Plentiful reinsurance capacity holds down rates, sparks innovation

The April 2016 reinsurance renewals were once again a buyers’ market as insurance companies in Asia-Pacific and worldwide found more than enough capacity to meet their needs, according to Aon Benfield’s latest market report. The broker reported that, not surprisingly, reinsurance buyers took full advantage of the continued soft market conditions to buy as much cover as made economic sense. The knock-on effect for primary buyers of corporate insurance in the Asia-Pacific region and worldwide is positive. Cheap and plentiful reinsurance capacity gives primary insurers more room for manoeuvre when competing for their business.hideThe pressure on reinsurance company margins from the continued soft markets and huge quantities of fresh capital market capacity means that the leading players—notably Swiss Re, Munich Re and Scor—are continuing their search for new business in the primary corporate space. Aon Benfield reported slightly rising demand in more mature markets such as the US and Japan. More significant demand growth was seen in India. The broker said that reinsurance capital ended 2015 at $565bn, unchanged from the third quarter of last year but down 2% from year-end 2014. Strong operating performances among insurers and reinsurers through the year were offset by strengthening of the US dollar and rising interest rates, added Aon Benfield. Alternative market capacity increased 12% year-on-year to reach $72bn. This capital now contributes 12% of the global reinsurance capital, with the strongest movement continuing for collateralised reinsurance, said the broker. The high level of competition is good news for those in search of innovation at the reinsurance and primary insurance level, according to Aon Benfield. “Reinsurers continue to invest in capabilities to support ceding company growth from diversifying exposures including US mortgage credit risk, life and annuity risk and other emerging risks such as cyber liability and corporate giga-liability risks,” it said. Regulatory changes and rating agency capital model adoption are expected to result in targeted demand increases in demand for cover. AM Best, for example, has released a draft update to its rating methodology and has suggested that some highly rated companies need to enhance capital adequacy. “Additional reinsurance, properly structured, will provide a meaningful component of this capital increase,” commented the rating agency. Aon Benfield said its outlook for the June and July 2016 renewals period remains “positive”. Insurers will probably achieve improvements in pricing, terms and conditions similar to those achieved for the first quarter renewals, it said. Change afoot in India and China Aon Benfield’s latest analysis states that regulatory developments will reshape reinsurance markets in China and India. “A number of regulatory actions in Asia are changing the market landscape. Key regions like China and India are seeing reform implemented that will likely bring new market players and potentially create reinsurance supported opportunities for insurers in the market,” states the report. China The most significant regulatory change in China is the China Risk Oriented Solvency System (C-ROSS), the second-generation solvency regime. As reported previously in Commercial Risk Asia, this new regime was formally implemented in January this year after a transition period that started in February 2015. Under C-ROSS, reinsurance impacts an insurer’s solvency through the capital requirement on premium risk, reserve risk, catastrophe risk and credit risk, explained Aon Benfield. The Chinese market is still awaiting further detail on how C-ROSS will actually be implemented in full. But, despite this, the broker said some cedants have started to try and work out how reinsurance decisions impact solvency and this may have an influence on future major renewals, especially for those insurers with weaker solvency positions. Aon Benfield said one notable topic is the choice between domestic reinsurers and offshore reinsurers. The broker pointed out that credit risk factors differ “significantly” between reinsurance assets associated with domestic reinsurers and offshore reinsurers. Those offshore reinsurers that provide collateral may narrow the gap. As a result, there may be an increase in the use of collateralisation in China in future renewals, concludes the report. China also introduced a new reinsurance registration system in January of this year. Under this system, Chinese insurers are only allowed to deal with formally registered reinsurers and reinsurance brokers. Also, only those reinsurers that have required international ratings can write business from Chinese cedants, explained Aon Benfield. “This regulation helps strengthen the market security and mitigate the credit risk. Some reinsurers may be filtered out if they cannot meet the registration requirement or do not regularly update their profile