LEE McDONALD: Hello, I'm Lee McDonald with the A.M. Best Company. Welcome to our webinar on insurance developments in Southeast Asia. Today I'm joined by several people who helped produce a new report from the A.M. Best Company, "Southeast Asian Insurance Markets: A Market Review." We've provided a complimentary link to that report in your notification and follow-up emails, so thank you for signing up for this webinar.

In London we have Yvette Essen, who helped write and edit the report we're going to discuss. In our Hong Kong office we have three gentlemen. We have Muongmo Lee, Billy Kwan and Terrence Wong.

Yvette, let's talk about the environment for insurance and the overall economy in this region. What have we found?

YVETTE ESSEN: We've been looking at the markets here in Malaysia, Philippines, Thailand, Vietnam and Indonesia and we found a number of things. Now obviously each market is different and varies in maturity, but we found that these markets are among the most exciting and rapidly developing markets in the world. There are a number of reasons for this. For example, insurance penetration is very low in these areas, less than 5% of GDP. In terms of the world's insurance market share that's less than 0.25% for each country. There are other reasons why this area is very exciting and there are opportunities for growth.

For example, people are increasingly understanding the merits of insurance. There's also increasing wealth in this region. There are some challenges of course to opportunities in this region but we'll go into those in more detail a bit later.

McDONALD: Terrence, why don't you talk about some of the individual insurance markets, what we're seeing there? Why don't you start with the Philippines please?

TERRENCE WONG: Yes, as Yvette mentioned, generally speaking the insurance penetration rate in these countries is very low. As economic activity continues to expand in this region the size of the insurance industry in terms of premium size and assets is expected to further expand. So to cover some of the statistics, such as in the Philippines the total gross premium written is the equivalent of 2.3 billion U.S. dollars and this only represents about 1.4% of their GDP and .06 percent of the world's insurance market. Total insurance assets in the Philippines in 2007 was around 88 trillion in Philippine pesos. If we look at Malaysia, the total GPW for the insurance industry as a whole was around 9 billion U.S. dollars and this represents about 4.3% of the country's GPW and 0.2% of the world's insurance market. Total insurance assets in this country in 2008 were around 21 billion Malaysian ringgits. In Indonesia total GPW was around 6.9 billion U.S. dollars and this only represents about 1.34% of the country's GDP and .16% of the world's insurance market. Thailand and Vietnam also share a similar track. In Thailand the total GPW was around 9.9 billion U.S. dollars and this only represents about 3.6% of the county's GDP and 0.2% of the world's insurance market. In Vietnam total GPW for the insurance industry as a whole was around 1.3 billion USD and again this represents only about 1.4% of the country's GDP and .03% of the world's insurance market.

McDONALD: Can you talk about the markets within some of these regions? Is there more to discuss as far as loss or expense ratios, the combined?

WONG: A couple of the items we would like to highlight here is, for example, the combined ratio in the Philippines was a bit high. One of the major reasons there, given the market structure there, a large number of small companies are in the Philippines. Many of them are family owned. So given the smaller premium scale, the expense ratios of these companies are usually high. So this leads to a lower level of underwriting profitability often resulting in a high combined ratio for the industry as a whole.

The other item might be worth mentioning here is, for example, in Malaysia, the Malaysia motor is a tariff market, meaning the tariff rates for motor are regulated by the Bank Negara. Unfortunately it seems it is the market consensus that the tariff rate for motor insurance third parties is too low for most insurance companies to cover claims. That's why insurers with a focus on third party motor insurance tend to suffer underwriting deficits.

McDONALD: Yvette, the report that you helped edit and write reports a lot of fragmentation in some of these markets. How is that?

ESSEN: We looked at the number of nonlife insurers in each of the markets and there were quite a lot of insurers. For example, in Indonesia in 2007 there were 94 registered nonlife insurers. Then with the Philippines there were 87 nonlife insurers in the Philippines. This seems to be a trend of most of the markets in Southeast Asia - a large number of nonlife insurers.

If we look at the market share, say of the top five nonlife insurers in each country, in Indonesia, Malaysia, the Philippines and Thailand, between 2005 and 2008 the top five nonlife insurers controlled 33% to 42% of the market. Now Vietnam is different. The top five there held 84% in 2007 although we've noticed that over the last few years this has been dropping. In 2005 the top five held more than 90%, almost 91% and that's because of the market opening up.

