Sky high capacity will fuel another comfy year for Asian insurance managers: Aon

The broker’s analysis of the performance and outlook of the major classes of insurance across the region is fully supported by the recent slew of annual results announced by the leading international insurance and reinsurance groups. There is hopeful talk of an inevitable end to the soft cycle among the carriers as the margins compress. But the fact is, most of the big insurers and reinsurers used their results announcements to promise investors that they would maintain underwriting discipline and reduce volumes if required, as well as cut costs and return capital if necessary. hide The results announced by leading Australian insurers QBE and IAG, of this issue, are typical of the trend across the globe. Aon’s latest Asia report states that it saw continued pricing pressures across most classes, and a challenging investment environment that has “pivoted discussions from underwriters around the need to improve underwriting performance”. Aon said that, despite the fact both insurance and reinsurance markets continue to be very competitive, there is a growing recognition that continued reduction in rates and broadening of terms and conditions is not sustainable in the medium term, particularly in the current economic environment. But the broker also concedes that market capacity generally remains “plentiful”. “Another relatively benign year saw very few significant insurable losses despite some regional and global insurers sustaining large losses, like the Tianjin China port explosion. This seemingly made little impact on the local Chinese market or the region as a whole. Coupled with more than adequate capacity in the region, the current competitive environment appears very sustainable,” concluded Aon. So what is the outlook in the major classes for Asian corporate insurance buyers this year? Buyers of aviation insurance can expect further rates decreases in the absence of a significant event driven by overcapacity. Aon reckons that the airline rates are below pre-9/11 premiums, which it said are widely considered to be unsustainable. Combined accident and attritional losses in 2015 are $1.5bn for the year set against a premium pool of about $1.2bn, reported Aon. “This also has increased the concern [about] the narrowing gap between attritional losses and diminishing premium. At these levels the market will be unable to absorb a major loss,” added the broker. Marine insurance buyers can also expect more competitive pricing and it will probably become even more aggressive during 2016, driven again by what the broker describes as “overcapacity”. “We anticipate that as margins are squeezed, claims will be scrutinised even [more closely]. We expect to see continuing movement of underwriters between insurers as well as from the broking sector,” commented Aon. Mining companies can also expect another year of softening premium rates, but further significant reductions will probably not be available from the specialist insurers in the mining market, according to Aon. “Insurers will continue to focus on flood risk, maintenance and risk management in the face of clients’ desire to preserve cash and extend the life of assets. M&A will continue in the sector throughout 2016,” predicted the broker. Construction may have slowed along with the regional Asian economy in recent times but even so, compared to other regions, there is still more investment taking place in Asia than elsewhere and this of course has made for a very competitive insurance marketplace, said Aon. The broker reports that capacity continues to increase, both from the regional centres of Singapore and Hong Kong, but also from London and elsewhere in Europe, as the market seeks opportunities for portfolio growth. “The lack of significant losses has also helped to fuel appetite for construction risk. There have been no major project delays, and insured losses from natural catastrophes in key markets, such as Indonesia and the Philippines, were below historical trends during 2015,” commented Aon. Meanwhile, some local markets have sought to counter the slowdown in the number of projects by retaining as much business in-country as possible. “Continued interest and growth in terms of market capacity is expected, as both macro data and proprietary research suggest that infrastructure spending within Asia will be considerably greater than what is being undertaken in other parts of the world,” concluded Aon. Energy market insurance buyers will demand premium reductions as they struggle to cut costs in a depressed market. Aon believes the market will deliver those reductions. Risk managers in the Asian power sector can look forward to greater competition in 2016 as more risks start to emerge from construction into the operational phase. The outlook for losses is stable. Power losses worldwide have been roughly $2.5bn for the past four years and that trend is expected to hold true again during 2016, said Aon. Buyers of financial lines and casualty cover in Asia can expect to see some new niche capacity in the region, either in the form of managing general agents or new markets as insurers look to differentiate themselves into niche products, predicted Aon. “WR Berkley is beginning to hire across all lines of business and will also add new capacity during 2016. The increased interest in cyber will continue into 2016 and could mark a big year for the product,” said Aon. Buyers of property insurance across the region can look forward to a continuation in the downward trend in rates this year as an increasing amount of capacity is focused on a limited premium pool, the company added. “Chinese, Korean and Japanese insurers continue to take part in non-Asia risk coming through London to be placed in Singapore and that is expected to continue in 2016, partly to take advantage of the competitive Asian market but also driven by global clients looking to diversify their programmes,” explained the broker. Structured credit and political risk is of rising interest to Asian risk and insurance managers, just as it is to their peers elsewhere in the world. Aon commented that the overall quality of many of the transactions now being presented to the insurance market from corporate and banking clients is generally lower than in 2013 and 2014. In some cases, this is leading to a “misalignment” between client demand, bank market capability and insurance market risk appetite. Aon said that, as a result of an increase in claim notifications from China on structured credit policies, insurer appetite for taking on new Chinese credit exposure has reduced and underwriters are becoming much more selective. The broker also said that it expects to see increasing demand from both financial institutions and corporate clients for cover for sovereign non-payment risk and exchange transfer risk (cover against currency controls being implemented by certain governments to prevent capital flight). Trade credit insurance is another area of rising popularity among Asian risk and insurance managers, according to market experts. Commodity producers continue to see falling prices and tight margins and it is very likely that it will be another difficult year for global trade. But Aon reports that Asia is still seen by global insurers as an area of growth and that will continue to feed capacity into the region during 2016, despite caution sparked by uncertainty in China and stock market volatility. “Insurers will therefore be placing more emphasis on managing capacity. Instead of writing large credit limits above and beyond actual requirements, insurers will be looking at clients’ needs more closely to maximise the use of their capacity and expand the quotas they have out in the market,” said Aon. Southeast Asia could be a “bright spot”, according to the broker. “Countries such as Indonesia, Malaysia, the Philippines and Vietnam have been growing markets for a number of years and the continued poor performance in China will encourage a shift of capacity towards these markets,” predicted the broker. Aon said that international insurers have been in the region long enough to understand these countries well and, combined with maturing banking markets, this should help fuel growth. The broker believes that India could also “strike a positive note” during 2016. “The regulator is starting to liberalise the market by allowing local banks to issue credit insurance policies, which will allow more secured funding via credit insurance. New guidelines are expected to be confirmed during the first quarter,” commented Aon. “Another theme for 2016 will be a move away from whole turnover policies towards excess-of-loss structures, particularly among more sophisticated clients with strong balance sheets, that are looking at how to get better value from the product. For these clients, price may not be the primary consideration so much as how to generate more cover and therefore sell more products. Ultimately, that means taking a larger share of the risk,” concluded the broker.

Sky high capacity will fuel another comfy year for Asian insurance managers: Aon

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