Asia has emerged as an attractive prospect for Bermuda players intent upon diversification and developing their global presence. Here, Bermuda Re examines the potential of an increasingly prominent and sophisticated market for Bermuda re/insurance.
As Bermuda re/insurers have sought to build and diversify their global footprint, companies have looked to new and emerging markets around the world, with the economies in Asia presenting a particularly attractive proposition. With the exception of Japan, re/insurance penetration is decidedly lower in Asia than in it is in Europe and North America, economic growth continues to far outstrip geriatric positive development in the West, while a full understanding of exposures and perils in the region is still being fully understood, presenting significant opportunities for those looking to develop their re/insurance presence into the region. Coupled with recent economic ructions in Europe and the US and the prospect – perhaps even the reality – of a double dip recession, the potential of Asia has rarely held more allure.
A host of Bermuda players already have operations in the region and as Thomas Lillelund, general manager and principal offi cer, Singapore branch at Aspen Re made clear, “Asia is a region of immense potential, which is experiencing signifi cant growth in population, economic output and personal wealth. These factors are a spur to demand for re/insurance and opportunities in the medium-to-long term are considerable for all lines of business”. Jarrod Hill, senior vice president, property and casualty, ACE Asia Pacific, was equally bullish about Asia’s prospects in the face of a troubled West. “As a dynamic region, Asia offers many opportunities, while the economies of both Europe and the US are mired in uncertainty. Asia is characterised by continued commitment to investment as the economies grow and local financial markets prosper, so opportunities in Asia will only increase,” he said. Asia’s potential is also supported by rapidly rising levels of insurance penetration. As Lillelund detailed, annual insurance growth in southern and eastern Asia between 1999 and 2009 was double that experienced in Latin America and almost three times that of Western Europe and the US. But even accounting for this rapid growth, insurance penetration is 15 to 20 percent of that in the US. He said that the evidence supporting future growth potential was undeniable, but that the “challenge the insurance industry faces is translating this potential into real, profitable and sustainable earnings”.
For ACE and Aspen Re, Asia represents the opportunity to diversify their traditional Bermuda portfolio by both product and geography. For ACE, its Asia Pacific operation is a retail insurance company operating across 13 countries in the region that complements its existing re/insurance business, while Aspen Re’s focus is on leveraging its existing expertise in order to extend reinsurance both local primary insurers and multi-national companies operating in the region.
Property still tops the list
Talking with both Hill and Lillelund, it is clear that a host of opportunities are apparent across a range of lines in the region. For ACE, the most significant are presented by the “rise of the middle class across the region” and the corresponding “increase in demand for life and personal insurance”, Hill said.
On the commercial side, Hill and Lillelund both highlighted property as the leading line for insurance and reinsurance, with marine reinsurance also attracting considerable interest. Lillelund said that “as countries develop and expand their economies and infrastructure” there will be increasing demand for property and marine re/insurance, although he admitted that “there is pressure on margins on these lines”. He added that Bermuda players could also exploit opportunities on specialty lines, which “require more technical expertise and where knowledge-sharing is highly valued by ceding companies”.
But as Hill outlined, “property remains the predominant commercial line of business and its dominance will remain for the foreseeable future due to continued investment in infrastructure and the energy sector, as well as strong investment in residential property”. Turning to casualty, Hill described the business as “relatively underdeveloped”. He said that the legal environment in Asia is still evolving and “less litigious than Europe and the US”, with the situation placing downward pressure on the demand for, and cost of, casualty products.
Developing alternative lines
Bermuda re/insurers have traditionally placed an emphasis on property cat and casualty business, but in recent years there has been a move to diversify by line. Operations in Asia appear to be no different. As Hill outlined, “business diversification has been a strategic initiative for ACE Asia Pacific for the past few years. Specifically, when property and casualty pricing was trending south, our accident and health business expanded rapidly while our offering for personal lines and business insurance has grown from strength to strength. The ACE Group is also investing in expanding our life insurance business in the region given the growth opportunities offered by the increasing needs of the rising middle class”.
Aspen Re, for its part, offers a broad range of “specialty reinsurance expertise across multiple product lines” that complements its property and casualty offering. And to provide additional technical expertise, the
company has developed its branch office personnel to include “professionals with multiple specialty underwriting skills” in Asia, as well as tapping into Aspen Re’s depth of global expertise to support its local team.
Obstacles nevertheless remain
Significant opportunities exist right across Asia, but impediments to development remain. Hill outlined three key issues that re/insurers face in developing into the region, namely:
- Traditional distribution channels: in comparison to other more traditional insurance markets, the variety of distribution channels available in Asia may present challenges for those re/insurers that tend to rely on a few large broking houses to distribute their products. In Asia, guan xi, or the strength of relationships, tends to favour long term associates that commonly reside in an agency network.
- Access to and pricing of business: for ACE, we have sought to overcome this challenge via organic growth or acquisition. For example, we acquired Jerneh Insurance Berhad in Malaysia and so added 1500 agents as a key distribution channel for our various lines.
- Size of market versus number of insurers: due to the abundance of opportunity the region offers, the market is crowded, while competition intensifies. In Hong Kong, there are 80 general insurers, in Singapore, 60 – far more than Australia, which is a larger marketplace. This has created significant competition, particularly for the plain-vanilla type property and casualty, SME and personal insurance.