But because of the general fragmentation of the markets in Southeast Asia, this is seen as quite attractive to outside foreign insurers. It gives them an opportunity to try to enter the market and compete in the market.

Now if we compare this to other, more developed and mature markets in Asia, for example in Japan, we can start to understand why these markets are seen as attractive.

For example, in Japan, consolidation among the leading top three players, nonlife players, will lead to about an 80% market control by just three players. So we can understand why this market is seen as attractive, why Southeast Asia is seen as attractive to foreign players. However as we mentioned earlier it is leading to severe competition.

McDONALD: Terrence, could you pick up on that point? What are you seeing in terms of concentration and fragmentation and what does that mean over the long term?

WONG: I agree with what Yvette has pointed out. This fragmentation presents opportunities for domestic and international insurance companies. We anticipate market consolidation could occur in the mid to long run, especially when the regulators will enhance capital requirements. So to strengthen some of the companies' market position and to be in compliance with the RBC solvency requirements, some insurers might choose merger as a strategy. This could create opportunities for investors to participate in local markets. That means there will be more companies for sale in the market for investors going forward.

McDONALD: Yvette, what do we see as the long-term impact of this competition?

ESSEN: Well we've seen already that it's hitting profits. In Vietnam, for example, eight of the 27 nonlife insurers were able to make a profit in 2008. So we're seen profits being hit. We're seeing high combined ratios. We potentially could see mergers and acquisitions activity because of capital requirements increasing in the future. So the competition could eventually result in M&A.

But we could also see casualties. If companies continue to try to win market share at the expense of conservative underwriting they could run into difficulty.

McDONALD: Terrence, let's talk about the regional perspective. Obviously we look at each insurance organization on its own, but our perspective is also colored by how we view countries. Could you explain our view of country risk in each of these nations please?

WONG: Yes, under A.M. Best's country risk rating methodology, countries are placed into one of the five tiers, ranging from one to five. So A.M. Best's country risk analysis aims to identify aspects of a country that could create difficulties and an unpredictable environment for insurers, based on three risk categories: economic, political and financial system risks.

So risk tier one means a stable environment with the least amount of risk and country risk tier five means the countries that hold the most risk. Currently Malaysia and Thailand fall under the country risk tier three and Indonesia and the Philippines are in tier four and Vietnam is in tier five.

McDONALD: Thank you. What's the relationship between ratings and our country risk tiers?

WONG: Generally speaking, the average rating level is usually correlated with country risk. For instance, an average rating in the country risk tier five category would fall in the range of BBB- to BB+ range. Then as the country tier moves up the average rating would increase.

But it's important to note that the country risks evaluation does not impose a ceiling on ratings in different domiciles. A.M. Best's highest rating can be achieved in any country if key elements of country risk could sometimes be managed or mitigated.

The other item that I think is to mention here is that A.M. Best's evaluation of country risk differs from a sovereign debt rating, which is an evaluation of ability and willingness of a government to serve its debt obligations.

McDONALD: So what you're saying is there isn't any kind of ironclad ceiling or floor, but it's more of a generalization?

WONG: That's correct.

McDONALD: Yvette, whenever you talk about nonlife insurance we're always at some point going to talk about catastrophes and catastrophic losses. Could you walk us through this area? The map is a nice little guide. Let's talk about some of the areas of catastrophe risk.

ESSEN: Well obviously catastrophic risk is very important here. It's one of the reasons why reinsurers might be attracted to this region, as it offers diversification of portfolio. We see a variety of risks here. If you look at events in the last few years you can see severe flooding in the Philippines in 2009, for example, an earthquake in 2008 in Indonesia and a tsunami in Thailand in 2006, in a country which previously was thought not to be that prone to natural catastrophes. So we are seeing that these areas are offering very different types of risks and exposure.

McDONALD: Each of the nations that we're talking about has their own form of catastrophic risk but ultimately they all might also have most of them is what we're seeing, right?

ESSEN: Right. They all have different risks but some are more prone to catastrophes than others.

McDONALD: Terrence, could you talk about some of the catastrophic events?

