A harder market reshapes reinsurers’ strategies
Asia’s reinsurance market continued to show hard market conditions in 2023—rate increases and tighter renewal terms—to offset the impact of inflation-induced rising claims, climate change and financial market volatility, a report by Fitch Ratings has stated.
The report, “Asian Reinsurance market: hardening market reshapes Asia’s reinsurance strategies”, published on October 20, notes that retrocession rates increased with limited capacity. This meant reinsurers are likely to enlarge their retention and will have to reshape their risk appetite.
Fitch said it sees improvement in risk selection, including portfolio diversification, repricing, and terms adjustment as the main drivers to preserve margins.
“The frequent natural catastrophes and weather-related losses in recent years, combined with the uncertainty in economic and geopolitical conditions, have led to a continuation in the hard market conditions for Asian reinsurers, similar to those in other regions,” the report stated.
“This put reinsurers in a better bargaining position, as reflected in the increasing rates and stricter terms and conditions during the renewal in the first half of 2023. Still, reinsurers also have to cope with limited retrocession capacity.” Fitch said because of this it sees risk selection as crucial for a stable pricing environment in the long term.
The report revealed that Asia’s premium-pricing rates, reported by various brokers, continued to increase through 1H23, ranging from 10 to 20 percent on a risk-adjusted basis. This is in contrast to the historically modest trend of a single-digit rate increase before 2022.
A mixed picture
According to Aon, Asian reinsurers’ capacity was adequate to get primary insurers’ exposures covered. But Fitch said it expects the upward trend to continue throughout the rest of the 2023, amid uncertainty on weather related losses and economic conditions.
Discussing Australia and New Zealand, the report said that price increases continued to be overshadowed by catastrophe losses in the past few years, including insured losses for floods in Australia in 2022, and extreme weather events in New Zealand in early 2023. The losses drove double-digit rate increases in 2023, similar to 2022.
Japan and South Korea also faced high rate increases with stringent terms and conditions in response to the catastrophe activity in recent years, including earthquakes and floods.
Price increases in some other Asia-Pacific countries, however, were moderate. “We expect reinsurers to maintain underwriting discipline and improve risk selection amid the hard market,” Fitch said.
It added: “We believe reinsurers will reduce exposure limits for catastrophe losses and also lower the commission rates to maintain profit and capital adequacy.”
Weather-related losses could push rate increases even higher amid the climate uncertainty, in Fitch’s view. Many Asia-Pacific markets, including China, Japan and Australia, were hit by extreme weather in 2022 and 1H23. Australia has faced back-to-back La Niña conditions in recent years and floods in the east in 1Q22 caused the highest insured losses on record.
China suffered the worst flooding in decades in Henan province in July 2021 and heatwaves in numerous regions in 2022.
The region continues to experience severe weather events following extreme rainfall in the northern region of China, including Hebei province, Tianjin and Beijing, in early to mid-August 2023. Extreme weather hit New Zealand in 1H23, with flooding in Auckland and Cyclone Gabrielle causing record losses.
Several other countries in Asia-Pacific, including Myanmar, Bangladesh and India, also experienced extreme weather losses due to landslides and heavy rainfall affected by Cyclone Mocha.
Regulatory concerns
The report highlighted some other concerns for reinsurers, noting that several regulators in the Asia-Pacific region have been continually strengthening their regulatory capital requirements for reinsurers.
“This will encourage reinsurers to build more robust capitalisation, and should help the industry in becoming less susceptible to economic and climate changes,” the report said.
