At the International Adviser Fund Links Forum held in London last September I was struck by the number of presentations that signalled the attractiveness of various international markets.
Jupiter talked about ‘Opportunities in cash rich Asia’ and Invesco presented on ‘Capitalising on distribution trends across Asia’s life insurance markets’.
Other fund managers gave an insight into the likely returns from assets in emerging markets such as China, India, Africa and Latin America.
At the Managing Directors’ Forum there was much debate about the UK offshore market and whether sales volumes would ever recover to the heady heights of the pre-recession era. It was good to hear some optimism from the UK specialists, as clearly this is a key market for a number of players.
I vividly remember one individual from the floor stating that market diversification must surely be a pre-requisite to ensure stability and mitigate the risk of over-exposure to a single market.
Of course this makes perfect strategic sense and in Friends Provident International we have been pursuing a strategy of market diversification for some years. However, it caused me to consider the practicalities of pursuing such a strategy, particularly in a recessionary environment where most parent companies are eager to keep the cash on the balance sheet and even the most exciting of new business ventures will be severely scrutinised and required to deliver impressive internal rates of return.
So, what is involved in diversification? Why is it easy to say, but difficult to do?
The world is a big place and there are many factors to consider before a list of potential targets can be drawn up. The first place to start is to do your research to establish which markets or segments are of interest, who are the competition and what will be involved in establishing a competitive proposition? Other considerations include the distribution of the products and services in that territory as well as the licensing and regulatory requirements.
Can you serve the market?
This may sound like a strange question, but most UK life businesses have been built on systems designed to serve the UK market. Whilst this can at times be an advantage, there are plenty of issues that need to be explored to understand the likely costs involved in delivering a credible proposition to an international market.
A key consideration will be whether the systems can cope with multiple currencies and languages? Systems designed to run updates overnight in the UK may mean response times are affected during working hours in other time zones.
In Friends Provident we have invested many millions over the years to ensure that we can provide localised solutions for our international customers and business partners to ensure they are supported with a robust service proposition.
Can you localise?
Long-term success in international markets really does rely on the delivery of a localised proposition. The expatriate market is limited and will not provide the volumes to justify a substantial investment. Targeting local customers will gain volume but requires an expert understanding of the market including the cultural dynamics.
Strong relationships with local business partners is something that pays real dividends in terms of understanding overseas markets, for example Friends Provident International’s successful entry into the German market has been underpinned by a partnership with a local distribution company who have advised on many matters from product design to service positioning.
Market entry
Having chosen the preferred markets and convinced the board that entry is a good idea, the real work of establishing the business can begin. This usually means preparing a detailed application for a trading licence and beginning the engagement process with the local regulator. This can be very time consuming as regulators need to be convinced that new entrants are serious about establishing a long-term business.
A key risk at this stage is that circumstances change and licences become unavailable. An obvious trigger for this is recession as the regulators look to protect existing operations.
Dubai is a good example where a moratorium was recently introduced and a number of licence applications are now stuck in limbo.
Having gained the appropriate licence, a local presence can be established which will probably be easier in today’s marketplace as office facilities are more freely available. Once local staff are employed the business can start in earnest. Or can it?
Many regulators now insist on a separate regulatory process for the licensing of products, which can be lengthy and detailed. This can sometimes mean a period of six to 12 months before products are authorised. Multiple product applications are not always acceptable to the regulator, so it could be 12-18 months before a full suite of products is licensed and ready to launch.
Market penetration
So, once you have the local operation and the products, the real work can begin to convince the market that your proposition is superior to that of the competition. There are some key challenges here.
Local partners are generally wary of new entrants and this really does take time to overcome. Most of the established businesses will have been through the difficult experience of a product provider exiting a market at some stage in their history. A solid track record of deep commitment to international business is a great starting point, but time is the real test for most distributors. Friends Provident International has been in Hong Kong for more than 20 years now and this has been a key factor in discussions with partners in other territories.
Another challenge for those considering diversification is that the existing players are already established. The early movers will have probably built solid relationships with local banks and IFAs; some may even be trying their hand at direct distribution via tied agents.
Is it too late?
I think there are real challenges for new players as far as the existing financial centres are concerned. That said, things change and with the right strategy and implementation who knows?
Markets go through cycles and some that have been closed or unattractive to date may well offer opportunities in the future. These markets probably need to be on the radar now.
I have been describing the trials and tribulations associated largely with the establishment of a ‘hub and spoke’ operation, which is a model we use very effectively in the Friends Group via both Friends Provident International and Lombard.
This approach involves the localisation of key functions to support the international markets while making use of centralised functions to drive out cost efficiencies so that propositions can be competitive whilst still providing solid returns for shareholders. Other routes to international markets do exist, such as the purchase of an indigenous business, and this will always be an option. But it is one that needs careful consideration and a keen appetite from the parent company.
Joint ventures can also be very effective and this path offers the opportunity to work in conjunction with a local company whose knowledge of the market can be a key strength. Friends Provident recently entered into such an arrangement with Am Life in Malaysia and the benefits that each partner has been able to bring to the business is being demonstrated clearly in the results.
Merger and acquisition may also provide a route to expansion and this is something that heralded the growth of Friends Provident International following the acquisition of Royal and Sun Alliance Financial Services back in 2002 However, this too is no easy thing to manage and can result in a prolonged period of introspection as integration activity takes its course.
Is it worth it?
Well, as I said at the beginning, diversification is easy to say but hard to do. However, from a Friends Provident International perspective, I would have to say that it has been very worthwhile. As well as the strategic and financial benefits it has also provided many of our people with exciting projects, overseas assignments, opportunities to learn new skills and languages. The wider business, meanwhile, now benefits from a richness provided by the cultural diversity of the international operation.
The enlarged international operation provides additional revenue streams to the group at higher margins than are available from the UK market but this has taken many years of dedication and development.
Managing multiple territories is a complicated operation that requires skill, expertise and sound management. This kind of model delivers a multitude of challenges ranging from the requirements of numerous regulatory bodies through to the prioritisation of proposition deliveries and leveraging the potential synergies that may be available across similar territories.
If a business can get all of this right then the components for significant growth and strong margins exist but of course if it was that easy everyone would be doing it.
Paul Tunnicliffe is director of international operations for Friends Provident International
