Hard market will prompt cedants to revisit reinsurance spend: S&P

For insurers that have been relying on reinsurance for many years, now could be the right time to revisit that strategy and focus their attention on underwriting discipline instead, said Eunice Tan, senior director and sector lead, Asia-Pacific insurance ratings, S&P Global Ratings.

Tan was speaking during a panel discussion held on Intelligent Insurer’s Re/insurance Lounge, an online platform where interviews and panel discussions are held live on a weekly basis and content is available on demand at any time to members.

The session, “Asia’s changing reinsurance landscape: a panel debate in lieu of SIRC,” held in advance of SIRC 2020 Re-Mind, also featured PK Bhagat, principal officer and head of reinsurance, GramCover Insurance Brokers in India.

“The abundance of reinsurance obviously comes with the cost of hardening rates. It highlights the importance of underwriting discipline,” said Tan.

In terms of the 1/1 renewals globally, S&P predicts a 5 to 8 percent increase for property and catastrophe lines. With rates going up and macro conditions being much more benign, direct insurers are being faced with top line challenges, explained Tan.

“Reinsurance decision-makers are going to have a tough call. They’ll have to balance the questions of ‘should I be paying for more protection?’ or ‘should I look at my appetite?’,” she said.

According to Tan, the beauty of the reinsurance business is the potential for alternative capital. Alternative capital could come into the market and take some of the risk, particularly given the broader interest rate environment.

She cited insurer Aviva’s agreement to sell its Singapore business for $2 billion to a consortium led by insurer Singapore Life as a prime example of private equity entering the market. As part of the deal, private equity firm TPG will have a 35 percent stake in the combined business.

Growth opportunities
The Asian story in terms of rates hardening is different from the situation in US and Europe, Tan said, and the fact that there’s still an abundance of potential growth in the region could bring prices down.

Asia-Pacific has experienced a series of catastrophe losses in recent years, such as bushfires in Australia and the devastating floods in Indonesia in January. These disasters, combined with the COVID-19 pandemic, have renewed insurance awareness, according to the S&P director.

“If you look at a study of economic losses versus insurance losses there’s still a huge gap, signalling that there’s a lot more to be done,” she added, explaining that there must be a collective effort between government and industry to tackle this problem.

Tan cited China, a country which has experienced typhoons and floods over the past two years, as a good example of collaborative effort.

“There is a lot more to come in terms of government effort. The Shanghai government, and other Chinese authorities, have been quite active in trying to bring up the catastrophe insurance concept among the people,” said Tan.

“If you’ve experienced loss, you’ll try to look for solutions to try to insulate this loss.”

Turning to the COVID-19 pandemic, Tan noted that the Asia-Pacific region has not seen as many losses as other regions. However, she suggested that the pandemic has brought business interruption insurance into the public eye.

“If you look at Hong Kong, after SARS there was a pickup of health insurance awareness. We’re definitely seeing the same storyline now,” Tan said.

“Geographically, if you take away the large economies in Asia-Pacific, such as China and Japan, you’re left with relatively small economies,” she explained.

“The need for reinsurance is definitely there as the markets cannot do enough to solve the problems within themselves. Our latest research highlighted that more insurance is required by the region to cope with these catastrophes,” she concluded.

To watch the full video interview on which this write-up is based, click here and visit Intelligent Insurer’s Re/insurance Lounge.