WONG: In terms of the catastrophic risk, as Yvette mentioned, I would say that Indonesia would be one of the countries that is prone to catastrophic risk. Similar to some emerging markets, what we observed is that insurance losses in general are lower than economic losses in some countries. For instance, the estimated economic loss from 2004 in the Indian Ocean earthquake in Indonesia was around $4.5 billion, but then the insured loss was only around $500 million. Another example I can give here is about the Typhoon Fengshen which hit the Philippines in 2008 with more than 1,000 deaths but the insured loss was only around $45 million in U.S. dollars.

McDONALD: Yvette, can you talk about some of the issues that are facing this market in a more general way?

ESSEN: Well staying with natural catastrophes for example, one of the reasons why the coverage might be so low is because there's poor quality data available. There's quite often little historic information in order to guide insurers and reinsurers. In addition to data issues, there's a problem with affordability. A lot of people simply cannot afford to buy cover. It's not so much of a priority for them to get insurance cover, although with the growth of microinsurance that is starting to change.

McDONALD: Terrence, would you have anything to add on those general issues?

WONG: Yes, regarding the poor data quality, in general what we observe is that the data quality in fact is improving in these markets. In the past insurance companies in these countries tended to rely on tariff premium rates. Given the de-regulation, insurance companies have more incentive to analyze past underwriting experience and to ensure their pricing adequacy and put more emphasis on the quality of the data the companies collect. So we observe that insurance companies in these markets are willing to direct more resources in these areas such as more sophisticated modeling. In general the data quality is improving.

About the affordability of the insurance products, there is no doubt the insurance products in some of these markets are available only for the middle and upper classes. So to address that, as Yvette mentioned, microinsurance could be one approach. Having said that, cost efficiency and ability to reach out to lower income groups are some of the key challenges. But with the support of the technology, the costs of the microinsurance products actually get reduced. This increases the attractiveness of offering these types of products.

McDONALD: Yvette, how are companies and countries responding to these issues?

ESSEN: We touched briefly upon microinsurance. It's also worth looking at pools. A lot of insurance and reinsurance companies are looking at this as a way to attract customers, customers who traditionally would not be able to afford insurance cover. So for example, we're seeing Munich Re looking at launching a microinsurance flood pool in Indonesia. It's been moving toward this. It also wants to develop microinsurance flood products in the Philippines, Vietnam, Malaysia and Thailand as well.

Munich Re is not alone. We've seen lots of different efforts in different countries. The Philippines as well, they're considering setting up a catastrophe pool. In Vietnam, VinRe, the national reinsurer, is considering a pool for typhoons and tropical storms. The success of these insurance initiatives, these microinsurance pools and initiatives will depend partly on the levels of government subsidies available.

McDONALD: Yvette, how are these nations and companies within those nations interacting with the reinsurance markets?

ESSEN: In the report we noted that relations with reinsurers are changing. They're changing in a number of ways, on a case by case basis. With Malaysia for example, we're seeing changes of regulation with the adoption of risk-based capital. It's resulting in increasing risk being ceded, particularly for small companies. We've noticed that small companies are trying to optimize their available capital resources, for example, by buying re-proportional reinsurance for larger risks.

In terms of reinsurance, there are other ways in which they're changing. In general in Southeast Asia, retention ratios are increasing. This could be for a number of reasons. Perhaps the introduction of more foreign companies coming in is leading to a general change because the foreign insurers tend to be more comfortable with holding on to risk. We're also seeing changes in terms of reinsurance, what is compulsory and what is not compulsory in different countries. That does vary country by country.

In the Philippines 10% of outward reinsurance must be ceded to PhilNaRe. In Thailand, most classes of risks tend to be passed on to ThaiRe to the tune of about 5% of business. Vietnam has been changing its reinsurance rules. It used to stand at 20% of certain risks being ceded to VinaRe on a compulsory basis but that's now moved to a more voluntary basis.

WONG: In general our experience in the other markets indicates that even with termination of the compulsory reinsurance cession, some of the professional reinsures would not suffer a significant decrease in premium volume after this termination. The reason is these have already established very good long-term relationships with some of the direct insurance companies.

The other item worthwhile to mention is about some Malaysian insurance companies and some insurers in Thailand with weaker RBC or solvency. They tend to cede out more risk to relieve the pressure on solvency requirements.

