Competition drives capacity to Asia in search of growth

Adrian Ladbury [AL]: How and why has demand for reinsurance grown so impressively in recent times in the Asia-Pacific region? Malcolm Steingold [MS]: The APAC region has experienced substantial economic growth in the recent past, with substantial GDP growth experienced in most countries. This has led to growth in personal and business wealth, accompanied by increases in aggregated risk. Insurance has supported this growth and consequently, there has been greater demand for reinsurance. Economic growth, losses and regulatory tightening of capital management have all contributed to an increase in the demand for reinsurance. AL: Typically, what kinds of structures and covers are bought in this region and how is this expected to change? MS: We generally see traditional structures, with quota share reinsurance still more prevalent than excess of loss. This is expected in developing markets. The exception is Japan, where there has also been substantial use of catastrophe bonds.hideAL: How have rates developed in the Asia-Pacific region and what is the outlook based on recent renewals? MS: Rates have generally followed the rest of the world and decreased, in line with the trend of supply growing at a faster rate than demand. Capital is abundant as reinsurance still represents an attractive investment, despite low interest rates and soft pricing. AL: Demand is up in Japan—why? MS: There is always demand in Japan because of the need for substantial earthquake cover. Insurers’ buyers are taking advantage of the soft market by buying more cover for minimal if any increase in dollar spend. AL: In your recent report, you say that domestic Chinese reinsurers will gain significantly more credit than offshore reinsurers under the new regulations. Why would this be the case and how is this justified? MS: There may be a lower capital charge for domestic reinsurers, but that doesn’t mean they have written more business. The aim of C-ROSS [China’s new risk-based insurance regime] is to retain more reinsurance revenue onshore by having a higher capital charge for offshore reinsurance. Notwithstanding that, we have not noticed a significant change in the use of foreign reinsurance capital during the most recent renewals. AL: Your report also forecasts that more collateral will be used by offshore reinsurers to narrow the gap. Why not just go onshore? MS: If the risk needs to be collateralised, that will be reflected in the rates, so it’s a question of the pricing gap between an offshore reinsurer offering collateralised lines against domestic reinsurers. AL: Are there limits to the amount of reinsurance that a Chinese ceding insurer can buy under the new rules? Do rules exist to prevent an insurer acting effectively as a fronter to reinsure virtually all the business overseas? MS: Chinese cedants are not buying anywhere near the amount of available limit. In regard to the second question, it would not make economic sense to reinsure virtually all business overseas via fronting arrangements. AL: Do you expect a flood of new foreign reinsurers to apply for Chinese licenses under the new regime and why did they not do so before? MS: Many offshore reinsurers have sought access to China through the Lloyd’s China platform because of the high cost of establishing themselves domestically in their own right. Having said that, most major reinsurers will, if they haven’t already, be looking to establish an onshore presence in China in some form. Before C-ROSS, there wasn’t the imperative to establish an onshore presence and reinsurers could more economically write business in China from the major markets such as London, Singapore, Bermuda or Hong Kong. AL: What would drive demand for reinsurance under Hong Kong’s new risk-based capital system? Who is aiming to tap this demand and how? MS: The introduction of risk-based capital regimes generally will result in a greater demand for reinsurance capital. AL: Turning to India, what are the opportunities for reinsurers under the new rules in in this huge market? What kinds of risks are they looking to tap? MS: The Indian market is already well serviced by reinsurers. But now that foreign insurers and reinsurers are able to own 49% of a company in India, this presents greater opportunities for offshore reinsurers. The area of greatest opportunity is agricultural reinsurance where, because of government subsidies, the premium volume has almost doubled in the past two years. AL: Do you expect a big investment in Indian insurers following the raising of the ownership cap to 49% and, if so, why? MS: Yes, the growth of both the Indian economy and the Indian insurance market present significant opportunities for the global reinsurance market, which is finding it increasingly difficult to achieve growth in the more mature markets. Taking a larger share in a joint venture allows insurers to play a more meaningful role in the economic and insurance market growth story. AL: Do India and China offer both serious premium volume growth and profit potential now or are these longer-term investments? MS: This depends on one’s perspective and market position in either of these two countries. China and India have been large insurance markets for some time and while still experiencing impressive growth, they should not be viewed as developing markets anymore. These countries already have sustainable premium volumes for current investment and great potential for longer-term strategic investments. While China and India are challenging markets from a profit perspective, this is no different to many other developed markets around the globe. Profitability is dependent on underwriting skill and how individual companies navigate the competitive environment, so it’s very difficult to generalise. China has been a difficult market for foreign insurers and they still represent less than 2% of the market. They have not been entirely successful in developing the opportunities. This is primarily due to the scale of distribution required in a country the size of China. China is also still predominantly a motor market dominated by local insurers. The opportunity for foreign insurers is to provide specialist products not readily available, via the right joint venture partner that is able to provide sound distribution. Credit insurance, for example, is a big opportunity—as is agriculture. Agriculture represents the second largest insurance premium pool in China and continues to grow. Groupama is an example of a foreign company experiencing success in a specialist class such as agriculture by offering specialist expertise and building a sound relationship with a credible joint venture partner.

Competition drives capacity to Asia in search of growth

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