector insurers stands at 0.1 percent of GDP, or kyat 32 billion, which grew by 40 percent (YoY) in Q3 2018/19. Contribution of Life insurance premium accounts for 31% and property insurance have participation of approx. 55% of the insurance market. The utilization of insurance services remains relatively modest, and has considerable scope for further growth. Distribution channels always play pivotal role in development of insurance business.  Individual agents the only channel presently available in Myanmar, the growth of other distribution channels like brokers, corporate agents and bancassurance need to be developed on priority basis which will help to grow insurance market.   Myanmar has signed a Memorandum of Understanding (MoU) with Indian Insurance Institute of India (III) to extend support & insurance knowledge in the country.

Opening of insurance sector will lead to fierce competition but simultaneously add experience, professional knowledge in domain to insurance industry. Insurance industry of the country is poised to grow mainly due to youth population, increasing middle class, rapid urbanization and improving economic conditions of the country.

Insurance industry need time to grow and imminent challenges like requirement of robust regulatory framework, public awareness, insurance industry association need early resolution and support from the government.  The insurance market will take time to grow with opening up to foreign players. But The local players also need time to build their infrastructures, capabilities and human capital before they face foreign competition or jump onto the joint-venture bandwagon. Insurance in any country is supplemental to growth of the country.

Regulatory framework

The two main laws regulate the insurance business in Myanmar are the:

• Myanmar Insurance Law of 1993, including the Third-Party Liability Insurance Rules for Myanmar Insurance.
• Insurance Business Law of 1996, as amended in 2015, for the private insurance sector, which mandates following basic regulatory principles:
  • formation of the IBRB;
  • establishment and licensing: public or private limited companies must obtain a license from the IBRB before operation;
  • capital, deposit, reserve, and funds requirement;
  • restriction on license transfer;
  • approval requirement for policy and premium;
  • liabilities of insurers, underwriters, and brokers;
  • auditing;
  • liquidation;
  • administrative actions; and
  • penalties for non-compliance.

The other regulatory bodies that oversee the licensing of insurance businesses and activities both for domestic and overseas insurance companies in Myanmar are the:

• Financial Regulatory Department (FRD) (frd.gov.mm) under the Ministry of Planning and Finance (MoPF).
• Insurance Business Regulatory Board (IBRB).
• the Directorate of Investment and Company Administration (DICA) under the Ministry of Investment and Foreign Economic Relations (MIFER) regulates company registration for all companies operating in Myanmar.

Reinsurance Directive No. 4/2020

Presently, Myanmar Insurance company is authorized to transact reinsurance business in Myanmar. Private insurance companies cannot provide reinsurance. New reinsurance directives will bridge the protection gap and increase the insurance penetration in the country.

In pursuant to the power conferred to Insurance Business Regulatory Board (IBRB), issued reinsurance directive which will come in to effect from 01 Oct 2020.  The highlights of the directive are.

• Reinsurance capacity to be developed within country by maximizing retention along with proper and adequate diversification of risks.
• Best possible reinsurance coverage to protect interests of policyholders, cedants at reasonable cost.
• Adequate technical capability & financially capacity to be developed.
• Simplify the reinsurance business.
• Every insurer & reinsurer shall maintain & maximize its retention calibrating its financial capacity, quality of risks & volume of business.
• Every insurer & reinsurer shall formulate suitable retention programme for each insurance segment.
• 20% of sum at risk for each life insurance business portfolio shall be maintained by every insurer & reinsurer.
• Every insurer shall commence annual reinsurance program for every financial year and shall submit its duly approved reinsurance programme by Board of directors to IBRB.
• After beginning of financial year, within 30 days, approved final reinsurance with declaration by the CEO that entity has not made any change in earlier filed program.
• In case of any revision, such revised programme duly approved by board along with justification, reasons shall be submitted to IBRB within 15 days.
• While finalizing reinsurance programme, each insurer and reinsurer shall consider the following matter.
  • Parameter considered for fixation of retention limits for every product of each insurance segment along with corresponding retention limits in the previous year.
  • The levels of retention ration on each insurance segment for the previous 3 financial years.
  • Premium income for last financial year and projected premium income for forthcoming financial year for each product of each insurance segment.
  • Details of proportional & non-proportional arrangements for each insurance segment including treaty capacity, retention limits, premium income, event limits etc.
  • Statement of reinsurance cost for projected year along with actual costs of reinsurance, ceded premium on proportional & non-proportional arrangements and estimated cost of current financial year.
  • 30 days after the end of financial year, insurer shall submit the following reports
    • Operations of reinsurance business in previous financial year
    • Provisioning methods & amounts for each kind of reserves duly signed by certifying actuary.
  • For catastrophic risk protection, every Myanmar insurers
    • Ensure adequate reinsurance arrangements pertaining to catastrophic accumulations.
    • Insurance arrangements shall be based on modelling report for forthcoming financial year duly approved by its Board of Directors or (CA, CFO and/or CEO) and shall file with summary of catastrophe modeling report along with the reinsurance programme.
  • Cross Border Reinsurers (CBR) shall satisfy the following criteria.
    • It should be insurance or reinsurance entity in its home country duly authorized by its home country regulator to transact reinsurance business during the immediate past three continuous years.
    • Shall have credit rating of at least BBB form Standard & Poor or equivalent rating from an international rating agency for immediate past three continuous years.
    • Should have adequate solvency margins as stipulated by home country regulator.
    • Past claim settlement experience shall be satisfactory and shall comply with any other requirement as IBRB mandates.
  • The order of preference to seek best terms shall be in the following order.
    • Myanmar Insurance
    • Any other reinsurer and foreign reinsurer’s branches (FRB) registered and licensed in Myanmar.
    • Cross Border Reinsurer (CBR)
  • Overall cession limits during financial year to CBR by the cedants transacting other than life insurance unless exempted by IBRB shall be in following manner. Such limits shall not exceed unless prior approval from IBRB.

