Plenty of potential: Overcoming obstacles is expected to better prepare the sector

The insurance sector is young but growing rapidly and is characterised by a relatively inexperienced labour pool, incomplete regulations, big plans for regulatory reform and fast growth from a small base. In short, it looks like a typical early-stage insurance sector in any developing country. The sector needs “technical assistance and labour training, new technologies, actuary training and better marketing strategies,” Sergey Gromov, the chairman of Mongol Daatgaal, told OBG. Over time, as that training takes hold, best practices are adopted and regulations continue to be updated, insurers will have a chance to grow their portfolios further.

URGENT NEED: Unlike many developing countries, Mongolia cannot afford to allow this process to take a decade or two. The national mining sector is ramping up quickly, and the country’s mines, workers and equipment will all need to be provided with some form of insurance. Mongolian insurers currently lack the capital and experience to do so, and most domestic insurance executives consider the idea of inviting foreign companies into a market currently closed to them to be bad business.

The majority of local insurance players do not believe their companies are ready to compete with major international firms. As of late-2011, there were no foreign companies in the market, though in June 2011 the Mongolian Growth Group (MGG), a foreign-owned investment firm with a listing on the Canadian TSX Venture Exchange, won a licence to set up and operate a locally domiciled insurance company, Mandal Daatgal (daatgal is Mongolian for insurance). More foreign interest in the growing sector is considered likely in the coming years.

A BALANCING ACT: Local insurers are aware that a balance must be struck between protecting their fledgling industry and meeting the needs of the variety of big projects that are going to be crucial to Mongolia’s overall economic development. “There is a risk that our local companies could lose market share, but Mongolia cannot restrict it,” said P. Ganzorig, the president of the Mongolian Insurers Association. “A lot of positives will come with the arrival of the big operators. It is just a matter of finding out the best way to manage it. Mongolian insurance companies should help each other grow.”

A good example of the local industry working together is the Index-based Livestock Insurance Project, a microinsurance programme that has been developed along with a handful of international partners to tackle one of the country’s most pressing economic challenges – the death of livestock as a result of the region’s dzuds, or harsh winter weather. Though the programme is in its infancy, its rapid expansion from pilot to nationwide initiative in the coming years is expected to help insurers improve their reputation among potential customers. The initiative has attracted a number of new policyholders to participating companies, an indication that Mongolians are open to insurance (see analysis).

SIZE & SCOPE: As of late October 2011 there were 17 insurance companies with about MNT57bn ($44.5m) in total capital. Of that total, 16 offered general insurance policies and one offered life insurance. Additionally, there were six brokers and 2080 distributors, the latter of which are agents who act as intermediaries between clients and a single insurer, instead of being able to offer rates from a number of firms. Local firms offer around 20 different types of insurance. Property insurance is responsible for the lion’s share of the commercial market, at about 88% of underwritten policies. The category includes crop policies, motor damages and liability, as well as the livestock programme.

In the commercial segment of the market, premiums written in 2010 reached approximately $23.4m, up from $16.2m in 2009, according to data from the Financial Regulatory Commission (FRC), the industry regulator. In recent years the market has grown by around 20% annually, with the exception being 2009, when Mongolia’s economy suffered a slump due to falling commodity prices. In 2011 revenue from policies is forecast to jump to MNT45bn ($35.1m), according to Ganzorig. The sector has a profit margin of about 20%, and a return on investment between 10% and 20%, according to J. Bat-Orshikh, the CEO of MIG Insurance. The premiums-to-GDP ratio in Mongolia is about 0.4%, which implies plenty of growth ahead if the country is to reach the 6-8% level seen in more developed markets.

HISTORY: There was no commercial insurance market in Mongolia during the communist era, which lasted from 1924 to 1990. In that period a state-owned company, Mongol Daatgal, met the insurance needs of other state-owned enterprises. An opening for commercial insurance was created when the country transitioned to a free-market democracy. The first laws on insurance were passed in 1997. Mongol Daatgal, then under the Ministry of Finance, continued to offer policies to state-owned firms, but it had to compete with a number of privately owned companies that had begun operations.

Mongol Daatgal was privatised in 2003, the same year policy sales to private customers began. By then, despite multiple failures in what was a lightly regulated industry, 24 companies offered policies of various sorts. Up until that point the industry had been regulated from within the Ministry of Finance, by an office called the Insurance Supervision Service. The market gained a stronger regulator in 2006, however, with the introduction of the FRC.

CURRENT FORM: As of early 2010 there were 23 companies in operation, but a subsequent hike in minimum capital requirements, from approximately MNT500m ($390,000) to some MNT1bn ($780,000), forced consolidation. Consequently, the market has been shrunk down to 17 firms.

Mongol Daatgal remains the dominant player, while seven smaller competitors, which are on relatively even footing in terms of size and assets, have captured most of the remainder of the market. The other nine firms presently operating are rather smaller companies with little market share, will welcome and indeed expect consolidation.

