There is opportunity amid the changing landscape
Ahead of SIRC, four experts from Aon’s Reinsurance Solutions covering four different regions sat down to discuss where they anticipate growth, and how their clients are coping with digitisation, and regulatory developments.
Where are you seeing growth in your region?
Rupert Moore, CEO Japan, Reinsurance Solutions: We see a number of growth opportunities, ranging from supporting our clients’ efforts to reduce the ‘protection gap’ for natural catastrophe, to the development of specialty casualty products and helping clients with global exposures.
George Attard, CEO Asia, Reinsurance Solutions: We are seeing underlying organic growth. This is driven by governments’ policy pushes on infrastructure investment leading to increased capacity requirements across multiple lines of business, and new product support such as cyber, specialty casualty, health, specialty, agriculture and life.
We are also seeing integrated treaty and fac solutions including fac facilities as well as increasing interest in government pools.
Qin Lu, CEO Reinsurance Solutions, Greater China and Commercial Risk, China: Health is the hottest topic in China’s reinsurance market. Aon is leading the efforts to bring together distribution channels, product expertise, insurance and reinsurance companies on this front. Also, protection gaps lie with nat cat risks especially for personal lines.
De-risking may create new opportunities for the insurance industry, and specialty lines including liability, agriculture, credit and surety continue strong growth. Greater China reinsurers are playing more significant roles via underwriting expansions and mergers and acquisitions (M&A).
Robert De Souza, president Asia-Pacific/CEO Australia & NZ, Reinsurance Solutions: Most clients are comfortable with catastrophe limits hence there has been little growth in severity covers that would increase overall limits. Growth in the Pacific region is coming primarily from an increased focus on volatility covers, particularly aggregate protections against frequency, or quota shares to protect retained risk.
This has been helped by reinsurance capacity being available and interested in supporting such protections. Casualty markets have also seen an increased interest in D&O protections.
How are clients coping with digitisation?
Lu: Chinese insurers are big investors in technologies. Many companies are actively developing opportunities, ranging from distribution, underwriting, and claims management to reinsurance.
Second, there is investment in reinsurance trading platforms, and early efforts to implement blockchain into reinsurance processes in order to achieve better efficiency, accuracy and transparency in the future. Finally, improvement in data quality and transparency will also support stronger modelling capabilities.
De Souza: Digitisation, the process of integrating digital technologies into everyday life, has become a primary focus for insurers, especially through the appointment of chief digital officers and chief customer officers. All our clients, especially those with substantial personal lines businesses, have invested heavily in digital marketing as well as processes to improve their service and efficiency.
Personal lines in this region is primarily undertaken on a direct basis hence there is a constant focus on improving their offering to ensure their social and economic connectivity, but especially their competitive position.
Moore: Japanese insurers have been seeking new products with a technological edge. Throughout 2018 there have been multiple partnerships between well-established carriers and startups in blockchain, telematics, cybersecurity or fraud detection using artificial intelligence.
The scope of such developments is not limited to Japan—many clients operate tech-based products to other countries outside of Japan. Finally, Japanese insurance companies are not looking just at improving their bottom line by bringing new efficiencies into the value chain, they are also developing complete new products based on pioneering technologies brought by the startups.
Attard: We are seeing increased partnerships between insurers and insurtech providers across the value chain: distribution/pricing and underwriting/claims management/administration; embedding technology to increase operational efficiency; and leveraging embedded devices and the internet of things (IoT), particularly in motor.
What new regulatory developments are on your agenda?
Moore: The biggest regulatory challenge in the next three years is expected to be the implementation of IFRS17. IFR17 does not distinguish between life and non-life contracts—the issue is short-term versus long-term contracts.
IFRS17 is going to have a big impact on insurers issuing contracts with multi-year coverage periods, mainly life and health insurers, but also non-life insurers issuing longer duration contracts.
The fundamental change for reinsurance brought by IFRS17 is that reinsurance may not directly mirror the underlying insurance contracts. Where this is the case there may be mismatches in the balance sheet that need to be considered.
Aon is committed to supporting clients answering the reinsurance-related questions and developing solutions that give our clients the most appropriate coverage under IFRS17 rules.
De Souza: In Australia the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry is still under way, with an interim report issued on September 28 2018, and the final report due in February 2019.
The final report will impact the regulatory agenda, and at this stage the Royal Commission has indicated application and enforcement should be increased, rather than there be substantive changes to regulation.
Lu: Mainland China and Hong Kong are both upgrading their solvency regimes. China expects to accomplish its C-ROSS Phase II project by mid-2020. Hong Kong will implement the new three-pillar solvency regime by 2021.
Second, IFRS 17 will be implemented in Hong Kong in 2021, impacting local insurers as well as China insurers listed in Hong Kong. All these changes might have an impact on the reinsurance demand.
Finally, the Chinese government is loosening its criteria of foreign insurers setting up in China. Qualified Hong Kong reinsurers receive favourable treatment under C-ROSS, so will the supply of reinsurance change as a result? We’ll see.
Attard: De-tariffication, which is leading to increased competitive pressures and requirements to differentiate products and services; strengthened regulation, such as RBC2, increasing minimum capital requirements; IFRS17 compliance; and the ASEAN Economic Community encouraging increased cross-border trade and cooperation.
Other examples are impacting specific lines of business, eg agriculture—in India, new PMFBY operational guidelines were introduced on October 1.
How are the needs of your clients changing?
De Souza: Increased complexity is an often-cited phrase when we talk about change in our business—and it is true. Insurers in today’s economic environment have a greater and more complex role to play with customers, industry, society, shareholders and regulators as increasingly active stakeholders. There is much more to the industry than correctly pricing for insurance risk exposure.
This change has led to an increasingly diverse range of skills and experiences being sought by insurers beyond the traditional industry and has created its own additional challenges.
Moore: Clients’ needs continually evolve driven by normal business factors such as regulation, globalisation, a need for product and distribution innovation to meet their own customer needs, and investor tolerances.
Attard: Given regulatory changes—reinsurance is increasingly being seen as an accretive form of capital; direct pricing is putting pressure on expense, therefore optimising reinsurance structure/costs; plus there is an increasing growth and diversification focus.
Lu: Reinsurance demand from most clients has evolved from a capacity play to a more comprehensive partnership with brokers and reinsurers who can support with product knowledge and underwriting expertise.
They can help develop complex structures to deal with solvency, volatility or other specific concerns. Reinsurance needs have become more and more differentiated; from a market sizing perspective, motor reinsurance will continue to reduce while speciality quota shares keep increasing.
What will be the main talking points at SIRC?
Lu: Insurers and reinsurers will be interested in what the other side is doing to target top line/bottom line jointly; market activities including M&A; the Lloyd’s budget review; personnel movements and their impact to the upcoming renewal.
Typhoon Mangkhut doesn’t seem to be a very significant event but there’ll be a lot of questions about its impact on specific programmes. Finally, premium settlement with certain Chinese cedants remains an issue.
Moore: We expect discussions to be centred on the recent loss activity from the typhoon season, the expected impact on their reinsurance partners and the general market environment for forthcoming renewals.
Attard: The reinsurance market outlook: pricing, capacity, demand changes, impact of recent events, modelling implications; industry M&A activity; growth initiatives; driving profitable growth; and closing the protection gap.
De Souza: For Pacific clients it will continue to be a means to maintain or establish partnerships built on understanding and transparency with their reinsurers. They will want to provide updates on the Pacific market conditions but also understand reinsurers’ approach to managing volatility, pricing and the capacity they can provide on a consistent basis over time.
Most of our market relationships are stable over a period and the ever-present focus on counterparty security remains.
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