Big cat losses have been forgotten too soon
Reinsurers have lost sight of how exposures have grown and have too quickly forgotten the big losses that hit the region just three years ago, Pietro Toffanello, head of property-casualty business in Asia Pacific for Gen Re, told EAIC Today.
He said that intense competition with players attracted by the strong growth prospects in the region is driving rates down and market conditions are very competitive in all lines of business.
“On top of the current oversupply of capacity, Asia is one of the very few areas in the world where economic growth has continued to be strong and prospects for our industry are promising,” Toffanello said.
“Therefore it attracts more interest than other parts of the world. Everyone wants to be here and write some business and this puts pressure on prices. But memories are very short if we consider the fact that this region faced its largest ever insured losses only three years ago.
“There is a lot of talk about how much capital has entered our industry recently, and I feel sometimes we lose sight of how much larger the exposures have become, especially looking at the tail of the distribution.”
In terms of property-casualty business specifically, he said demand for insurance and reinsurance is growing and will continue to do so.
“With increasing insurance penetration, and the irreversible trend towards urbanisation, values at risk and their concentration continue to grow,” Toffanello said.
“Also, a more numerous and wealthier middle class will want to find insurance solutions to protect their assets, with a growing demand for more tailored and sophisticated products, especially on the liability front.”
That does not mean there are no dangers facing reinsurers moving into the region—especially when rates are so soft. The region has the potential for very severe catastrophes although this also presents an opportunity when the gap between economic and insured losses is considered.
“The increase in frequency and severity of extreme events is undeniable. If we couple this with the growth in exposures, the insurance and reinsurance industry will need to prepare to cope with ever increasing losses,” Toffanello said.
“Recent events have shown that the gaps between economic and insured losses in Asia is still huge. More can be done to improve disaster mitigation and readiness. There is a clear urgency for governments around the world to be more proactive around mitigation and risk management in exposed areas, without which the opportunity for the re/insurance industry to deliver financial stability at affordable prices will inevitably be limited.
“At the same time, the demand for catastrophe protection will continue to grow exponentially, as governments will continue to explore ways to off-load part of their liabilities to the private sector.”
There are also much wider potential growth prospects. But Toffanello said that Gen Re is mindful of seeking out only opportunities it believes will be stable and sustainable over time. It also understands the importance of differentiating itself from the competition.
“We see interesting opportunities in all the markets we deal in, but want to make sure we develop a presence that is stable over time,” he said.
“We are not interested in taking advantage of temporary dislocations, whether at market or client level. There is a lot of undifferentiated capacity out there, whether from the so-called alternative markets, or from the smaller and lower rated reinsurers.
“Being like everyone else is not a good strategy any more and the increased activity on the M&A front is clearly a sign of that.
“We want to represent a reliable and relevant choice for all the reinsurance buyers who are not just interested in buying a commodity, but want to access our underwriting and claims expertise.
“Our goal is to enable them to have a dialogue with a partner that understands risk and can help them to get comfortable in retaining more risk and earnings over time, while at the same time utilising the highest rated security in the industry.”
Toffanello added that another important factor to consider in any analysis of the Asia-Pacific region should take into account regulatory change—a dynamic that is reshaping the landscape of many countries in the region.
“All countries in the region have moved towards stricter requirements for capital and risk management. We fully support the effort towards applying strong prudential regulation while maintaining open and competitive insurance and reinsurance markets,” he said.
“As new standards and requirements are being introduced and discussed globally, the evolving regulatory landscape will continue to drive capital requirements—and then reinsurance-buying strategies.
“These changes will certainly trigger a revision of net retentions, reinsurance structures and credit quality and I believe this will continue to increase the demand for reinsurance, as an effective and reliable source of capital.”