McDONALD: Yvette, one thing that's very notable about this region is that it's home to one of the world's largest populations of Islamic people. I guess we can assume that's an opportunity for Takaful and re-Takaful? What are we seeing there?

ESSEN: The use of the word "opportunity" is very appropriate. Southeast Asia in general is seen as a very important place for Takaful and re-Takaful. If you look at Indonesia for example, it's got the largest Muslim population in the world. It's no surprise there that countries such as Malaysia and Indonesia are offering Takaful as an alternate to conventional insurance. Malaysia is the second largest insurance market in Southeast Asia after Singapore but it's also becoming an international financial hub for Islamic insurance. We are seeing an increase in the number of Sharia'h-compliant products being offered and also an increase in the number of sales as well.

McDONALD: What are we seeing with non-Asian insurers, what you might call foreign insurers at this point?

ESSEN: We've seen in terms of foreign insurers there is quite an interest in Southeast Asia. We're seeing that across the board. For example, here in the U.K., Prudential has expressed a great interest in Asia, particularly Southeast Asia. There seems to be a shift there from more mature markets such as Japan and Taiwan into Indonesia, Vietnam, Malaysia, Thailand and the Philippines. It's just not insurers, life insurers and reinsurers that are expressing an interest in Southeast Asia. Brokers as well have spotted potential in this region. Willis, for example, recently increased its stake in its Malaysia business from 19% to 49%.

McDONALD: Terrence, what are you seeing in that market as far as the role of non-Asian insurers?

WONG: What we observe is some foreign conglomerates have turned to these markets to capture the growth opportunities. Some domestic insurance companies are keen to access to the technical know-how, in terms of underwriting expertise and financial resources of some global insurers. As a result, some local leading insurance companies are willing to form JVs. One of the examples I can think of at this point is Jacindo. They do have a JV with Tokio Marine and Allianz.

McDONALD: Whenever we talk about emerging markets you're always talking about new occupations for people and new ways of doing business. What's the personnel challenges here, Yvette?

ESSEN: Personnel is one of the challenges that not just foreign insurers and reinsures face, but also that the domestic market faces as well. For example, rules have changed and some foreign ownership rules have been relaxed so there should be more of an interest. But there are going to be issues and problems, for example, with recruitment, talent and finding expertise. In our research for this report people often talked about the shortage of talent, the shortage of actuaries, claims managers and that staff had been enticed from one company to another. They were coming at a premium. They were quite expensive to recruit, these people.

We're also finding specifically with Takaful insurance, finding Islamic expertise can be a challenge. There is often talk of a shortage of Sharia scholars, which is resulting in some scholars being on dozens of boards. So there are quite a few challenges with talent and shortages of appropriate personnel is certainly one of the biggest ones.

McDONALD: It's always interesting when you go from market to market how it generally starts at the face-to-face selling level and moves up. What are we seeing in this region in terms of distribution?

ESSEN: Well distribution varies country by country, although generally there is a traditional dependence on agency forces. That's not changing significantly. Having said that, there is also generally a move to try to use banks more. There's a growing influence on the banking channel, on bancassurance. Relationships between banks and insurance companies are in some cases becoming closer, although again this does depend country by country. Some countries don't seem quite comfortable yet with this bancassurance model. There seems to be more of a reluctance, for example in Vietnam to putting money in banks as a lot of people are still very dependent on cash. Cash is the preferred method of payment still. So bancassurance has been less of a success story there.

On the other side of the coin is Malaysia. Malaysia is one of the more mature markets, the most mature market in Southeast Asia, besides Singapore. We're seeing there more direct marketing by the telephone, through the internet. In Malaysia the internet penetration is slightly higher than in some other countries such as Vietnam. But we are seeing that intermediaries are opposing this direct marketing method as well, particularly Malaysian motor brokers and agents.

McDONALD: Regulation is always an important topic and over the past several years it's become even more important as in this region we've seen a lot of growth in the sophistication of the regulatory structure there. It's always a vital and important area. Yvette, what are we seeing?

ESSEN: We've seen regulation in general is changing quite dramatically in this region. Again it depends country by country but there is definitely a change here. Solvency II of course is a European initiative and it doesn't apply to companies operating in Southeast Asia. However it is having a knock-on effect. There's a general knowledge and awareness here in Southeast Asia that standards need to improve and regulators are in general taking quite good steps forward to change this.

