1 November 2015 News

Changing regulation will drive demand for reinsurance

The introduction of risk-based capital (RBC) regulatory regimes by regulators across Asia will accelerate the development of insurance markets in the region and drive demand for reinsurance as insurers change the way they manage their capital, Kenrick Law, regional chief executive, Allianz Reinsurance Branch Asia Pacific, told SIRC Today.

Regulators such as Hong Kong and India are working on their own regulations, as are a number of other regulators. As such regimes are introduced, insurers will increasingly use reinsurance as a form of capital relief, Law believes.

“Insurers are intensifying their efforts to search for alternative and innovative ways to access capital and reinsurance protection. As the RBC regime starts to take effect in various markets, insurers will consider reinsurance as a means to provide solvency relief,” he said.

“Hence, reinsurance is becoming an important capital management tool for insurers across Asia.”

He said this knock-on effect has already been documented in some countries. When an RBC-based regime was based in Malaysia, it led to higher demand for quota share (as a prospective solvency relief solution) and also a loss portfolio transfer (as a retrospective solution) protection, he said.

On the regulatory downside, however, he said there was also a worrying trend of protectionism emerging in some countries, which can hinder the growth of reinsurance.

“India, China and Indonesia have recently proposed change to re/insurance regulations. This movement will certainly increase the operating costs for global reinsurers as they are required to set up local offices in these countries,” Law explained.

“From capital usage and operational efficiency, this may not be ideal for either insurers or reinsurers who are active in these markets.”

Allianz is very positive about the Asian reinsurance market overall, however. Law believes it will continue to offer high growth potential. China and India specifically will continue to grow, he said, due to a number of factors including low insurance penetration, rising population moving to urban areas, and a growing middle class.

He notes that as at December 2013 insurance penetration remained low for China at 1.1 percent and India at 0.6 percent, below the average of 1.4 percent for Asia-Pacific and well behind developed markets in this region such as Australia, New Zealand and Korea.

On top of this, growing economic wealth will also lead to a demand for insurance protection across many lines including motor, liability, life and health insurance. Meanwhile, large infrastructure investments will spur demand for engineering insurance, Law said.

In China, he also notes, the economic outlook remains positive which is largely due to the significant support from local government to see continuous market growth and diversity in its insurance product offering.

He said that non-life premiums are expected to benefit from the government’s intention to raise insurance penetration as well as boosting its efforts to drive development of the reinsurance market through regulatory initiatives such as C-ROSS.

“Likewise, in India and Indonesia, the governments are carrying out pro-growth structure reforms, including increased spending on infrastructure, which should boost demand for non-life insurance,” Law said.

These positive factors mean that the Asian re/insurance market will continue to be attractive to global players.

“Global players are still eyeing Asia as a growth engine in the next decades. Re/insurers will continue to set up shops in the region, especially in Singapore,” he said.

He admitted the market has been challenging thanks to soft rates and a low interest rate environment largely due to the continuous quantitative easing measures taken by the European Union, China and Japan.

With this in mind, reinsurers need to get back to basics and focus on underwriting profit to achieve positive results—a process which Law claims has already started.

“At the recent renewals, we observed that reinsurers were being more disciplined and starting to walk away from non-profitable business. The Tianjin explosion and a number of cat events in Australia during the first half of 2015 serve as a reminder to us that the environment will remain volatile, unpredictable and challenging.

“Nonetheless, I am still cautiously optimistic about the development of the reinsurance market in Asia,” he said.

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