17 June 2013

China: from local to global

Everyone has an eye on China. Home to more than a billion people and with an economy that continues to grow against a background of wider global contraction, it wouldn’t be wrong for re/insurance players a world away to look at the sleeping giant and thrill at the potential profit. But there’s more to the Chinese property catastrophe re/insurance market than meets the eye and—as the old saying goes—fools rush in.

In truth, China is a dangerous game. But the figures do look enticing. According to James Few, CEO of Aspen Re: “The Asia Pacific region is one of the most active for cat with, for example, 58 percent of earthquakes worldwide happening in the region. The emerging markets have plenty of cat peril to thinka bout. Insurance companies and owners of property in such regions are aware of the peril, and recognition of how the international catastrophe reinsurance market can help is growing."

According to the Centre for Research on the Epidemiology of Disasters, 43 million people were affected by disasters in China in 2012. Recent floods in the provinces of Jiangxi, Anhui and Hunan killed six people and affected 33,000 hectares of crops. In Hunan, the worst hit province, more than 2,200 homes were destroyed and 14,000 people relocated. The need for property catastrophe reinsurance is undeniable.

According to Stephen Warwick, CEO of Greater China at Aon Benfield: “There are only two large reinsurers operating in China, namely the China Re Group and Taiping Re. No doubt more local reinsurers will emerge over time, but it will certainly be a medium to long-term development. The big opportunity for foreign reinsurers is cat and specialty lines, where there is increasing demand and ease of doing business through international brokers with a presence in China.”

“Most reinsurers are categorised as expanding, stable or watching,” Helen Ye, executive director, China, at Aon Benfield told Bermuda Re. “There are many well-known global cat reinsurers that are watching. In view of its potential and current growth rate, most reinsurers are taking an interest in the Chinese market.”

With considerable demand and access through the Lloyd’s market and international brokers, breaking China may seem straightforward. Looks can be deceiving. Like many emerging markets, China is a minefield of poorly understood and difficult to model risks, complex regulation, language barriers and culture clashes. If you want to be successsful in China, according to Few, you have to take a measured approach.

"When you've got a market growing that fast it's quite hard to use historical data to predict the future. The market growth is making that history somewhat irrelevant."

“We established our office in Singapore for the Asia Pacific region in 2008 and wrote our first policy in China in 2009. Since then we’ve taken a reasonably conservative approach. We haven’t rushed to write premium in China—instead we spent a lot of time trying to learn about the region, more about the business and more about the exposures. We’re trying to understand the dynamics of the marketplace as best we can, and gradually through time we have written more business.”

Warwick insisted: “The main challenge is gaining an understanding of the market and the drivers that result in decisions. These are often different from what one might assume, and are not always the same as in a western market, so reinsurers have to step back and re-evaluate the assumed truths of why companies buy reinsurance and how. An ability to deal with reality is important.”

Difficulties present themselves right from the beginning. As Warwick explained: “The regulator in China is very powerful, politicised and complex. Interaction between the regulator and international firms is not easy.” The complexities make it advisable to go through Lloyd’s or a broker with an established presence on the ground. Aspen, which has been operating in China for five years, still hasn’t been licensed.

“We have considered it carefully ,” Few said. “Given that we’re reasonably conservative at this stage in our development in China we haven’t yet felt that a local licence is necessary, but it’s not impossible that we would utilise our Lloyd's vehicle at some point in the future.”

There is also a disconnect between business cultures. According to Warwick, the work rate in China is intense, the speed at which clients expect results and service is far greater than in many other countries, and holiday periods differ.

And, unlike many countries, business isn’t conducted in English. Going into China expecting to be a hit right off the bat—and without any Mandarin speakers on your side—can alienate firms in a country where local access and relationships can be the difference between winning the best business and getting none at all. “We have seven Mandarin speakers in the company,” Few said. “Going into China requires a lot of local knowledge and contacts. Relationships are very important in China, and if you don’t have those local relationships it’s quite difficult to get the best quality of business.”