Addressing similar concerns, Lillelund said that data scarcity was the key issue holding back re/insurance development in Asia, with a “lack of historical information, poor data quality or a dearth of vendor models” all creating issues and potential concerns when pricing risk. He said that to address the issue, Aspen Re has “undertaken a number of research and development projects to develop bespoke rating and assessment tools and to validate existing rating tools”. Such an approach enables the firm to leverage its own existing knowledge base to better evaluate and understand exposures in the region.
As one might expect of a geographically disparate region, re/insurance patterns in Asia are very different from those of Europe and the US, presenting re/insurers with unique challenges and opportunities when they set about tailoring regional solutions. One of the major opportunities for international re/insurers is that as the market grows and develops, local insurers are turning to reinsurers “to help grow their regional businesses in the face of increasing competition from multinational carriers”, Lillelund said. Hill added that with the large number of small and medium-sized insurers in Asia, many with “other business interests”, they often look to reinsurers to take on more business, and as such, “retentions tend to be smaller while a large portion of reinsurance is purchased”, Hill said. For Bermuda reinsurers, the market’s attractions are palpable.
The other significant difference is that reinsurance products tend to take the form of quota share solutions, rather than the more traditional excess of loss. As Lillelund outlined, such an approach is “frequently designed to reduce earnings volatility rather than provide direct capital support. Local insurers may also look for support on a multi-line basis when lines of business are currently too small to be economically viable as standalone placements”.
Aspen Re, for its part, has taken a collaborative approach to the Asian market, one that recognises both the specific needs of smaller, local players as well as Aspen Re™s multi-national clients. As Lillelund detailed, Aspen Re is helping with knowledge sharing and risk transfer. ﬁIn the early stages of a market's development, sales in the more standard products predominate. But demand for specialty lines, such as directors and officers, medical malpractice and professional liability lines, increases as it matures. As energy and infrastructure projects grow, the demand for capacity in other technical lines also increases,” he said. And it would seem that this is where Aspen Re can apply its global expertise to add real value
to those relationships it has built in an increasingly vibrant and sophisticated Asian re/insurance market.
Asked if potential acquisitions in the region would suit Aspen Re’s strategic ambitions in Asia, Lillelund said that Aspen Re “believes there will be opportunities for us to augment our underwriting product offering through the establishment of new specialist underwriting teams in the region. There may also be some potential upside in looking at broader acquisition plays – from Aspen’s perspective we don’t rule out acquisition as a route to growth – but it would have to take us in the right strategic direction and at the right price”. ACE, for its part, spoke in rather broader strokes, Hill indicating that the firm “will assess the viability of strategic alliances when these make business sense and are in line with our strategic goals”. Evidently,
opportunities for potential acquisitions and synergies in Asia exist, but as with any possible move, such a step would have to reflect and enhance the re/insurer’s existing strategic ambitions.
Dangers inevitably lurk
There is always a danger when entering new territories and/or lines of business that you will be exposing yourself to potential and unseen dangers. And development into Asia is no different, with the region presenting its own unique challenges for international re/insurers. “The biggest unknown is the development of the legal environment across the region and how this will impact the casualty classes of business,” Hill said.
Mitigating such concerns requires “strong underwriting, coupled with a process of identifying negative loss trends in frequency and severity”. Aspen Re similarly highlighted underwriting discipline as key to dealing with potential threats, Lillelund arguing that “robust risk management governance”, which examines both known and emerging risks, will enable international re/insurers to meet risk challenges as and when they emerge. Finally, Hill said that “significant regulatory change globally” – with Asia being no exception – would create additional challenges for the industry, but he was confident that ACE is strongly positioned “to manage challenges and capitalise on opportunities” in the region. And it would appear that ACE isn’t
alone, with Bermuda re/insurers playing an increasingly prominent and timely role in the development of Asian re/insurance. Eastern promise, it would seem, is living up to its billing.
China: opportunity rides a dangerous wind
The Chinese market continues to exhibit undeniable potential, with engine room economic growth and low
levels of insurance penetration presenting significant opportunities for Bermuda re/insurers; but a recent report by AM Best entitled China: a dangerous wind or an opportunity suggests that while opportunities are apparent, challenges nevertheless remain.
The report found that “intense competition remains a characteristic of the Chinese non-life market”. This is balanced by a desire to underwrite for profit, but the recent economic downturn had helped focus firms’ long-term ambitions on the potential of the Chinese market “despite considerable start-up and investment costs”. The report found that players are nevertheless “engaging in more realistic pricing” strategies and are “more selective in their choice of risk”.
Insurance growth continues to present opportunities for those considering the market, AM Best’s report finding that insurance premiums underwritten rose by 39.1 percent in 2008 and by 13.8 percent in 2009, with 2009 premiums reaching $164 billion.
Addressing the role of foreign reinsurers in China, the report found that they account for only 1.2 percent of
the non-life market. AM Best’s analysis found that it “takes a considerable amount of time and capital to build a presence in China”, with foreign players yet to establish a significant toe hold. It also indicated that it is difficult to attract and retain local talent and to build a presence on the ground, but added that if reinsurers did not establish themselves “they fear that remaining an outsider for too long could lead to greater entry hurdles at a later date as local insurers become more mature and sophisticated”.
AM Best said that opportunities nevertheless exist for firms that can demonstrate effective enterprise risk management and sought after international expertise, with particular opportunities in international shipping re/insurance. Bermuda players will have to invest long term if they are to reap rewards in what will undoubtedly become a leading global re/insurance market.
Bermuda, Asia, ACE, Aspen Re, AM Best, re/insurance