Fitch: pandemic will bolster demand for re/insurance in APAC

Fitch Ratings has said that lessons learned from the COVID-19 pandemic could be set to boost demand for the Asia-Pacific reinsurance sector, as heightened risk awareness, as well as the wide protection gap, prompts changes in the market.

Speaking on a panel ahead of the Monte Carlo Rendez-Vous, representatives from the rating agency’s Asia-Pacific insurance analytical team said that while longer term risks such as climate change and the ongoing fallout from coronavirus provided challenges, overall the large protection gap in the region marked a significant growth opportunity for the market.

Senior director Siew Wai Wan said that the overall economic losses from the pandemic in the region had reached around $85 billion, and the gap between insured and business losses stood at around $50 billion, demonstrating the scale of the protection gap in the region which needs to be filled.

He said that risk trends including climate change and increased focus on cyber risks and security stemming from the pandemic, when nefarious actors took advantage of the uncertainty and rapid changes to work, represented growth areas for the market in future.

However, he added, the growth would have to work in tandem with a “rationalisation” of prices and terms and conditions if it was to be sustainable over the longer term.

“This gap presents an opportunity for Asian reinsurance companies to offer their capacity in this region. But in order to do that, Asian reinsurance companies are challenged to continually renew their premium pricing to ensure that they are able to underwrite policies on a sustainable basis,” the director said.

“From that perspective, we believe that rationalisation in pricing and policy terms and conditions will continue to feature very strongly for Asian reinsurance policy renewals.”

Capitalisation stays strong

Despite losses incurred as a result of the pandemic and widespread catastrophe losses over the last year, Fitch senior analyst Jessica Pratiwi said that capitalisation across the sector remained strong.

Pratiwi noted that in two of the largest markets—China and Indonesia—solvency ratios remained well above minimum required levels, at 314 percent and 250 percent, respectively, at the end of 2020, showing the broad resilience of the sector despite the economic turmoil of the last 18 months.

“Overall we see Asian reinsurance capital buffers remain in line with their business profiles based on available statistics for selected reinsurers, with the quality of shareholder equity remaining sound for most if not all of the market,” she said.

Pratiwi highlighted how the persistent global low interest rate environment had caused a rethink in how carriers were managing the investment side of the balance sheet, with some players moving towards riskier assets in a bid to boost returns

“We see that investment management remains key in maintaining local solvency margins, as we are aware that the low interest rate environment has been a challenge for Asian reinsurers for several years, and that looks set to continue,” she said.

“While some reinsurers may shift their investment portfolios towards riskier assets in search of higher yields, we do not expect them to do so aggressively.

“We view that each reinsurer will need to consider local solvency requirements as investment in riskier assets require higher capital charges under their regulatory capital framework, and we note most industry players are increasingly working on optimising their business strategies to balance the investment challenges with assets and liabilities to maintain their solid capital buffer,” she concluded.