Asia: All that glitters is not gold, says Hannover Re chief

Given the fact that emerging economic regions such as Asia are showing stronger rates of growth than mature markets such as Europe and the US, it is natural to assume that leading international insurers and reinsurers such as Hannover Re will look for growth in these parts. The simple logic is that if the economic growth outlook remains poor for the mature markets and rates remain so competitive, one has to assume flat or even falling premiums in core markets that will need to be compensated for by high growth in emerging markets. Combine this with the fact that insurance and reinsurance buyers in emerging regions such as Asia nowadays prefer to work with local brokers and insurers and are actively encouraged, or indeed forced, to do so by local supervisors, then the argument for physical expansion into the region is obvious. The international market has of course not missed this point. Lloyd’s’ decision to set up in Singapore, China and most recently India is a prime example of how the market is attempting to secure current and future growth in Asia, to compensate for tough traditional markets such as Europe and North America. Hannover Re and its main international rivals such as SCOR, Swiss Re and Munich Re, for example, have all received licenses to set up shop in India under the Insurance Regulatory and Development Authority of India’s (IRDAI) new system, to augment their existing operations in China and across the Asian market. At the end of December last year, the German reinsurance group announced that it had received approval (R3) to establish a branch in India from the IRDAI. The company stated at the time that the opening up of the Indian market to foreign reinsurers enables it to enjoy direct access to the country's growing insurance market. With this licence, the company was able commence business operations in property and casualty as well as life and health reinsurance, from its base in the Mumbai financial services centre. "I am delighted about the opening up of the Indian market for (re)insurers. The establishment of our branch means that we can now be even closer to our customers and respond more attentively to their reinsurance needs", said Ulrich Wallin, chairman of the executive board at Hannover Re, when the license was announced. “Hannover Re is a strong partner for customers in the Indian market that will put its knowhow and longstanding expertise at their disposal. With a total population of some 1.3 billion, a rapidly growing middle class and a comparatively low insurance density relative to other national economies, India constitutes an attractive market of the future,” concluded the reinsurer’s statement. But, as Mr Wallin told Commercial Risk Asia in a recent interview, it is unfortunately not that simple, partly because everybody else has spotted the growth opportunity and the Asian insurance markets remain far from open for international insurers and reinsurers in reality. “To an extent yes, we can hope for growth in emerging regions such as Asia to help counterbalance tougher core established markets such as Europe. But growth in China and India is mostly only to the top line and a lesser extent, if at all, to the bottom line because the business is rather competitive,” he explained. “Of course there is the general image of these being high growth markets and the result is that they become highly competitive and this hits profitability. For the 1 April renewals in India, for example, we saw a lot more business but actually wrote less because we were not prepared to support the low margins on offer, particularly in property. But we do still see growth in the long run,” added Mr Wallin. The increasingly competitive nature of the Asia-Pacific market was stressed during Hannover Re’s presentations at the annual reinsurance gatherings in Monte Carlo and Baden Baden. During the Monte Carlo meeting, Hannover Re said that “intense competition continues to be the hallmark of these markets”, adding, however, that recent catastrophe losses in the region are having a “restraining” effect. “In view of these conditions, Hannover Re concentrates on its good, long-term customer relationships and adds to its portfolio only when margins are adequate,” stated the reinsurer in what was not exactly bullish language. The reinsurer added that prices for Japanese programmes fell by single-digit percentages in 2016, while at the same time demand for reinsurance capacity grew. It therefore predicted a “stable” price level in the 1 April renewals. The outlook for the Australia and New Zealand markets was not great either. “Growing pressure on prices and increasing competition in primary insurance business also led to further price reductions on the reinsurance side in 2016,” stated the reinsurer. In February, Hannover Re announced that it felt able to raise its outlook for profits in 2017 and a small increase in gross premiums on the back of the year-end renewals. The group reported that the rate decline in non-proportional business was “less marked” than in the past three 1/1 treaty renewals. It notably reported a “pleasing outcome” of renewals in North America, where there is a more positive economic outlook, and in Germany too. The outlook for the theoretically attractive growth markets of Asia was nowhere near as bullish. Hannover Re said that it proved “impossible to avoid making share reductions in unprofitable business – above all in China – which consequently led to lower premium income in this market”. “The picture in the rest of Asia was a mixed one, with modest premium declines for the company throughout the region. Natural catastrophe business saw further rate decreases in some areas, owing to the absence of market-changing large losses,” added the reinsurance group. Exposure growth Another sobering element to consider is the fact that, while growth rates may be higher in emerging regions such as Asia and the premiums look attractive on paper, fast growth can carry some dangerous future risks. Hannover Re’s working group on ‘Emerging Risks and Scientific Affairs’, which is led by Dr Andreas Tacke, head of scientific affairs, published a technical paper in January that focuses, for example, on asbestos claims: it highlights some very worrying trends in Asia that could accompany the region’s industrialisation process. The paper notes that while asbestos claims are finally abating in Europe and the US, there is “severe potential” for such claims developing in Asia. The working group points out that asbestos litigation is the longest and most expensive mass tort in US history. The total cost of asbestos litigation in the US alone is estimated at more than $250bn. Asbestos-cement products are expected to be the leading market for asbestos worldwide. The working group also observes that world production is likely to remain steady at approximately two million metric tons for the near future, because of continued demand for asbestos products in many regions of the world. “Most of the countries with the sharpest increases in asbestos use are in Asia, and the majority of people now being exposed to asbestos live and work in Asia. Asian countries account for about 50% of global asbestos use,” the paper states. Industrialised countries are showing a steady decrease in asbestos use but developing and newly industrialised countries show a “definite” increase. “Top consumers are China, Russia, India and Brazil. While asbestos mining is currently banned in India, its import, export or use in manufacturing is permitted,” the report continues. The potential for the insurance industry if it blindly writes for growth is obvious. As the working group points out, insurers may receive claims from a range of lines. Product liability, employers liability, workers compensation and D&O pose the risk of “major” losses, it argues. “The main future exposure for asbestos litigation can be expected in the major consumer countries. As in several other regions, the characteristics in these countries are an unconfined use and/or production of asbestos and universally or partially low standards in workplace safety,” the report adds. “Due to the insufficient health statistics and protracted health effects, a high burden of asbestos-related diseases and death cases is to be anticipated in these countries during the next decades. For China, experts predict an annual death toll from mesothelioma and related diseases of 15,000 by 2035. In contrast, European countries and the US have seen the peak of the asbestos epidemic already,” concludes Dr Tacke.

Asia: All that glitters is not gold, says Hannover Re chief

Want to read this article?

Read Next

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

Absenteeism drops dramatically in France

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

Absenteeism drops dramatically in France

Want to read this article?

Read Next

Insurtech partners with USAID on climate adaptation programme

ICEYE in data collaboration with Juniper Re on flood and wildfire

Senior appointments in Lockton’s crisis management team

European rates up overall but financial and cyber lines falling: Marsh

Absenteeism drops dramatically in France

Related Articles