Regulatory changes and shrinking margins

Intense competition in Asia-Pacific means any improvement on rates is hard to achieve. These are among the conclusions of a new report, Asia-Pacific Reinsurers Should Increase Rates, But Will They? some of which are summarised here by Philip Chung of S&P Global Ratings.

Regulatory changes and shrinking margins as competition remains fierce in the Asia-Pacific region—those will be the two biggest concerns of reinsurers in the region as they move into the January 1 renewals, according to Philip Chung, a senior director and analytical manager, financial services ratings, South & South East Asia, S&P Global Ratings.

Summarising the conclusions of a new report by S&P Global Ratings called Asia-Pacific Reinsurers Should Increase Rates, But Will They? and published at SIRC this week, Chung stresses that the financial position of reinsurers in the Asia-Pacific region remain strong. But the region also remains competitive and reinsurers seeking rate increases may struggle because of this in the region.

“We think that Asia-Pacific reinsurers’ ratings will remain stable. They have strong capitalisation and even those affected by catastrophe losses in North America will have sufficient capital at high levels. There is also the potential for some growth in the renewals.

“However, there is also considerable pressure on margins, which has been a concern for several years now. Pricing across Asia-Pacific is very tight. Some reinsurers are moving capital into other areas where they can achieve better margins. But the market will remain very competitive.”

Chung adds that more reinsurers are moving into life reinsurance because of pressure on the property-casualty side. The projections in this market are for strong growth and very strong return on equity of around 10 percent going forward.

Chung says that some reinsurers have also tried to mitigate the continual rate decreases by utilising multi-year contracts and even structuring contracts so that the cedant gets a rebate of sorts if their loss experience is low.

“These sorts of structures are becoming more common; they help the reinsurer lock in a certain rate but also reward the cedant if their book performs well,” he explains.

Such is the competition in the region, he warns, that reinsurers attempting to implement rate increases, perhaps following cat losses in North America, could find themselves losing market share as cedants instead turn to new capacity providers willing to write business at a lower rate.

“Some reinsurers may be looking to maintain price discipline and even seek rate increases but such is the competition here there will be others willing to replace them even if pricing is inadequate,” Chung says.

He adds that in some cases this situation may not be black and white. In some cases, regional reinsurers that are closer to the original risk may have more information on a certain risk and may legitimately be able to price it differently.

Equally, the capital requirements on a certain risk could vary depending on which regulatory regime a reinsurer falls under. This can create an imbalance in how different reinsurers view different risks and also mean a variation in pricing.

Regulatory changes have also changes the landscape in certain markets. The new C-ROSS regulatory regime in China, for example, has changed the capital requirements around motor business, making it much more attractive for insurers to keep on their books as opposed to passing to reinsurers. This has led to a significant reduction in the gross written premiums of some players in this market.

On the flipside, as more countries adopt regulatory regimes based on Solvency II, reinsurers are also finding ways to help insurers by using reinsurance as a capital management tool—and that too is leading to growth in the region.

Chung is speaking at 10am on Wednesday November 1 alongside Eunice Tan, director, Asia-Pacific insurance ratings, S&P Global Ratings, in a session called Credit Trends in the Asia-Pacific Reinsurance Sector.

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