Regulatory reforms to boost demand for local reinsurance—Fitch

This is the finding from a report from rating agency Fitch. The report, Asian Reinsurance Markets – Regulatory Reforms to boost Asian Reinsurance Competitiveness, states that these various legislative developments and the resulting changes to the business climate in the region will force direct insurers to rethink their risk appetite and risk management strategies. In particular, many of the legislative changes have a protectionist undertone and are aimed at increasing the amount of business placed with domestic reinsurers, as opposed to the international reinsurers operating in the region. In order to capitalise on these opportunities, local reinsurers will have to make various changes to make their risk management controls more sophisticated and to increase their capacity for what could be an upsurge in premium volume, says Fitch.hideThey will also have to operate in a more competitive environment, as has been demonstrated by the new local reinsurers that have set up in China and other Asian countries in the past 12 months. Fitch believes regulatory reforms will be the key influence on Asia’s reinsurance market and it highlights three specific initiatives. Firstly there is the new capital regime in China – the China Risk Oriented Solvency System (C-ROSS), which is set to be introduced later this year. It is designed to strengthen insurers’ capital requirements and risk management and transparency disclosures, bringing it in line with the insurers facing Solvency II in Europe. Fitch anticipates a number of implications from C-ROSS for local insurers, including their use of reinsurance. “Reinsurance receivables from local reinsurers and overseas reinsurers carry different capital charges, as C-ROSS encourages the placement of reinsurance within the local market rather than overseas. Direct insurers will therefore need to review the appropriateness of their reinsurance ceding programmes and assess the impact of their reinsurance panel used on the capital requirement,” it says. C-ROSS also places greater importance on insurers’ capacity for catastrophe risk as part of the process for determining individual capital charges. “Insurers would need to obtain extra reinsurance cover if their net catastrophe exposure is evaluated to be significant relative to their capitalisation,” states the report. The demand for life reinsurance is likely to be reduced as a result of C-ROSS, says Fitch, given that it requests the life direct insurers to use a more realistic actuarial approach in calculating their life insurance liabilities. But newly set up or smaller general insurers with relatively thin capitalisation will need to rely on reinsurance to mitigate any solvency strain that results from new business, says Fitch. “The growth dynamics of China’s non-life insurance sector remain positive though, despite slower economic activities. In terms of direct written premiums, China’s non-life insurance recorded a growth of 11.6% in 2015 and 9.4% during the first five months of 2016 on a year-by-year basis.” Indonesia has enacted a similar plan to change the dynamics of its reinsurance market by favouring local reinsurers against their overseas counterparts. Back in December 2014, the Indonesian Financial Services Authority issued a circular requiring Indonesian insurers to reinsure all of their motor, health, safety, surety, credit, life and cargo business with local reinsurers. For any remaining business, 25% must be placed with local reinsurers – a marked increase on the previous level of 10%. “Fitch thinks that such protectionist measures will be beneficial for the Indonesian industry in the long run, as this would eventually raise the level of sophistication in capital management, reserving and catastrophe modelling for the domestic (re)insurers. They have traditionally been heavily reliant on international reinsurers for their reinsurance arrangements.” Vietnam is charting a similar protectionist path as it seeks to reshape its reinsurance market. The Ministry of Finance announced a proposal earlier this year to control the extent of reinsurance premiums underwritten by foreign reinsurers outside the country. According to the Association of Vietnam Insurance, less than two thirds of reinsurance premiums were retained within the country. Conversely, India has embarked on a cautious internationalisation of its reinsurance market, allowing overseas reinsurers to set up branches in India. These foreign firms will be required to retain a minimum amount of reinsurance business within the country and Indian direct insurers will still be required to give priority to a local reinsurer when it comes to placing business. But the Indian regulator will also raise the foreign ownership limit in Indian insurance companies from 26% to 49%. Protectionism will not be the only driver of reform in reinsurance markets. Asian regulators are also looking to enlist the help of reinsurers in ensuring a more effective response to the devastating losses resulting from earthquakes in the region. The China Insurance Regulatory Commission (CIRC) and the Ministry of Finance jointly issued an earthquake insurance plan in May 2016, designed to protect households from earthquake and tsunami losses. The insurance will be underwritten by individual insurers as either a standalone policy or as an extension to existing household insurance. So far, 45 insurers have signed up to the scheme. It is a measure that Fitch welcomes: “The agency takes a favourable view of the initiatives by various regulators to implement earthquake insurance schemes in their respective catastrophe-prone markets.” However, it will have to be seen if the schemes encourage greater take-up by households. Taiwan developed its own earthquake insurance scheme for households – the Taiwan Residential Earthquake Insurance Fund – back in 1995 but take-up has never increased beyond 50%. The gap between insured losses and total economic losses arising from natural catastrophes improved in 2015, but Fitch believes it is still far too wide. Many Asian markets have low insurance penetration, which Fitch believes will provide solid business growth potential – including the relatively untapped Indonesian, Chinese and Indian markets. The total insured losses in Asia improved to 19% of the region’s total economic losses in 2015, from 10% in 2014. Asia has by far the largest protection gap (the difference between insured losses and economic losses) of any other region when it comes to natural catastrophes. The size of the gap may have come down in 2015 but this was more a result of a relatively benign environment free of major natural disasters, rather than a significant increase in insurance penetration. The two notable exceptions – an earthquake in Nepal and the explosion at a chemical storage facility – illustrate the difference in terms of protection gap. The Nepal earthquake claimed almost 9,000 lives and economic losses of $6bn of which less than 3% was insured. In contrast, the Tianjin explosion took place in an area of much higher insurance penetration and incurred insured losses of more than $3bn, according to latest estimates from Swiss Re. Nevertheless, the credit quality among reinsurance companies in the region remains strong, says Fitch. Furthermore, efforts have been made to address one of the biggest shortfalls in natural catastrophe insurance in Asia – reliable and comprehensive loss data. Fitch believes that such data is vital for insurers to “better understand and manage its catastrophe risk exposure”. A number of initiatives have been started such as the NatCatDAX, which was established in Singapore in April 2016. It aggregates natural catastrophe data from both public and private sector companies. The NatCatDAX currently covers the Philippines, Taiwan and Thailand and plans to include other Asian markets in the future. In addition, the insurance industry is developing its own data modelling; for example, Aon Benfield’s catastrophe development team is developing models for flood risk in Malaysia and Indonesia. According to Fitch, there is “solid business potential for the Asian reinsurance market to flourish”. Consequently, there should be a wave of merger and acquisition activity and new reinsurance companies in the region, aiming to tap into the vast business growth opportunities. Fitch believes these changing dynamics will be positive for the region and will enhance both the capacity and growth of the Asian reinsurance markets. Furthermore, the dynamics might help address the chronically poor insurance penetration rate for the region. Despite constituting 34% of global GDP and 59% of the world’s population, Asia’s total penetration rate was as low as 5.3% in 2015, with three of the most densely populated countries – China, India and Indonesia – sporting even lower rates between 1.7% and 3.6%. But the Chinese market is most likely to benefit from the changing dynamics, says Fitch, with several new reinsurance companies entering the market. In early 2016, the CIRC approved the establishment of a new reinsurance company, Qianhai Re, in Shenzhen city. The People’s Insurance Company of China (PICC) also plans to set up a new reinsurance firm, PICC Reinsurance. Meanwhile, Pacific Life Re set up a branch in South Korea after gaining regulatory approval, while Mapfre Re set up branches in Singapore and Malaysia in 2015.

Regulatory reforms to boost demand for local reinsurance—Fitch

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