• Every insurer & reinsurers shall cede compulsory maximum cession up to 10% on any insurance segment business to Myanmar Insurance. However, any refusal by Myanmar Insurance for such cession, the residual part of the risk may be insured with CBRs.
• Insurance Pool can be proposed by any insurers by submitting a proposal to IBRB. After examining various aspects like objective, capacity, limits of liability IBRB may permit formation of domestic insurance pools.  Formation of pools and selection of administrations shall be as per the instructions of IBRB.
• Non-compliance may attract penal provisions in accordance with Insurance Business Law and rules.

Analysis

Burma was province of British run Indian state and has been separated from India in 1937. India and Myanmar share border of approx. 1600 Kilometers and maritime boundary in Bay of Bengal.  Relations of both countries stood the test of time.

The guidelines reflect the guiding philosophies based on Indian Reinsurance regulations 2018 issued by Insurance Regulatory Development Authority of India (IRDAI).  IRDAI in accordance with the provisions of Insurance Act 1938 & IRDA Act 1999 notified the Reinsurance Regulations on 30 Nov 2018.  In recent years, India has been developed as reinsurance hub in Asia.  International Financial Service Center (IFSC) first of its kind in India has already been operational & insurance giants like GIC Re, The New India Assurance Co. Ltd & Export Credit Guarantee Corporation of India (ECGC) have already been operational in IFSC at GIFT City, Gujarat. More than 10 foreign reinsurers including Lloyds have already opened their offices in India. Thus, taking cue from Indian reinsurance industry, Myanmar insurance shall garner huge benefit in reinsurance which will help in building confidence in financial system of the country, better risk management in coming years.  These guidelines shall develop adequate capacity within Myanmar simultaneously open the market to CBRs.  With opening up of market, each and every insurer licensed in Myanmar can design its own reinsurance programme and shall seek best terms with FRBs and CBRs which was earlier restricted to Myanmar Insurance.  This will help insurers to broaden their reinsurance base to build up capacity and to use reinsurance as an effective tool to stabilize Profit & Loss, balance sheet volatility. Myanmar reinsurance directive mandates minimum retention of life insurance business shall be 20% and this minimum retention is justified as insurance industry is in tender stage and need time to grow. 10% obligatory cession to Myanmar Insurance shall leverage the Myanmar Insurance to develop its capacity & and broaden its base for future expansions.  In long term, Myanmar Insurance shall gain experience and confidence for handling diversified insurance portfolio by the provisions of this directive.

In order to develop reinsurance capacity in Myanmar, different types of pool and alternative risk transfer method shall also need to be developed.  Various types of insurance pools required immediate set up as geographically Myanmar is disaster prone and adequate reinsurance arrangements will help to manage peak & troughs of large claims of insurance companies. Foreign Reinsurer’s Branches (FRBs) as well as Cross Border Reinsurers (CBRs) shall exploit the opportunity to tap the uninsured assets of the country with its experience and capacity to exploit opportunities available in the region.

Issuance of reinsurance guidelines by IBRB is advanced step and liberalization of Myanmar Insurance market is win-win situation for the insurance industry of Myanmar which has ample opportunities for growth as well as need of the hour to develop adequate capacity in Myanmar along with business opportunities for reinsurers.

Conclusion

Opening of Myanmar Insurance market shall help the reinsurers to unleash huge potential of Myanmar.   Economy of Myanmar is picking up and has potential to achieve growth of 8% of GDP and may quadruple its economy over 200 Billion $ by 2030 opines McKinney Global report. Banking services are severely limited but now number of foreign banks have also been allowed to transact business in Myanmar.  This shall be game changer for banking and insurance services coupled together which will augments boost financial inclusion and stability in the region.

In addition to framing reinsurance guidelines, time has come where IBRB need to set guidelines and promote ‘interests of policy holders, setting up mechanism for improvement in turnaround time (TAT) for various insurance services to boost insureds confidence in financial system, steps to build up capacity and education in insurance sector to cater the need of fast-growing industry.

With the opening of insurance market, it is envisaged that Myanmar’s economy has good medium- and long-term prospects.  The economy will keep growing due to accelerated reform implementation, huge infrastructure spending and investment and liberalization of banking and insurance. Japanese insurance company Dai-Ichi forecasted that insurance sector in Myanmar is expected to grow 100-fold, to $1.3 billion, over the next decade.

There is no perfect reinsurance programme nor permanent one.  Reinsurance programs are customized options which need continuous monitoring and assessment for effective outcomes. Opening the gates to reinsurers is the right move as economy of country is shifting from agrarian to industrialization and service sectors.  Reinsurers will not only bring additional capacity in the region and narrow the protection gap of the country by increasing insurance penetration but also provide better risk management services.