Regulatory changes constrain already challenged reinsurers in Asia-Pacific

Many of the recent regulatory changes in Asia are creating more constraints than opportunities for reinsurers in the short term, Victor Peignet, chief executive officer of SCOR Global P&C, told SIRC Today.

He said C-ROSS, the new solvency regime in China, for example, means substantial additional capital needs and operating costs for foreign onshore reinsurers, with no extra investment flexibility in return.

“In India, substantial operational costs will be added to foreign reinsurers electing to operate locally, while in Indonesia, a proposed new regulatory framework for reinsurance, aimed at protecting the emerging domestic reinsurance industry, puts local insurers at risk and prevents foreign reinsurers from investing in the country,” Peignet said.

This all comes against a backdrop of what have also been a challenging few years for reinsurers operating in the region, thanks to several severe loss events in the Asia-Pacific. When combined with significant changes in regulations, this has meant overall low expected and actual profitability, Peignet said.

“The series of large cat events in 2010/11, along with the most recent large industrial losses in China, bear witness to the ever-increasing concentration of insured assets and exposures in Asia,” he said.

“In this context, the challenge for reinsurers is to be able to adequately assess, quantify and price the risks in order to bring in more capacity over the long term, along with solutions and expertise to monitor the risk of accumulations of insurable/insured assets in cat-prone areas, and the risk of bottlenecks or the propagation of defects in the supply and integration/transformation chains.”

He stresses that SCOR has a long history in the region, which accounts for nearly 20 percent of its P&C business. It continues to pursue development there, he said.

“Considering the low insurance penetration rates and the in-depth transformations undergone by the main economies in the region, we strongly believe that the Asia-Pacific region will remain a key area of demand for reinsurance and we are keen to take part in the sustainable development of insurance in the region,” Peignet said.

He welcomed government policies in some countries which provide incentives and support to increase what are still very low P&C insurance penetration rates and improve risk awareness. These will help maintain the rising demand for P&C reinsurance in the emerging markets, where urbanisation, special economic zones and industrialisation will continue to develop. “This is particularly valid for the largest economies in the region,” he said.

“Helping societies to become more resilient to disasters is an important role played by the reinsurance industry. The promotion of new insurance business models, which use new technologies and offer new products, is leading insurance companies to partner with reinsurers that provide expertise in addition to capacity.

“Reinsurance expertise and capacity are also needed to enhance traditional products and cope with the accumulation of insured values.”

Things are changing. He believes that over the past eight years, risk awareness in the Asia-Pacific region has increased significantly, along with risk knowledge and the level and quality of information.

“Efforts in this regard need to continue, and the cooperation between the private and the public sectors needs to be intensified. The P&C insurance and reinsurance industry has yet to translate premium growth into a level of profitability that is commensurate with the required investments and the risks carried.”

Much of the pressure on rates in other parts of the world has been generated by the influx of alternative capital into the industry and the use of alternative methods of risk transfer such as insurance-linked securities (ILS). While this is less true in Asia, this form of capacity has had an influence, Peignet said.

He notes that a few large Japanese P&C and mutual companies have been using cat bonds in their protection programmes for several years. New issuers have emerged in 2014 and 2015, including the first cat bond covering Chinese risks, which was launched earlier this year.

“While alternative capital currently represents only a marginal fraction of the aggregated cat limits purchased by Asia-Pac insurers, nevertheless, it has had an influence on prices, by providing competitive quotes that have been used by big buyers and brokers as pricing benchmarks for the higher ends of large traditional cat XL programmes.”