Governments are taking the lead
Market participants in Asia face a multitude of challenges that are affecting the market simultaneously, making it very difficult to respond adequately to each one, Moungmo Lee, general manager, analytics, AM Best Asia-Pacific, told EAIC Today.
He listed regulatory changes, a soft reinsurance market (benign catastrophe losses over the last two years), sluggish economic conditions (low interest rates or a low investment income environment) and bipolarisation of the industry as being just a few major characteristics of the current market.
He said another issue is capital and compliance costs, which are generally increasing due to regulatory changes.
“The soft reinsurance market to some extent is helping companies to lessen some of the burden of increasing costs.
“With lower investment income and the upside gain for taking additional investment risk being low in the current market conditions, companies are taking on higher underwriting risks and economically passing the peak risk to the reinsurance/retrocession market,” he said.
“Due to the ‘reliance’ on soft reinsurance market conditions, the industry will face a difficult business environment if the reinsurance—especially the catastrophe reinsurance—market hardens. However, this scenario seems to be remote at this point.”
As many of Asia’s insurance markets are homogeneous, differentiation is evident when there exists a cost advantage, Lee added.
“In general, larger companies do enjoy economies of scale compared to smaller players in the market. Smaller companies using the same business model as the larger companies, but with higher cost structures, are being marginalised.
“Demand for reinsurance will continue to grow in the region for multiple reasons,” he said. “Risk itself is growing very fast, demonstrated by the fact that Asia’s portion of global catastrophe losses has increased over the years. In addition, the gap between economic and insurance losses in the case of a catastrophe is still very wide and represents further growth potential.
“Currently, as commercial viability is an issue in expanding catastrophe coverage to a wider population, governments are taking the lead. Governments have budgetary constraints, so incentive systems should be developed for commercial industry to take part in one form or another in order to effect a meaningful reduction in the gap between economic and insured losses.”
He added that the devastating Thai Floods did a lot to improve sophistication in the market with many companies improving their risk management since then.
“In the same way that credit awareness increased after the global financial crisis, the Thai flooding—or any other catastrophe losses—drove companies to improve quickly their catastrophe risk management,” Lee said.
“And due to the large claim sizes and their complexity, the importance of claims management increased as well.
“The need for insurers to maintain their credit ratings has also become more important, with companies who have felt rating pressure due to a reduction in capital from large losses being quick to respond and raise capital (or improve capitalisation) by various means, something which was not very common previously.”
