One theme that emerged from September’s Monte Carlo Rendez-Vous was that re/insurance companies need to look for pockets of opportunity wherever they can. One such area could be Asia. Bermuda:Re+ILS takes a look.
Asia: the largest continent, with the shortest name. It’s also the place that excites an increasing number of people, for one major reason. It’s seeing huge levels of economic growth as the various countries within the region accelerate away from their previous torpor.
As economic growth ramps up then people—and countries—are becoming more aware of the benefits posed by insurance and reinsurance. This manifests itself in two ways: the growth of local re/insurers and the growing interest of outside re/insurers.
Rating agency AM Best also views Asia as being a particularly interesting place at the moment.
“Growing alternative revenue sources is key to maintaining relevance for Asian reinsurers, as many of them have found it challenging to meet their top and bottom line targets, so they have continued to focus on revenue diversification and enhanced risk management,” says Moungmo Lee, managing director, analytics–Asia-Pacific at AM Best.
“Some Asian reinsurers have diversified into life reinsurance, agricultural business and other markets, but the long-term profitability of this diversification remains to be seen.
“Overseas expansion remains challenging. None of the local advantages that a reinsurer might possess (knowledge, language and high service levels) is applicable when expanding overseas. While local dominance is dwindling over time, many can grow only a limited amount of business profitably,” he adds.
"That greater diversity is a good thing for the market as it also means there is a greater breadth of intellectual capital at work." Brad Kading, ABIR
According to Lee, risk-adjusted capitalisation remains stable and adequate and as markets are experiencing slower growth rates immediate pressure on capitalisation is low. These levels remain adequate for most local Asian reinsurers to serve their local markets.
“Most of the larger Asian reinsurance companies have higher combined ratios compared to their international peers, for a number of reasons, including a higher composition of proportional business. For growth markets a higher combined ratio can be offset by good-to-strong investment income.
“As capital continues to rush to Asia, market hardening will have to come from outside the region,” Lee says. “The Chinese and Indian markets have tremendous growth potential and interest for setting up new companies will continue. In addition, some reinsurance start-ups in Asia are expected to go live from the first quarter of 2017.
“The regulatory cost of doing reinsurance is increasing in some key markets, requiring capital to be held locally or more premiums to be ceded locally. While local reinsurers will benefit from this, AM Best believes that they will face the opposite challenge when expanding overseas.”
Fitch Ratings agrees that Asia holds promise and opportunities for reinsurers from outside the region. In its September 2016 Outlook on the region Fitch says that it believes that various regulatory initiatives could lead indirectly to greater demand for reinsurance, as direct insurers rethink risk management strategies and appetite. Asian regulators have implemented—or are in the process of implementing—a range of measures which would alter the operating and business climate in the region.
In China, Fitch believes, the new risk-based capital framework, the China Risk-Oriented Solvency System (C-ROSS) is likely to prompt greater placement of reinsurance within the local market rather than overseas. This is attributable mainly to the difference in capital charges imposed on reinsurance receivables from locally incorporated reinsurers versus those for overseas reinsurers. The agency also expects market competition to intensify with several new local reinsurers being set up in China in 2015/2016.
In addition, Fitch points out that legislative changes in Indonesia, Vietnam and India are trending towards being more protectionist in nature, with attempts to increase the percentage of insurance business to be placed with domestic reinsurers.
Local reinsurers are being constantly challenged in their ability to improve their risk management sophistication and controls, to keep up with the upcoming surge in premium volume.
Fitch adds the caveat that the Indian market, by contrast, has opened up cautiously to allow overseas reinsurers to set up branch operations. These foreign firms are required to retain a specified minimum amount of reinsurance business within the country, while the Indian direct insurers would need to give priority to a local reinsurer to accept their reinsurance business. The government has also raised the foreign ownership limit in Indian insurance companies from 26 percent to 49 percent.
The gap between insured losses and total economic losses arising from natural catastrophes improved in 2015, but Fitch believes it is still far too wide. Many Asian markets have low insurance penetration, which Fitch believes will provide solid business growth potential—including the relatively untapped Indonesian, Chinese and Indian markets. The total insured losses in Asia improved, to 19 percent of the region’s total economic losses.
Fitch expects the operating landscape of Asian reinsurance to be shaped by a combination of three factors: new operations established by foreign reinsurers in Asia; start-ups by Asian insurers themselves; and ongoing merger and acquisition activity in specific Asian reinsurance markets. This will in turn raise the level of competition, alongside a plausible transfer of technical expertise and knowledge from the foreign entrants.
Speaking at the Monte Carlo Rendez-Vous Brad Kading, president of the Association of Bermuda Insurers and Reinsurers, says that Asia has been affected by an increase in the frequency and severity of natural catastrophes in the last few years, although there were fewer events in 2015—and thus far in 2016—than in 2011. Consequently, premium rates for regional reinsurance policies which were renewed during 2015/2016 have dropped by 5 to 10 percent on average, depending on the extent of catastrophe exposure of the specific Asian market.
Kading believes the global expansion of some of these reinsurers, often at the expense of the incumbent biggest reinsurers, is becoming a big talking point in the industry.
He cites the growth and outward-reaching strategies of the likes of GIC Re, Korean Re and China Re as potentially representing an industry-changing evolution as these companies make it into the top 20 and then the top 10 of the global rankings of reinsurers.
On top of these specific players, he notes that China has awarded reinsurance licences to five new domestic players in the past 18 months and a number of large Japanese companies are also building a market presence globally through subsidiaries.
“I don’t think people have been that focused on the growth of domestic Asian reinsurers,” says Kading.
“But there are some large players starting to operate from some very robust markets with a global reach. The Singapore market has grown exponentially in recent years, for example, and is a good platform from which these companies can operate.
“If you look at what that means, we are starting to see a decline in market share for the top five players and a greater spread of the risk. That greater diversity is a good thing for the market as it also means there is a greater breadth of intellectual capital at work.”
He adds that the presence of these players should also help increase insurance penetration in their domestic markets, an effect that would benefit the industry as a whole.
“They will have an in-built interest in developing their own markets for their own economic benefit. If they can help that happen, that benefits everyone,” Kading says.
“China is one of the largest economies in the world,” says Franz Hahn, chief executive officer at Asia-based Peak Re. “There are a lot of opportunities there. We are lucky, having started our business off in Hong Kong, right on the doorstep to China, which gives us the right exposure to that market, and also to the other emerging and mature markets in Asia-Pacific.
“China will grow naturally over time and will assume a very prominent position in the global insurance market. Chinese insurance companies already have the right scale to expand into other markets. It might still take a bit of time for them to familiarise with the global insurance market, but once they are present in those markets, they’ll have become truly global players too.”
AM Best, Insurance, Reinsurance, Bermuda, Asia-Pacific, Monte Carlo Rendez-Vous, Analytics, Fitch Ratings, Moungmo Lee, Brad Kading, ABIR