Increased scrutiny of Asian re/insurers cat risk will increase costs

AM Best, meanwhile, has reported that the operating environment for insurers in the Asia/Pacific region has improved in the most recent fiscal period, boosted by a significant recovery in asset prices. As insurance penetration grows and economies develop in the Asia Pacific region re/insurers will play an increasingly important role in funding the recovery of disasters. This will increase rating agency scrutiny of re/insurer catastrophe risk, including the quality of data collected, the systems used to monitor exposures and the models used to determine Probable Maximum Losses, noted Aon Benfield. Rating agencies have previously been restricted in their analyses of these types of risks due to the lack of catastrophe models for many Asian perils, in particular flood and tsunami, and many insurers historically have relied on Cresta level aggregates with little detail, the broker explained. But data quality is improving as insurers invest in systems capable of capturing location and construction information of a global best practice standard.hideRade Musulin, Chief Operating Officer of Aon Benfield Analytics in Asia Pacific, said: “While rating agencies have always considered catastrophe risk in rating companies in Asia Pacific, their focus on the issue will increase as the insurance system plays a greater role in funding natural disaster losses in the region. “Re/insurers with significant catastrophe exposure wishing to earn strong ratings will have to make substantial investments in several areas such as technological solutions to capture data and human capital to evaluate, underwrite, price, and reinsure property exposures. Many of these tasks will take years to implement, meaning re/insurers in Asia Pacific must make investments today to meet requirements likely to be imposed in coming years.” The recent Indonesian earthquake and the flooding in Pakistan are recent evidence of the region’s exposure to natural disasters. “Rating agencies are focused on catastrophe risks for re/insurers that are underwriting property exposure in regions subject to natural disasters, which has been standard practice for quite some time now. Globally what differs is the sophistication and ability for companies to measure this with some degree of accuracy, and the rating agencies’ expectation is that this will improve in many of the ‘emerging markets’ in the near future,” said Kelly Superczynski, Global Head of Aon Benfield Analytics’ Rating Agency Advisory group. “With catastrophe risk playing an important role in deciding the insurer’s capital adequacy, rated companies must demonstrate how they monitor their exposures, how they measure the possible financial impact of natural disasters, and how they plan to fund losses through reinsurance or other sources of capital,” she added. Fellow rating agency AM Best has said in one of its special reports that the operating environment for insurers in the Asia Pacific region has improved of late, on the back of a recovery in asset prices. Insurers have benefited from higher investment income as well as realised and unrealised capital gains that have led to improvements in capitalisation. However, financial results may not be as strong as in 2009, as asset prices rebounded from such a low point in 2008, AM Best cautioned. In addition, the region’s stock markets have been volatile, and insurers are investing new cash flows at extremely low interest rates. Premium growth in most life and non-life markets has remained strong, AM Best said, though Japan’s non-life market and Australia’s life market each experienced contractions in premiums. Prudent insurers have adjusted to low interest rates. Life companies have tweaked product designs, while non-life insurers have raised premium rates and improved underwriting standards. Leading insurers in the region continue to adjust to competitive forces prompted by the emergence of direct sales and distribution through bancassurance. On the regulatory front, the pace of growth in China’s life and non-life markets has led regulators to focus on improvements in market discipline, while Japanese insurers face a revised regulation for calculating solvency, AM Best continued. Asia’s larger players, with limited opportunities for growth in their home markets, continue to look abroad to expand their business. Meanwhile, US-based Prudential Financial Inc. and MetLife Inc. purchased former units of American International Group, to bolster their presence in the Japanese life market. Initial public offerings in the past 12 months have set the stage for more companies to seek financial flexibility to remain competitive domestically while expanding overseas. To access a copy of the AM Best special report, please visit http://www3.ambest.com/bestweek/bestweekreports.asp?rt=ir.

Increased scrutiny of Asian re/insurers cat risk will increase costs

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