Asia first – John Tan, ACR Capital Holdings and Asia Capital Reinsurance

John Tan’s explanation for his decision to launch ACR Capital Holdings and Asia Capital Reinsurance Group in 2007 is simple, logical and it is probably no surprise that it has worked so far. The best ideas are, after all, usually the ones that just make simple, common sense. “I founded the company five years ago because I saw clear signs that the time was right for Asia to have a regional reinsurance company. Asia’s risk landscape was developing rapidly and would continue to grow and evolve rapidly for some time. There was a need for the reinsurance industry to also develop in tandem,” he told CRE during the St Gallen Symposium in Switzerland this summer. Mr Tan explained that, at the time of the launch, most reinsurance companies in Asia, apart from ACR, were domestic national reinsurers which merely added capital to the local insurance market.hide“The effect of this is that it accumulated risk and added little value in terms of product development and knowledge transfer as there was also no incentive to be different or competitive,” he explained. Mr Tan said that there was also no reinsurance capacity purely dedicated to the region and so Asia was largely dependent on global capacity and technical expertise from outside the region. During the 1997 Asian financial crisis for example, the region saw an outflow of funds and this had what he described as a ‘systemic’ effect. “All the infrastructure projects in the region stopped and the currencies of Asia collapsed. So I, and a few like-minded partners, decided there was a real need to fill this gap with an Asia-focused reinsurance platform with the right risk expertise and knowledge of the region and the commitment to support Asia’s long-term growth,” he said. The obvious question to pose is: Why had this not occurred to anyone else before? Mr Tan said that it is not so simple, particularly as the Asian market is such a relationship-based community. But there was also complacency which worked in his favour, he said. “The general view for most people is that to build a long-term business you need to build trust and you can’t start such a business just like that. Since there were already very established and big players in the market, there was also complacency in the market on the supply of reinsurance capacity. At the same time, many did not quite see the demand potential yet,” explained Mr Tan. The reinsurer said that one of the challenges he faced when creating the business was that people were also sceptical because they did not think he would be able to find enough business to generate the returns required by capital providers. Experience has proven him right, he believes. The appeal of a truly Asian-based reinsurer is perhaps obvious on the surface. But, in this hard-nosed financial world where returns are so difficult to earn, one has to wonder how and why can an Asia-based and focused reinsurer really do a better job than one of the big western reinsurers with their huge resources and hard won reputations. Mr Tan pointed out that, prior to last year, most of the established players had published very high catastrophe losses in the west. Katrina, he pointed out, was many times worse than the Kobe earthquake of 1995. The reinsurance market was tough for a few years following that loss, and Asia was also affected. In his view there is therefore a need to address this ‘total reliance’ of capacity outside the region. Mr Tan also said that, with the persisting economic problems in the west, Europe and the US need growth engines in Asia such as China and India. For this reason Asia will benefit from dedicated capacity to support its economic activities, he said. “What differentiates ACR is our depth of commitment to Asia and we continue to look for more partners who have the same vested interest to develop the long-term viability and sustainability of the Asian market,” added Mr Tan. So the next obvious questions to ask were: What is the growth strategy and what are the keys to success in the Asian market? “While all (re)insurers will get hit if a big event happens in Asia, Asian-focused (re)insurers that do not underwrite anything in the west will not be affected should similar events occur there,” said Mr Tan, adding that this is an advantage for Asian insurers and reinsurers. According to Mr Tan, as the Asian economy grows, it is now the time for insurers and reinsurers to grow as demand increases. “As a ratio of income, insurance penetration is the highest in Japan because it is the most developed. China has grown exponentially and Indonesia is next and picking up. We see a lot of opportunities in Asia. If you include Australia, New Zealand and the Middle East it accounts for 60% of global population. It is therefore important to create value for Asian companies as the region develops,” he explained. Strategically, ACR is focused on building facultative reinsurance business in Asia. From launch, Mr Tan said that the company has placed an emphasis on having a high ratio of underwriters. Currently ACR has the largest team of facultative underwriters in Asia by any standards, said Mr Tan. And, over 35% of the group’s staff work as underwriters. If claims and risk management were included it would be more like 55%, he added. In terms of geography, ACR is committed to Asia. “We see Japan as a very long-term market and normally as a new player you do not get much chance to get involved. Having doubled our business in this market each year, Japan is now one of our biggest contributing markets. This is a largely because of our local presence in Japan, which we recognise is very important as an Asian reinsurer,” he continued. As elsewhere in the world, transparency and talent are the two main challenges that face the Asian risk and insurance market, according to Mr Tan. He said that, apart from Japan, other markets are still developing and, given the fast growth of exposures and frequent natural catastrophe events, more needs to be done to collate good information on risks for effective modelling and pricing. “ACR aims to help increase the level of transparency for the industry so that we can compare markets, exposures and peaks, and find out how to add value to the region,” he said. “In terms of talent, as markets in Asia are relatively young, there is a shortage of experienced resources to meet market demands. Training by reinsurers is therefore necessary to help fill this gap. In this respect, ACR hires experts from all over the world and brings them to Asia to support our operations as well as to provide training to our clients and new entrants to the industry,” continued Mr Tan. Another key challenge is natural catastrophes, he said. “We saw a number of large scale events last year in Australia, New Zealand, Japan and Thailand. These events were very valuable as we learnt a lot of lessons. Amongst them, we now see a critical need for catastrophes to be managed regionally and globally as it is becoming increasing difficult for them to be contained locally. Many markets were not able to handle the claims,” he said. Mr Tan said that the Thai loss, like the whole of 2011, was ‘totally unexpected’ partly because it did not occur solely because of climate change. “The event was a result of a combination of natural causes and human decisions. Even the Thais admitted as much. In Japan, everyone is aware of earthquake threats, but in Thailand, the general consensus prior to the floods was that the country was safe with low catastrophe risk. To have a catastrophe of this magnitude because of a flood is unexpected for Thailand,” he explained. But what should the market do to react to such a challenge? Insurers and ultimately risk managers are looking for answers and will not wait forever and valuable business could be lost as a result. “First, you need more transparency to understand if the pricing is adequate. For every dollar of exposure you need premium income. There is a need to review the different prices and exposures in different markets so as to ensure that prices charged are uniformed and fair,” said Mr Tan. “Secondly, we have to work with risk modelling companies closely on some of these topics to make some real progress to set better control of exposures,” he continued. “Our Asian catastrophe pool, for example, allows for such transparency. To further encourage this, the industry needs to come together as partners to share rather than see each other as competitors,” concluded Mr Tan. The reinsurer’s conclusion certainly concurs with most experts within the international risk and insurance market recently interviewed who have undoubtedly concluded that the only real way to tackle such big risks is to sit down as openly as possible as an industry, lay the cards on the table and thrash it out in a mature and constructive way. It is in the interests of all governments and international financial and economic bodies to make sure that risk solutions to such problems are discovered, and sooner rather than later. But, unfortunately, it seems that the biggest potential impediment to this actually happening will be the rules and regulations that these very governments and international bodies have created to stop competing parties from talking to each other and customers about such problems and seek solutions. It does not seem that there is any silver bullet solution to this thorny issue in Asia, just as there isn’t in Europe or the US. But at least Asia now has a serious regional player that can help ensure that the debate is underway and that perhaps the solutions are more locally applicable than they may have been in the past.

Asia first – John Tan, ACR Capital Holdings and Asia Capital Reinsurance

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