as required,” commented the broker. Combined with the central government’s policy of “more reinsurance players”, the new regulations that may favour domestic reinsurers, this is prompting more reinsurers to enter the Chinese market, notes the report. In the first quarter of 2016, the regulator approved Taiping Re China, PICC Re and Qianhai Re. Prior to these, the only local Chinese reinsurer was China Re. According to Aon Benfield, other local reinsurers are expected as offshore reinsurers are applying to open branches and subsidiaries in China, and Lloyd’s syndicates are using Lloyd’s China’s platform. “As a result, capacity from the domestic market will increase and cedants will have more choices,” said the broker. Another pending regulatory change in China is taxation reform. The broker said the central government has clearly communicated that business tax will be changed to value added tax from 1 May this year. The detailed rules for reinsurance are not available yet but the central government has reportedly vowed that the tax burden will not increase after the reform. Hong Kong As previously reported in Commercial Risk Asia, Hong Kong is another vibrant insurance and reinsurance market that is also expected to embrace risk-based-capital (RBC), noted Aon Benfield. The detailed RBC rules will be revealed this year and a quantitative impact study will begin. “To date, Hong Kong has been a fragmented market with many insurers. Whether the RBC regime will cause capital pressure—and the potential for reinsurance to be actively utilised to mitigate such pressure—remains unclear,” states the report. India Aon Benfield also focused on India, a market that is becoming increasingly interesting for the international insurance and reinsurance community (see related article on page 1 on the new Lloyd’s operation in the region). The heightened interest has been sparked by the impending opening of India’s reinsurance market to foreign reinsurers that is expected to provide “significant benefits” to the domestic insurance industry in the form of additional capital and expertise. The big change is that, as a result of insurance laws that were passed in March last year, overseas reinsurers are allowed to establish local branches in the country. Under the Insurance Regulatory and Develop-ment Agency’s (IRDA) new rules, there will be three categories of reinsurers allowed to operate in India. Under the first and highest category, a branch office is required to retain a minimum of 50% of the Indian reinsurance business. Reinsurers in this category are given priority over reinsurers in lower categories. Reinsurers in the second category will have to retain a minimum of 30% of the Indian reinsurance business. The final category is for reinsurers that set up operations in one of India’s special economic zones. The regulator also issued regulations for Lloyd’s syndicates, members and services firms that wish to set up operations in India, hence the latest news on this issue’s front page. Under these rules, each syndicate needs to retain a minimum of 50% of the Indian reinsurance business, thus limiting retrocessional arrangements. Aon Benfield noted that, while reinsurance branches will have priority over reinsurers based outside of India, the national reinsurer will still have priority over the branches. As Aon Benfield compiled its latest market report, the IRDA had given initial approval to Munich Re, Swiss Re, Hannover Re and Scor to open branches in the country. It is expected that final approvals will be received by the end of this month. RGA and XL Catlin have also applied to open branches and the broker said it expects others to apply shortly. “With a physical presence in the country, the market expects that foreign reinsurers will be able to better assess risk and be able to reinsure risks beyond their current scope in the region, creating real opportunities for reinsurers,” stated the reinsurance broker. “Beyond improved underwriting of currently reinsured risks, it is anticipated that reinsurer expertise and support will play a key role in insurance companies being able to broaden insurance offerings in the market, particularly looking to increase penetration in the mid-market and lower income segments,” added the broker. Aon Benfield also believes that the availability of increased capital inflow will enable insurers to increase penetration of insurance and social security, particularly in the rural sector, among informal workers and for the untapped population in urban areas. As part of this semi-liberalisation package, the Indian authorities also raised the foreign direct investment cap to 49% from 26% in insurance business, in March of last year. “Along with related changes, this potential increase in foreign investment will likely have a significant effect on the insurance industry,” concluded Aon Benfield.

Plentiful reinsurance capacity holds down rates, sparks innovation

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