Dichotomy in Asian markets: reinsurance rates harden but insurance remains flat

As COVID-19 hits the balance sheets and capital positions of companies in Asia, industry professionals at virtual SIRC 2020 will be talking about what role reinsurance can play to help with exposure, capital management and other areas of the business.

However, according to Kenrick Law, regional chief executive and head of P&C client management at Allianz Reinsurance, discussions between reinsurers and clients might be more “interesting” than in other years as there are clearly some differences in the expectations around renewal outcomes.

“The interesting thing is the retro market has hardened. Then you see the reinsurance market has hardened to a different extent in different regions—in Asia-Pacific the direct market is still relatively competitive, so we’ll see whether the hardening retro and reinsurance markets will spill over into the Asian market going forward,” he told SIRC Today ahead of SIRC 2020 Re-Mind.

“The European and American markets have already experienced rate hardening on the direct side, but in Asia it is still pretty much flat, or a marginal increase. Hopefully we can see a bit of change in that.”

Asia approached the 2020 COVID-19 pandemic with the experience of the 2003 SARS outbreak fresh in its memory.

Law said that after the 2003 event, Allianz Re had reviewed policy wordings and coverage “and tried to make sure we didn’t pick up unnecessary exposures that we didn’t intend to cover anyway. So we’ve gone through that exercise”, he recalled.

As a result, the reinsurer hasn’t seen a lot of those kinds of exposure coming up in 2020.

One challenge the company has seen was clients’ ability to pay premiums on time.

“They couldn’t go back to the office to settle payment or couldn’t collect the money from their clients, so we do see that quite a bit, for example in the Indian subcontinent, and also in Pakistan,” Law said. “We have worked with clients to manage these issues.”

Drivers of change
Asked if he thought COVID-19 had been an accelerator for change, Law said: “Pandemic is traditionally considered to be a life and health event, but interestingly enough COVID-19 turned out to be a bigger P&C event than a life and health event, at least from the Allianz Group perspective.

“I’m sure our peers and some of the clients might see the same things, so on the P&C side we have seen a bit more impact than life and health.”

For Law, there are four main perspectives for how the pandemic has driven change: accelerated digitisation; risk management reviews; operational management; and policy transparency.

“Regarding digitisation, we’ve had to speed up the whole project. Luckily for Allianz Group we started our project to become more digitised globally about five years ago.

“The change is in terms of systems and equipment and how we interact with our clients, so that’s something we need to continue,” he said.

“On the risk management side, the COVID-19 event has had a huge impact on both the assets and the liability sides of the balance sheet. That triggered a full review of the enterprise risk management framework of the clients and ourselves as well.

“If you look at the typical risk profile, it looks at credit risk, underwriting risk, market risk, etc. But hardly anyone was looking at a scenario like a pandemic, so it’s a good opportunity for companies to review their risk profile and include pandemic as one of the key risk exposures,” he added.

The company’s operational changes align, in part, with its digitisation project, he said, adding: “But more importantly it’s about how we interact with each other internally and with our clients, to make sure we set up a future-proofed operation going forward.”

To ensure the reinsurer’s transparency of policy terms, Law said it had been “similar to exercises we experienced with SARS”.

“We basically turned the whole portfolio upside down to see what we cover and what we don’t, and then tried to make sure that we have a very clear understanding of what we want and what we don’t want, and have a clear underwriting appetite,” he said.

Market conditions
“Market conditions in Asia at the moment are the typical situation, where reinsurance would expect one thing and then the client and the broker would expect something else,” Law reflected.

“I’m sure it’s not unique to Asia, but as I mentioned earlier, there is clearly some difference in the expectation of what the renewal outcome is going to be.

“Clients are already expecting that the market will turn hard, but there’s still a lot of capacity available in Asia on both the reinsurance side and the direct level.

“COVID-19 is actually not helping this situation because it slows down business, the volume will be affected and so on. In order to catch up on their targets, some insurers will have to be a bit more competitive.

“That’s why the direct market in some of the countries in Asia is still relatively soft, whereas the reinsurers will have a different expectation about the renewal. How the increase in reinsurance costs can be transferred to the direct market will make for an interesting discussion,” he said.

The Asian market, characterised by a difference in expectations, has also affected product development for the better, he added.

“Thailand is a very good example in terms of how creative or innovative the market would be, in terms of quickly coming up with a product which caters for the COVID-19 exposure, be it for travel, health or business interruption.

“They embraced the pandemic and tried to come up with some new products. The market is relatively creative in some parts of Asia.”

For the Allianz Group, market conditions mean the company is reviewing all its programmes to make sure that the business is sustainable “because there are certain pockets of the business in our portfolio we see that may not be sustainable”.

“A small loss can tilt the balance to the other side,” Law said, adding that the reinsurer’s aim is to make sure that the business it writes is sustainable and priced adequately.

Opportunities for growth in Asia have shifted slightly from last year, particularly as tensions between the US and China continue to escalate, he said.

“If you’d asked me about opportunities for growth last year I would have said it was in China, India and Africa, and agriculture.

“But if you’re looking at the political tensions between China and the US, then you’ll see that China will probably invest more in this part of the world rather than in the US.

“The Chinese will now have to focus more on their business partners in Europe and South East Asia. We have already seen Alibaba, Tencent and others try to set up their regional hubs in Singapore and they are moving their operations into South East Asia.

“I’m quite optimistic that in the next decade or so more investment will be coming to this part of the world. I see the growth potential in South East Asia is pretty good in the next decade or so—on top of China of course,” he concluded.