Asia remains underinsured but industry must remain mindful of climate change

Many markets across Asia remain underinsured, presenting an opportunity for the reinsurance industry to devise solutions. But the industry must also remain mindful of the impact climate change may be having on the frequency and severity of natural catastrophes, an issue that has been somewhat eclipsed by COVID-19.

That is the view of Tobias Farny, chief executive, Asia-Pacific (Greater China, Australia and New Zealand), Munich Re. Speaking during the SIRC 2020 Re-Mind virtual conference, taking place this week in place of the physical 17th Singapore International Reinsurance Conference, which has been rescheduled to November 2021, Farny highlighted some of the key issues facing the industry.

“There are a number of markets where we see underinsurance of core risks such as natural catastrophes,” Farny said.

“Especially in Asia, including China, we see that sums insured do not match the substantial values at risk. Together with the relevant institutions, such as provincial governments, Munich Re is active in pushing solutions for the main natural perils.

“Another area that risks being overshadowed by the ongoing COVID-19 crisis is climate change. Some regions and regulators have been proactively putting the topic of climate change on the agenda.

“The recent bushfires in the US and Australia, for example, have shown that dealing with the impact of climate change is absolutely vital.

“In Australia, the severe weather events experienced in 2019 and the start of 2020 continue to be high on the agenda,” he said.

“These developments go far beyond the insurance sector and have reached adjacent industries such as banking. In China, the motor market is about to be de-regulated. This will have severe impact on the performance of the motor business.

“In connection with our consulting services, Munich Re is active in helping clients to prepare and execute on these new developments.”

Cover for China
Farny explained that, for China specifically, Munich Re believes there is a need to continuously expand the coverage for small and medium-sized enterprise (SME) and commercial business in all lines of business “as many family operations are not covered against a plethora of risks, be it personal or property”.

“For larger businesses, reinsurance continues to provide companies with the ability to secure the balance sheet and profit and loss of primary operations for them to concentrate on their operations and clients.”

Commenting on hardening rates, Farny said the market has been triggered following years of eroding rates caused by excess capacity and low major-loss expenditure, particularly in European markets. This has been exacerbated by low interest rates, which are likely to remain lower for even longer due to the coronavirus pandemic. All these factors are impacting the profitability of reinsurers.

“Insurance covers are likely to become more expensive, particularly for long-term risks in third-party liability and other lines,” he said.

“Over the course of the last few years, we have witnessed the effects of excess capacity and comparable low major-loss expenditure, such as risk prices having come down substantially.

“In some lines, this has led to the exit of a number of players. Given the overall economic situation with foreseeable low interest rates in the years to come, it is inevitable that the entire insurance industry needs to work on bringing back appropriate risk prices.

“Munich Re has been, and will be, a dedicated, stable player in global risk markets and we will continue to devote capital and know-how to understanding risk and the needed price, terms and conditions to go with it,” Farny said.

He stressed that COVID-19 has presented an unprecedented set of challenges to communities and companies all over the world. Munich Re is closely following current developments. “Our thoughts are particularly with all those directly affected by the virus itself or by the economic crisis,” he said.

Farny stressed the impacts of this pandemic will be manifold, and that it is challenging to give precise predictions about the insurance and reinsurance outlook.

“The broad observations regarding the reinsurance industry is that market players will have to take a close look at their capital position and undertake scenarios helping them to prepare for a variety of adverse developments,” he said.

“At the same time, moving to the liability side of the balance sheet, it is equally essential for the insurance industry to achieve a stable earnings scenario for shareholders as well as clients. With social distancing currently in place, it is even more important to be connected with clients to understand their changing needs.”

More tech needed
Farny believes that COVID-19 will accelerate the existing trend of the industry embracing and using technology to a greater extent. He said the requirement to go digital and to use technology will change the way the insurance industry will manage its processes in the future.

“As a people and relationship-focused industry, the use of technology to overcome communication hurdles will allow us to navigate through these challenges. The pandemic will catalyse the need for new technologies to produce stable processes. However, it must be caveated that nobody has full transparency about the political and economic developments in the next months to come,” he said.

“The sector is making a concerted effort to focus on innovation and digitisation, and data and advanced analytics are integral to this.

“Insurance has always been data-driven, but we now have enhanced capabilities and methodologies to store and analyse more data, and we can leverage this data more effectively and efficiently.”

He explained that in an increasingly digitised world, insurers are under pressure to deliver a seamless customer experience. “With more insurer options and commoditisation across products, superior customer experience is an important differentiator.

“Reinsurers can work with insurers to put data at the heart of comprehensive, journey-based approaches to streamlining processes and interactions with clients, and develop new tools to help them evaluate new-age risks, such as quantifying the pricing implications of implementing a predictive model that increases underwriting automation or simplifies an application form.”

Farny added that investment in digital and advanced analytics capabilities is helping the industry reduce costs and streamline operations. This, in turn, is freeing up capital to invest in improved customer and agent experience, as well as products and pricing that better reflects clients’ needs and risks across the region.

He continued that there is demand in the industry not only to upgrade claims management capabilities but also to strengthen the resilience of the entire financial services industry with strong input from reinsurers.

He said that from a product perspective, cyber risk remains one of Munich Re’s most important strategic growth areas. In 2020, Munich Re estimates the worth of the global cyber insurance market at more than $7 billion, with North America remaining the strongest market valued at $5.3 billion.

“We foresee strong growth in Asia, which is currently worth about $450 million, with the biggest demand for cyber insurance coming from the industries most affected by attacks—the health sector, manufacturing industries, and IT, finance and service companies. (source: Munich Re Risk and Trends 2020).

“From experience, our clients want to shorten the time it takes to launch new cyber insurance products into the market, so we have focused on having the right capabilities on the ground in Asia based in our regional hub in Singapore, as well as across our offices in South Korea, China and Japan,” he concluded.