In particular we've seen a move toward risk-based capital in Indonesia, Malaysia, the Philippines and Thailand. These steps are being taken in different stages. Some countries are move developed than others. For example, on a case by case basis we're seeing the Philippines have had their risk-based capital framework adopted since 2006, although enforcement has been delayed. There will be a focus more on implementing risk-based capital later and increasing minimum capital requirements sooner and before risk-based capital standards.

In Malaysia, this is the most developed case here of risk-based capital in the five countries that we're looking at in Southeast Asia. Now risk-based capital here became fully operational in 2009. So that framework was in place since last year and up and running. We saw a number of results due to the introduction of risk-based capital. For example, with the regulator Bank Negara taking control of the nonlife insurer Tahan Insurance in May last year for failing to meet its minimum solvency margins. We talked also earlier how risk-based capital has resulted in more proportional reinsurance as an alternative to risk-based capital in Malaysia for smaller insurance companies.

Moving away from Malaysia, in Indonesia the framework for risk-based capital has been in place since 1999. The minimum capital requirements will start to increase in three steps from this year. In terms of other changes, in Thailand we are expecting that some consolidation could happen, which could result in more takeovers from international companies. That's not just because of regulation, because of RBC being in place in 2011, but also with international financial accounting standards coming into place as well that same year.

While we're talking about changes in regulation, it's worth noting that foreign ownership rules are also changing. So it's not just risk-based capital but also regulation. We've noted in our report that it is becoming increasingly easy in terms of rules for foreign companies to partake in domestic insurers across Southeast Asia. Again in Thailand, foreign equity participation has increased, being lifted from 25% to 49% in some cases. That will enable foreign insurers to take more of an interest. In Malaysia last year, rules on foreign investment were also relaxed. That went from 49% to 70% of equity. With Vietnam there are already some fully owned foreign insurers and that is the same with the Philippines. Foreign companies can own up to 100% of a domestic insurer, whereas in Indonesia rules there allow an 80% ownership by a foreign player. So we are seeing changes. We've seen changes not just in terms of risk-based capital but also in terms of regulation and enabling foreign insurers to increasingly participate.

McDONALD: Terrence, what are we seeing in terms of regulatory change and regulatory sophistication?

WONG: One thing I would like to highlight here is about the enforcement of the regulatory measures. What we observe is that some regulators have rolled out prudent regulatory measures. However, full enforcement of these rules is not really in place. So from a rating perspective the strict enforcement of solvency rules or regulation is more than just having prudent regulation.

McDONALD: We're moving toward the conclusion and wrap-up of our presentation. We'll be talking about rated companies in one minute. Yvette, just looking ahead, what are the high points here that you're seeing in these markets?

ESSEN: Well there are certainly quite a number of drivers here to spur the market on in Southeast Asia. We talked about the market developing in terms of low insurance penetration but that's changing with the growing awareness of the benefits of insurance. With international standards and regulation being put in place, that should provide some more security to foreign insurers and reinsurers coming into the market.

It depends, country by country, in terms of prospects for each region. Malaysia already is one of the most developed markets here in Southeast Asia, certainly in terms of international standards and regulation. Thailand has amended its rules in terms of its Nonlife Insurance Act as of February 2008. So we could see some change as a result of the Nonlife Insurance Act. Insurers structured as private limited liability companies will have a certain number of years to become public companies. We are expecting in general foreign insurers' interest should continue. Aviva just recently said it's looking to acquire a company in Indonesia and is looking for a joint venture opportunity in Vietnam.

In terms of prospects and trends, we're predicting that there could well be more initial public offerings by companies. Local companies might go down this route not just because of regulation and capital requirements but because they will want to expand into new products and fund that expansion.

However there are quite a number of challenges and issues that need to be addressed. In general, not just stepping away from insurance issues, there are economic issues that will hinder or could hinder growth in the region. For example, the pace of global recovery, inflation, these issues are quite important. Of course they're very important, in fact. In terms of specific insurance risks, we need to see standards enforced here. For example, in Indonesia, third party motor cover is compulsory and if that's enforced that of course will benefit the market. Most importantly, underwriting discipline has been an issue in SE Asia. In order for the market to grow that does really need to be addressed. If companies continue to write just for market share there could be casualties, particularly among the smaller local insurers. The growth of markets will depend on the effectiveness of local authorities in each country.