Establishing relationships and becoming familiar with business culture requires a boots-on-the-ground approach, but setting up asatellite office can be tricky in and of itself. According to Warwick: “The sheer size of the country means there is no one ‘centre’ for reinsurance. Beijing, Shanghai and Shenzhen are the three principal hubs, and one should not assume that you can see China by seeing Hong Kong.”

Five years in China has taught Aspen a similar lesson. Few acknowledged that as Aspen grows in Asia, it may need to open further offices across the region, particularly since his global strategy involves getting close to his clients. “We believe we get better distribution if we’re closer to the customer. At the moment we’re using Singapore to cover all of Asia, but I think in the future we may have more than one office in Asia because it is such a large region.”

“The Chinese dynamic really lends itself to having a presence in an Asia-backed centre,” Malcolm Steingold, Aon Benfield’s CEO of Asia Pacific, confirmed. “Business can still be channelled to Lloyd’s, the London market, or indeed Bermuda, but a regional presence offers greater insight and therefore risk conferencing. The provision of training and assistance with the development of products are certainly key activities required to build brand and understanding in China.”

Being close to your risks in China is a smart move, particularly because property damage results from a broad range of forces. “It’s worth remembering that China is exposed to a lot of perils,” Few warned. “There are floods and winter storms. It isn’t just typhoons and earthquakes.”

Furthermore, modelling capabilities in China leave much to be desired. According to Vivian Cheung, financial analyst at AM Best Asia-Pacific: “Insurers and reinsurers find it difficult to develop catastrophe protection products that cater to the Chinese market due to the lack of quality data, such as proper assessment of the tolerance level of infrastructure/buildings to natural and manmade catastrophes and insured value, and also the lack of proper modelling capabilities to assess their risk exposure and price the risk adequately. The market’s acceptance of a more scientific and systematic pricing system is also waiting to be tested.”

Dr Milan Simic, senior vice president and managing director at AIR Worldwide, added: “Better data would significantly reduce the uncertainty in modelled loss results. The excellent models that are now available to the Asian market are only as good as the exposure data that is used as an input.

“A priority is to help those clients who do not recognise the value of catastrophe models to achieving more accurate model results. That means promoting and facilitating the use of detailed locationspecific data, which can be scarce in this region. Because variations in earthquake ground motion, typhoon wind speeds, or flood depth can be highly localised, understanding where your exposed properties are and what they’re made of is essential to understanding your catastrophe risk,” he continued.

“Companies whose exposure data is aggregated to the prefecture or province level may be forced to pay higher reinsurance prices because of the uncertainty in their modelled losses—even if they may have sound underwriting practices.”

Few explained how his company is working with NASA to help supplement existing data. He told Bermuda Re: “What we’ve been doing is building our own models for those perils, which we’ve been doing for years. We’re in a reasonably good place with that, but it does take a long time to get it right.

“Reinsurers should take that seriously. You can’t just plug and play a vendor model: you’ve got to do a lot of research and development around the edges. Doing your own research is essential to supplement the information that’s available. That can be quite expensive and timeconsuming, but I think it’s a better understanding of risk. Quite a lot of research and development needs to go into preparing yourself properly for Chinese opportunities. Perhaps a bit more so, in fact, than in other territories.”

Few believes that the explosive growth in China—precisely what makes it so appealing to global re/insurance players—is one reason modelling the risk there is so difficult. “When you’ve got a market growing that fast it’s quite hard to use historical data to predict the future. The pace of market growth is making that history somewhat irrelevant.”

Paul Markey, chairman of Aon Bermuda, concluded that it is “a rapidly developing environment”, but that the Chinese market is “first and foremost a local market; as it continues its transformation into a leading global economy, certainly the thought and hope is that trade in insurance and reinsurance will become a much larger global opportunity”.

China, while on its way, is yet to arrive on the global re/insurance scene. Puzzling out when to make a move, and learning as much as possible in the process, is part of the fun for Few. “I do think it’s exciting,” he said. “Understanding a new market and a new risk is an exciting part of developing business. There’s been a steady improvement in data and the companies that have bothered to travel to the region and spend time there, spend time with the Chinese staff and make some connections, are starting to build relationships. But it’s a fairly slow and progressive process.”