South & SE Asian reinsurers can't price to beat inflation, AM Best warns

South and South East Asian (S/SEA) reinsurers are not likely to muster the pricing power to keep pace with both claims inflation and rising retrocession costs while still playing catch-up on underwriting profitability, analysts at  AM Best have said.

“Although AM Best expects the segment to see sable growth, supported by the expansion of primary insurance markets with economic recovery and increased insurance penetration, S/SEA reinsurers are likely to face headwinds in the meeting their cost of capital over the intermediate term,” analysts wrote in a report on the sector.

Pricing has firmed, but likely remains too far behind the curve to achieve technical profits while chasing inflation.

Two years of relative respite after heavy cat losses in 2018 and 2019 plus ongoing rate increases, very notable in the April 2022 renewals, have firmed results. But, the industry remains at a technical underwriting loss. Combined ratios came down 3 points in 2021 to a still-notable 108%.

“Pricing increases may not be sufficient for S/SEA reinsurers to achieve significant improvements in technical profitability given expected increase in loss costs, if an inflationary environment persists over the medium term,” analysts claimed.

The rise in retrocession costs presents an additional hurdle for rate hardening to clear, AM Best noted.

Technical underwriting losses have left the industry over-reliant on investment gains, AM Best said. While that proved punishing in the H1 2022 market upheaval, hope is held out for the impact of reinvestment gains at higher yields.

But not enough. “Inflation-related impacts on underwriting performance could outstrip any benefits from higher investment yields,” analysts claimed.

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