McDONALD: I note that we do have questions and I'll be getting to those after our next exhibit here. Terrence, could you talk for a moment about the ratings that we've issued to organizations in this region?

WONG: Well basically in Malaysia we have five ratings. Most of them are reinsurance companies. We rate Asia Capital Reinsurance and we rate ACR ReTakaful, Labuan Re and Malaysian Re. they all carry 'A-' ratings. We do have a direct company, which is the Lonpac Company, which carries an 'A-' rating. This company is number six in the market and has a market share of around 4.2%.

In Thailand we rate Asian Reinsurance and the rating is a 'BBB' ICR with a stable outlook. In Indonesia we rate Asuransi Jasa Indonesia. This is the second-largest insurance company in Indonesia and it represents around 9.7% percent of the market share. In Vietnam we just assigned a rating to Petrovietnam Insurance Joint Stock Corporation and it's a 'BBB-minus,' positive, rating and this again is the second-largest insurance company in Vietnam and captures around 18.5% market share. In the Philippines we have two ratings. One is Malayan and the other is National Reinsurance Corporation of the Philippines. Both have 'BBB' ICRs from A.M. Best with stable outlooks.

McDONALD: I'd like to turn to questions right now. We have a gentleman who asks: what will happen to insurance companies in Indonesia that don't meet the RBC, risk-based capital requirements, according to schedule? Is there any indication at this point that anything may occur? I'll start with Terrence.

WONG: Well in general our understanding is that companies do need to follow the RBC standard. It's the first country in Asia to adopt the RBC framework. They launched the RBC back in 1999. Our understanding is they need to follow the RBC requirements.

ESSEN: In terms of Indonesia, as was just mentioned, the framework for RBC has been in place since 1999. That's following the financial crisis of 1997. So regulators there have greater powers to discipline financial institutions. As a result stricter capital adequacy requirements were in place, though we've seen that's not been fully implemented yet in Indonesia. So yes, in theory most Indonesian companies should be we placed for an increase in minimum capital requirements. However one would expect that some mergers and acquisitions could still occur in this country. We can go back to the case study of Malaysia, having introduced their risk-based capital and the exhibit we showed earlier showing capital adequacy positions of insurers ahead of the introduction of risk-based capital in Malaysia generally indicating that most companies were well placed to introduce RBC. Although that was the case we're still seeing some activity and capital injections in Malaysia. So we would expect something similar in Indonesia.

McDONALD: Let's turn to a different question: given the increasing importance of Takaful in Indonesia and Malaysia, is it fair to say that foreign players should direct their resources to Takaful and less on the conventional front? Obvious we're not giving business advice, but what have you heard from those insurers as we did our research, Yvette?

ESSEN: Well in terms of Takaful and re-Takaful, a lot of foreign insurers are interested in this. We've seen, for example, Swiss Re and Hannover Re trying to build up a presence in Malaysia. However, it is worth noting that generally in terms of Takaful and the research I've done into Takaful and re-Takaful insurance, this is seen as an alternative to conventional insurance and reinsurance but this business is not always necessarily profitable. We're just coming out of a recession and in some countries we haven't really come out of a recession but consumers still are very conscious about what they're spending their money on. Although Takaful might be Sharia'h compliant insurance offerings, people are still looking at price. Although there are attractions of having compliance in Islamic insurance cover, price is quite often the most important factor. So companies and individuals might prefer to just go for the cheapest cover, whether or not that is Takaful and re-Takaful or just conventional insurance.

So yes, there are opportunities there for Takaful cover but this is still a very small fragment of the insurance market generally and it will take some time for people's mindsets to change, for there to become a demand for such offerings.

McDONALD: Thank you. By the way, we're fielding quite a few questions and I'll get to as many as we can. They're good questions. I'm going to combine two questions in the interests of time. Is there a cultural reason for the low take-up of insurance or is it just a matter of affordability? While you're answering that question, another person asked a similar question about why are there so many insurers in some of these regions? Basically, are there any cultural issues to the acceptance of the insurance product? Yvette, would you take a shot at that question?