TOP EIGHT: The top eight firms hold about 95% of the market, according to Ganzorig, who said that eight companies would be a comfortable number for the sector. Mongol Daatgal, the legacy company, now has about 30% of the insurance market, down from approximately 75% a decade ago. The firm, which was founded in 1934, has an even mix of retail and corporate customers, but it is working to boost its retail side, which it believes could eventually provide up to 80% of its overall revenues.

Ranking the other top insurers is difficult, as they are growing at rapid and changing rates. Consequently, a listing based on size, underwriting income or other metrics would be constantly in flux and none of the insurers have established a public listing on the Mongolian Stock Exchange. Differentiation strategies are emerging, however. For example, Soyombo Daatgal told OBG it is the first company in the sector with a formal reinsurance treaty. Similarly, Ard Daatgal, which began operations in 1994 and was the first private insurance company, as well as being the first joint venture, in the country, aims to become the first firm to be rated by an internationally respected ratings agency, such as Moody’s, Fitch or Standard & Poor’s. It is expecting to double its growth by the end of 2011.

Tenger Insurance, which was set up in 2001 as Bat Daatgal, currently has 20 branches operating throughout Mongolia serving both corporate and retail customers. To become more competitive, the company is developing a five-year plan that could possibly see it buying out or merging with other local insurers, as well as developing top-quality products that meet international standards.

MIG Insurance, whose sector holdings amount to about 10.6% of market share, will be celebrating its 15-year anniversary in 2012 after opening in 1997. MIG is looking to expand in the coming years by increasing the number of products it offers, as well as the number of agents and brokers. Another insurer that has been on the market since the 1990s is Bodi Insurance and Reinsurance. It offers a variety of individual and corporate insurance products.

The country’s newest insurer is Mandal, which won a licence in June 2011 to offer property and casualty insurance. According to the firm, its $5m in capital makes it the market leader, according to that particular metric. The company’s parent, MGG, was founded in February 2011 by an American hedge-fund manager, Harris Kupperman, and is listed on the Canadian TSX Venture Exchange, a bourse located in Vancouver that hosts smaller equities. As of late 2011 the firm had raised around $35.5m in capital. Apart from the $5m directed to Mandal, it plans to allocate the money toward a number of real estate ventures in Mongolia. Though foreign-owned, Mandal has hired a Mongolian management team and plans to focus on life insurance as well as opportunities in the burgeoning mining sector.

This is a path many insurers in the sector follow. “The capital markets are quite weak so we cannot invest our surplus premiums,” said D. Chuluuntsetseg, the CEO of Ard Daatgal. “Surplus premium usually flows into property investments, banking deposits and certain corporate bonds.”

GAINING EXPERTISE: The FRC, Mongolia’s financial services regulator, works alongside the Bank of Mongolia, the central bank, to ensure all financial institutions, including insurers, submit audited annual financial statements to the regulator by February 10 each year. Statements are prepared in accordance with International Financial Reporting Standards (IFRS) — used by most developed countries.

The FRC is working to modernise the system and overcome a variety of challenges. Collecting on a claim is difficult for many policyholders. In recent years the FRC has had to use its influence to help customers receive what is contractually owed to them. The regulator is considering several reforms to eliminate market distortions and inefficiencies. For example, there are currently no regulations mandating that insurers share customer data with each other, which would help the underwriting process by allowing insurers to better understand their potential policyholders’ histories, credit worthiness and individual risks. Regulations to define and clarify important positions, such as those of loss adjusters, have not yet been created. Additionally, instead of seeking out one or perhaps two operating licences, insurers must obtain one for each type of product they offer, which can be time consuming. “Getting a licence can take as long as three months,” Mongol Daatgal’s Bat-Zul told OBG.

CHANGES AHEAD: Clearing up the mix of inefficiencies and legal ambiguities currently tamping down on the potential for substantial growth in Mongolia’s insurance sector in the coming years is the FRC’s primary goal moving forward. Most major changes to insurance law will require a vote in the Grand Huraal, Mongolia’s parliament, which looked to be unlikely in the beginning of 2012, as the legislative agenda appeared lengthy, with insurance matters further down on the docket from concerns about mining and capital markets.

When politicians do turn their attention to insurance, however, they will be presented with several key initiatives, which could be passed as individual laws or rolled into one comprehensive overhaul of the existing insurance legislation. Some of these reforms include allowing firms more control over how they deploy their investment accounts and increasing the minimum capital requirement, which is currently set at MNT1bn ($780,000).

MOTORING ALONG: The greatest impact will likely come from motor insurance, which is now mandatory due to the draft legislation on driver’s insurance that was passed on October 7, 2011. The legislation came into effect on January 1, 2012 and every driver has until October 1, 2012 to get driver’s insurance, or they will not be permitted to drive. The FRC has worked with the industry to set the insurance rates that will be charged for the different classes of vehicles. Estimates put the number of insurable vehicles in the country at about 300,000, of which only about 10% are covered. This should mean an immediate 30% increase in the size of the market. It will also likely result in a surge in claims; in Ulaanbaatar, the capital, traffic jams are frequent and minor collisions are relatively common. How insurers handle the initial period of coverage will go a long way towards improving their reputations or cementing a negative perception among the population.

