Outlook good for Asian risk managers as carriers fight for market share

Recent reports from leading international brokers such as Aon Benfield and Guy Carpenter, and nine-month results published by the big international insurers and reinsurers support exactly what a group of leading Asian risk and insurance managers told Commercial Risk Europe over the last few weeks: there is no shortage of capacity and no sign of a market hardening in the primary corporate insurance or reinsurance markets. One risk manager and Parima board member even said that he was beginning to feel increasingly concerned about how low the insurance and reinsurance markets are prepared to go as the sector struggles to deal with abundant capital from return hungry investors and thus seemingly endless soft terms and conditions. “I am of the personal view that pricing of insurance is becoming dangerously low. This is not a general commodity product, it must be priced properly commensurate with the risks it is covering. Insurers must stop lowering prices just to win market share. If we do not stabilise the price of insurance commensurate with the actual risks, there is a real danger the ‘surplus’ capital will flee the insurance market as soon as the equity/investment markets improve and we will be left with a significant dearth of capacity,” David Ralph, Head of Risk Management & Compliance at PCCW, the Hong Kong-based holding company of HKT Group Holdings Limited, the information and communications technology firm, told Commercial Risk Asia.hideMr Ralph is absolutely right to be concerned that a turn in the financial markets could rapidly change the market. This could leave many risk and insurance managers in difficult meetings with CFOs who are perplexed about the sudden rise in cost after a prolonged period of cheap rates and ever wider conditions. Wise risk and insurance managers in Asia and worldwide will continue to seek the best terms and conditions possible with their brokers but, at the same time, carefully warn their bosses that this will not last forever, it could change very suddenly and make sure that these conversations are minuted. But for now the outlook looks rosy, according to market leading firms. Germany-based international reinsurance group Hannover Re commented on the state of the market during its recently published third quarter results. It said that it had seen additional ‘significant’ rate reductions in the renewals at 1 April, 2015 that have resulted in a ‘level being reached that from an underwriting standpoint leaves no room for further price erosion’. In Australia and New Zealand the continued uncertainty surrounding the run-off of losses from the five New Zealand earthquakes of 2010 and 2011 has had a ‘stabilising’ effect on rates, said Hannover Re. For the Asia-Pacific region generally the German reinsurance group said that ‘intense’ competition continues to be the ‘hallmark’ of these markets and had caused rates to decline overall again. The reinsurer rather hopefully added that: “The most recent large losses should, however, serve to subdue any further rate erosion. In view of the prevailing soft market conditions, Hannover Re concentrates on its good, long-term customer relationships and supplements its portfolio with profitable niche business.” From a global perspective, Hannover Re said, again rather hopefully, that it expects the pressure on prices and conditions to ease in the round of treaty renewals in January 2016. “Rising demand for reinsurance protection should have a favourable effect overall on the market development. Reinsurers with an excellent rating are likely to benefit here because ceding companies are imposing even more exacting standards on financial strength,” it said. The brokers are not so confident of a flattening in market conditions, let alone softening. At the start of this month reinsurance broker Guy Carpenter, a member of Marsh & McLennan Companies, published a report at the Singapore Insurance and Reinsurance Congress (SIRC) that concluded that prevailing market conditions continued to allow buyers in the Asia Pacific region to achieve ‘favourable’ pricing, terms and conditions as capacity continues to exceed demand. The reinsurance broker said that Asian insurance and reinsurance buyers have taken the opportunity to increase protection levels. The regional catastrophe limit bought increased by exactly 10% year-on-year and conversely the GC Asia Pacific Rate on Line (ROL) index was down by 9.9%. In its Asia Pacific Catastrophe Report 2015, Guy Carpenter said that the 2015 underwriting year is set to mirror that of 2013 and 2014 by returning a regional catastrophe loss ratio of below 20%. This comes despite continued depreciation of some key zone currencies against the US dollar, the catastrophic explosion in Tianjin, China and the deterioration of prior year losses from New Zealand and Japan. New money continues to arrive in the reinsurance market in search of returns. Guy Carpenter said that outstanding 144A catastrophe bonds had increased by 22% since September 2014, in addition to the completion of Panda Re by China Re (see news on page 3), the first ever catastrophe bond to benefit a Chinese insurer or reinsurer. ‘low interest world’ It is this alternative capital, provided by return hungry investors in the low interest rate world, that has had such a softening impact on the global reinsurance market in recent times. “Appetite for regional primary catastrophe premium from alter-native capital providers remains high and although a key component of the functioning market, penetration on programmes remained low [in Asia] relative to other territories. Such capital is estimated to form close to 6% of total regional catastrophe limit,” said Guy Carpenter. But this proportion is expected to rise. When China Re announced the completion of its bond it also revealed that the Chinese government is looking at potential rule changes to foster the creation of a Chinese catastrophe bond market. Regardless of this, the traditional insurance and reinsurance companies are still very keen to continue their growth in Asia as growth rates in Europe and the US remain very low and emerging markets such as Asia very enticing. There are two key reasons for this. Despite a recent slowing in growth rates, Asian economies still look far more appealing than those in the US or Europe and, despite some high profile losses such as Tianjin and the Thai floods and Japanese tsunami of 2011, losses are not that bad at all. The market opportunities are obvious. Aon Benfield’s annual Country Opportunity Index works out which are the most attractive countries of the world for insurers and reinsurers based on a number of factors such as premium growth rates and penetration potential, market losses and overall performance and political risk. This year’s index saw Indonesia, Malaysia and Singapore tie for first spot. Indonesia’s five-year cumulative net combined ratio was 87.4%, the five-year premium growth rate was 7.2% and political risk was judged to be medium. Malaysia reported a market combined ratio over the last five years of 89.6%, premium growth rate of 6.9% and a political risk score of medium to low. Singapore had a combined ratio of 88.1% over the last five years, premium growth rate of 5.6% and a low political risk score. These are clearly markets that insurers and reinsurers want to expand into. And, one of the reasons for these sub-90% combined ratios is the relatively low level of losses experienced in Asia, said Guy Carpenter. “Despite a number of market losses, the Asian 2015 regional catastrophe loss ratio is currently below 20%. It is therefore unsurprising that we continue to see interest from both new and old capital, providing buyers with a choice of products and a selection of counterparties with which to transfer their catastrophe risk,” said James Nash, CEO of Asia Pacific Region at the reinsurance broker.

Outlook good for Asian risk managers as carriers fight for market share

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

European Parliament approves regulation to tackle forced labour

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

European Parliament approves regulation to tackle forced labour

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

European Parliament approves regulation to tackle forced labour

Related Articles