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12/04/2016

Insurers, is your Joint-Venture set-up to fail in Asia?

M&A and joint ventures have seen an unexpected turn in Asia in the last few years

The M&A activity has known a slight slowdown in 2014, with a significant rebound in 2015 (+8% in value out of the total global transactions[1]), which indicated a promising future for these activities in Asia for 2016 and beyond.

An intense cross-border activity has been also seen in the market, as nine of the ten largest M&A transactions in Asia in 2015 were cross-border acquisitions.

However some Asian markets are usually either not mature enough for a concentration trend or are under a very restrictive regulation for such operations (China). As a consequence, insurers sometimes choose a joint-venture rather than a merger or an acquisition.

For such types of operation, the market observation proves that there are clear winners and losers, as 49% of cross-border joint ventures fail to meet strategic and financial expectations for at least one partner[2].

These facts allow us to ask ourselves, can the specificities of the Asian insurance industry create additional challenges in the downstream integration phase of a joint-venture?

 

Asia is a catalytic but challenging environment for joint ventures

Asia has an adequate environment to push insurers to opt for the joint venture model. First of all, the regulatory uncertainty and regulators diversity are pushing insurers to choose a lighter way of cooperating. For example, the upcoming capital requirements (RBC in Hong Kong) coupled with their own respective implementation pace (China moving faster than any other supervisors with the C-ROSS) is pushing the industry players to consider new ways to partner in Asia. Secondly, new sources of capital (investment banks, hedge funds and private equity firms) provide opportunities and budget to plan for long term joint ventures in the region.

Nevertheless, many challenges are encountered when undertaking a joint venture in the region. For example, the company valuation is often more complex in Asia due to the poor quality of the data available in developing markets. The Asian insurance industry is also suffering from human capital issues, as there is an expertise shortage in the industry as the agents’ or actuaries’ scarcity proves it. Additionally, talent retention is a common issue due to the historical high turnover.

 

These specificities have an impact on the downstream integration process

From a human resources perspective, they may result in conflictual management styles or cultural behaviours gaps within the joint venture. These potential internal miscommunications may be emphasized when it comes to cross-entities, therefore cross-countries communication, with the difference in language to begin with. For the human capital impact, the uncertainty created by the joint venture can generate additional turnover in the teams and eventually put in danger the insurers’ best assets.

If we look at the legal framework, be reminded that in most APAC jurisdiction, no automatic transfer of employees are planned in case of a joint venture, which can result in an operational nightmare, especially when it comes to managing specific clauses such as expatriate contracts or detachments. Another legal challenge resides in the difficulty in safeguarding intellectual property developed in the joint venture, especially in some countries where intellectual property is a rather new concept (such as China, despite the effort from the State Intellectual Property Office).

Lastly, even though the regulatory uncertainty is one of the reasons why insurers may choose joint ventures instead of M&A, it makes it difficult for both partners to build long-term joint target operating model.

 

What can insurers do to minimize the impact during the downstream integration process?

Sia Partners uses a six-stream framework to overcome the integration pitfalls. When deploying such framework, extra focus must be dedicated to identify the challenges for each stream, and analyse their transversal impact and interconnection. 

Among the detailed recommendations provided for such projects, Sia Partners includes the following items, but not limited to:

  • Include the latest regulatory requirements in the joint venture’s target operating model;
  • Assess the estimated joint venture lifespan;
  • Adjust the partnering strategy according to the source of capital and the business partners chosen;
  • Focus on talent retention activities during the human resource transition  through the joint venture’s lifespan;
  • Conduct a cultural analysis of the business partners and its national work culture;
  • Benchmark the outsourced activities in Asia to identify the redundant activities or poor performers following the joint venture.

 

Conclusion

Building a long lasting joint venture is not easy, and the key success factors lie in the downstream integration process. The median lifespan of joint ventures are around 8.5 years, and 31% end within the first 5 years[3], while most of the company plan on a much larger horizon. Most insurers apply a rigid framework, while it is necessary to encompass local specificities, especially within the diverse and unbalanced environment that is the Asian insurance industry.

 

 

Sia Partners

 


[1] Source: Institute for Merger, Acquisitions and Alliances

[2] Kwicinski, J. (2016). Why Joint Ventures Fail — And How to Prevent It.

[3] Kwicinski, J. (2016). Why Joint Ventures Fail — And How to Prevent It.

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