ESSEN: Yes, in terms of low insurance penetration there are number of reasons. The cultural challenges there are certainly an issue. People are not used to buying insurance. They haven't seen it as a compulsory thing, something that they must have as in the western world. That's changing and companies are advertising more and governments are becoming more involved and regulators are becoming more involved. So that's certainly starting to change.

LEE: Before we move on to the next question I wanted to add on the two questions that were raised. We have to note that these economies are developing, although they're developing fairly fast. In countries like the Philippines and Vietnam, up to one third or a quarter of the population is below the poverty line as defined by the U.N., which the updated version is less than two dollars per day. So it's practically impossible for those populations, one third or a quarter of the population, to afford any insurance.

On the question of why so many insurers, in the past issuing licenses was more relaxed than these days. Regulators of course had means other than minimum capital to start the company. It's not cultural, but a lot of those companies were family owned and maybe you can say it's cultural in that merging two families may be more difficult in this region than in the western world where it was easier for two families to merge.

McDONALD: Thank you. If you could continue with this question and perhaps Yvette will add to it, we have a rating in Vietnam and they are part of our coverage. Do you have any more to add about the insurance sector in Vietnam as far as what we're seeing and whether we believe that's an emerging and growing area?

MOUNGMO LEE: Yes, insurance obviously is growing fairly fast in Vietnam. Another factor that's slightly different in Vietnam versus the other ones, Vietnam's economy is being developed by the central government, a centralized development, a controlled development, however you want to call it. A lot of this growth is coming from commercial products. At some stage if the economy grows further, personal lines will start kicking in and grow very fact but at this point the growth, healthy growth and profitable business is coming from commercial lines. A lot of infrastructure headed by the government is heading those demands, or supply, of insurance.

McDONALD: Given the recent and perhaps continuing global recession, has that affected insurers' plans in this region, both within the region and those looking to enter the region? Have you seen any impact of the recession?

ESSEN: In general, this area has not been immune from the global recession. We've seen, for example, car registration falling in countries such as Vietnam and Thailand. Generally companies, global insurance companies are trying to rein in expenditures. They're trying to cut costs, cut staff and focus on core business. We've also found that while this may be the case, foreign insurers still find Southeast Asia extremely attractive. They might have to watch their budgets. But Southeast Asia does offer great opportunity for growth. These companies do need to look for ways to expand.

If you look at the companies in the report, there are so many different foreign insurers. We mentioned just a handful of them in our conversation now. Plus, then you look at companies such as Chubb, Liberty, QBE, Hannover Re and Aviva, AIG, Prudential. There are so many companies that have specifically earmarked Southeast Asia as an area for growth. So yes, the recession has hit the markets of Southeast Asia. It has hit global insurers. However these global insurers still see the potential in Southeast Asia.

LEE: I would start from the good side. These economies were not fully integrated with the international financial system so they've been, to some extent, immune or less hit. On the other side, these economies do heavily rely on external capital to fund their internal projects, the mega projects such as oil, development and infrastructure such as power plants. International financial markets slowed down. They had to postpone a few national big projects, which actually have restarted recently. Some from the outlook point of view we will see, if the national financial markets rebound in a healthy manner, that the government projects will kick in and then it's going to grow much faster because it was delayed for a couple of years.

McDONALD: What can you say about the average return on investment of insurers in these nations? In particular, what lines of business seem to be growing the most vigorously and where the opportunities continue to be more apparent?

WONG: Well from the investment side it really depends on the investment mandate of the specific company that's within their own organization. So in general what we observed before the financial crisis is that the interest rates level in some of the Southeast Asia countries actually was quite high. Most companies in these markets have quite prudent allocations with a focus on fixed income instruments. The return, thus, was also reasonable or quite decent. Then after the crisis as the governments cut down the interest rate, it also went lower. At this point of time it's not as much as to what they had in the past.

McDONALD: Well thank you very much. We appreciate the questions. I'd like to thank our panelists, Yvette Essen, Mmuongo Lee, Terrence Wong and Billy Kwan. Thank you. That was a very good session and very well attended. Thank you to everyone who attended. If you have any questions about anything with A.M. Best always start with www.ambest.com and you can always get to our regions there or you can look up a rating for any organization in the world that we happen to rate. I'm Lee McDonald with the A.M. Best Company. Thank you for joining us.

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