A number of other regulations would also have an impact. The minimum capital requirement is expected to at least double to MNT2bn ($1.6m), and raising it to MNT3bn ($2.3m) is a possibility. Further consolidation of the 17 insurers into a smaller group of larger companies is widely forecast. “There are even possibilities for larger companies to merge because if larger foreign insurance companies enter Mongolia, we need to be in a position to compete for business,” said G. Tsogbadrah, the CEO of Tenger Insurance. “Sector consolidation is very important.”

Another potential new law addresses insurance companies’ investment accounts, allowing them to buy equities on the Mongolian Stock Exchange. Insurers are currently barred from equities and can use their investment accounts only on bonds and bank deposits. Returns are currently above 10% on all of these asset classes, so there is more at issue than increased risk and potential profits. The overarching concern is that there are no long-term capital funds in Mongolia. Pension funds and insurers are typically major providers of these funds in more developed markets – the FRC is working to introduce a Mongolian version of this market role.

MINING OPPORTUNITIES: The coming mining surge in Mongolia is widely considered to be a catalyst for the local insurance market’s growth. It is hard to estimate the importance of the burgeoning mining sector to future economic expansion. The country is home to massive deposits of gold, copper and coal, among other minerals. As of late 2011 only one mining project was up and running (albeit well below capacity), with another scheduled to begin production in summer 2012.

If both of these mines continue on their march toward sustainable production for the foreseeable future, Mongolia will likely see a rush of exploration activity. According to some forecasts the market for mining equipment could well surpass $1bn. Other insurable assets will include the mines themselves and the workforce, as well as the infrastructure needed to get raw materials to ports and factories. Plans under consideration include an east-west railroad with several spurs; an industrial park in Sainshand, the eastern capital of Dornogovi Province; and a handful of major road and highway projects.

It still remains unclear, however, whether international insurers will see Mongolian mines as high- or low-risk ventures. Key factors these firms will take into consideration include the safety of workers, natural disasters and government relations. Unlike Indonesia and the Philippines, earthquakes are much less frequent in Mongolia, and the country does not present many dangers for oil workers.

The primary fear for underwriters will likely be the sanctity of contracts signed with the government. For example, Khan Resources, a Canadian venture with a uranium licence in the eastern part of the country, had those rights revoked by the government in 2009. The official reason cited was environmental compliance issues, and the licence to mine the deposit was later given to a Russian company. Khan is pursuing legal options, including appealing to the UN Commission on International Trade Law.

MICROINSURANCE: Boosting capacity and improving laws and regulations is expected to have a positive impact in the coming years. Another potential growth catalyst is microinsurance, which is the scaling down of typical insurance products into limited-coverage products at very low prices, with a view to attracting customers and developing brand loyalty that will pay off when they can afford more.

In 2005 the Index-based Livestock Insurance Project was kicked off by the Mongolian government and the World Bank to help farmers and herders cover potential livestock losses due to the country’s extreme weather conditions. After the initial three-year pilot and an overall positive response, the project was extended and has since seen an increase in the number of policies and products made available. Additionally, in 2009 the UN Development Programme and the FRC introduced a project that was designed to help further develop the capacity of microinsurance in the country.

OUTLOOK: Though it has yet to have a major impact, a 2010 change to banking laws make it possible to market insurance through banks, which have larger customer bases. This bodes well for insurance uptake.

The widespread propagation of a livestock insurance initiative to the country’s large and spread-out herding population should assist in spreading the concept of insurance, which in the long-run may very well help expand the population base purchasing insurance premiums.

Furthermore, the legal modifications regarding insurance under consideration at the Mongolian parliament will likely see debate in 2012, though perhaps not before the parliamentary elections scheduled for June 2012. Those reforms to the insurance law, which include the creation and modification of rules regarding mandating the purchase of auto insurance and professional liability insurance, while not affecting a huge proportion of the population (especially in the case of the latter requirement), nevertheless would act as a strong indicator for the expansion of the insurance sector overall. Likewise, an increase in minimum capital requirements could possibly further help push the sector towards a direction which is suited for more long-term expansion of insurance products (see analysis).

Insurance players will still face a number of challenges, one of which includes the likely entrance of large foreign firms into the young and still-developing market. “We expect foreign entrants to the market in the near future,” Chuluuntsetseg told OBG in an interview. “We have recently had both Canadian and British companies showing interest in the Mongolian insurance sector.”

However, with the government continuing to work to remove roadblocks to the ongoing expansion of the sector, the potential for growth in the coming decades looks to be both clear and well on its way.