Shanghai will emerge as a reinsurance hub

As some of China’s re/insurers find their feet and settle on a reinsurance strategy Shanghai could develop as another reinsurance hub in Asia over the next few years, just as Singapore has, Moungmo Lee, managing director, analytics, AM Best, told SIRC Today.

Lee notes that while Toa Re and Korean Re have both reached the top 10 in the Top 50 Global Reinsurance Groups, in terms of absolute capitalisation, they are small relative to the world’s biggest reinsurance companies.

Some of China’s companies have the potential to be much bigger, however. He notes that China Re reached an absolute capital size of close to $9 billion in 2014 and is likely to exceed $10 billion once it goes public by the end of 2015. In addition to this, he predicts that some of the country’s biggest insurers will also branch into reinsurance—and they could become sizable entities.

“Just like in Japan, where major insurance groups conduct reinsurance business, major Chinese insurance groups will have reinsurance subsidiaries in the near future,” Lee said. “The size of the reinsurance business of companies such as PICC and other large insurance groups could quickly rise up the list of the Top 50 Global Reinsurance Groups, depending on their reinsurance strategy.”

He notes that the profits of most of Asia’s reinsurers exhibit some different characteristics to those of their peers and rivals globally.

Most of the Asian reinsurance companies in the 2015 Top 50 Global Reinsurance Groups show higher combined ratios compared to the others in the list, he notes, mainly due to a higher composition of business with variable commission (profit commission), Lee said.

“In some cases, the reinsurance companies exhibit less volatility than the direct companies in their own markets. In absolute terms, the underwriting profitability of Asian reinsurers seems to exhibit a clear gap relative to others, but from a risk-adjusted (profitability) point of view, the gap may not be as significant as it seems,” he added.

“The results of the big four Asian reinsurers were driven by investment income rather than a positive underwriting income over the past five years. Thus, the profitability outlook of the Asian reinsurers would be in line with the investment income outlook, which varies by market but is generally negative.”

Most Asian insurers continue to enjoy stable results, but they face increasing challenges demanding a change in business model that is sustainable for the long term.

“Traditionally, many of the Asian reinsurers were characterised by a dominant local market position and a portfolio that is concentrated on proportional businesses. Due to these characteristics, generally they showed less volatile results regardless of the market cycles, albeit with a higher combined ratio,” Lee said.

“With the changes of the local insurance market dynamics and intense competition among reinsurers, however, this business model is facing increasing challenges. Means for capital supply have widened for the direct insurance industry and, moreover, the business retention capability of the direct players is on the rise, especially for the larger ones.

“Even for those reinsurers who continue to maintain or even increase their market share in their respective local markets, the business portion from large cedants is decreasing. On a positive note, the change in market dynamics is a gradual shift whereby the Asian reinsurers have time to respond. On a negative note, Asian companies are not allocating sufficient time and resources to carefully study the fundamental market change.”

Partly to counter this, many players are seeking diversification.

“Asian reinsurers are actively diversifying into other business lines and broadening their geographical scope,” Lee said.

“They are looking at life reinsurance, personal lines business with some solvency relief characteristics and agricultural business, which are lines with higher premium volume. Broadening geographical scope into other countries is a priority for many Asian reinsurers but the experiences have not been too favourable thus far as the overseas premium reaches a certain size."