Aon sees opportunities across an evolving region

Ahead of SIRC, four experts from Aon Reinsurance Solutions covering four different regions discussed where they expect growth, how their clients are coping with digitisation, regulatory developments and how the needs of their clients are changing.

In which lines of business are you seeing growth?
Robert De Souza: The relatively stable personal lines market means that market share growth strategies continue to be challenging. However, original rating has exhibited some growth over the past year as catastrophe pricing across the region remains a focus.

Commercial and industrial special risks rates have been steadily increasing over the past 18 months due to changes in appetite both locally and from Lloyd’s, and this has created growth opportunities in the direct and facultative markets.

Some insurers are withdrawing capacity in some geographic areas which has created pricing and growth opportunities. PI & DO have experienced significant changes in appetite across the market following a period of continued market softening. Life and health (L&H) reinsurance presents significant opportunities across the region as buying trends continue to change.

Rupert Moore: While the Japanese insurance industry strives for growth across a range of product lines from cyber to specialty casualty, the major focus in Japan over the past year has been managing the impact of major typhoons.

According to the General Insurance Association of Japan (GIAJ), the industry has paid out in the region of $14.5 billion across 1.325 million individual claims from a combination of heavy rains in July 2018, and typhoons Jebi and Trami.

For GIAJ members, this surpassed the number of claims that resulted from the Great East Japan Earthquake (and tsunami) in 2011. In 2019, Japan was hit by two large typhoons, Faxai and Hagibis. The damage from these two events is still being assessed and publicly available information is limited. Although early in the process, as at September 13, 2019, GIAJ put the claims count from Typhoon Faxai at 184,548.

This is an extremely strong claims performance from the industry and demonstrates the value of the insurance product and a commitment to client service.

George Attard: Underlying organic growth in the traditional P&C sector continues, and the specialty lines exhibit continued growth.

Agricultural business is growing across Asia as governments seek to lessen the protection gap through increased penetration, product development and expanding coverage to a wider variety of crops.

Marine hull and cargo premiums are responding to reductions in insurance and direct/fac reinsurance capacity.

L&H remains a steady growth area for the foreseeable future, reflecting the continued emergence of Asian middle classes and presenting an opportunity for the reinsurance industry as demand increases for capital management and legacy de-risking solutions.

We continue to invest in our specialty capabilities to support our clients and partners.

Qin Lu: On L&H, in the mainland China market health insurance premium continues to present considerable growth—24 percent in 2018, in comparison with 9.5 percent growth of property lines.

The penetration of L&H insurance is still low, and the protection gap is huge. Chinese L&H policyholders accounted for only 8 percent of the total population, with only 0.13 insurance policies per capita, while the average household insurance policy in Japan was close to 4.

The increase of the proportion of target clients aged 35 to 54, the breakthrough of gross domestic product per capita and increased health awareness will further enhance the demand in the next few years.

From the reinsurance perspective, IFRS 17 and the low interest environment triggered higher reinsurance demand for life and critical illness products due to the solvency considerations.

In property cat, there is a surge of recent cat events across the region (China, Hong Kong and Japan) with increasing concerns on climate change and global warming.

In agriculture, despite recent losses, agriculture business is one of the top agenda items for many regions. It supports rural farmers which is a top political agenda for many regions.

What types of innovation and technology are your clients embracing?
Attard: The technology-enabled trends we see include online distribution via direct or B2B2C platforms; a customer-centric digital ecosystem via online policy and claims management, 24/7 service, chat bots, telemedicine and coaching apps; business process automation/enhancement via data acquisition, risk selection, claims management, and fraud detection; and loss assessment by satellite technology to expand the potential customer base and speed up the claims settlement process.

De Souza: Innovation and technology are being embraced across all aspects of doing business. From underwriting to claims assessment, insurers maintain their focus on providing customers with smooth end-to-end experiences.

Automated claims assessment, particularly across motor, has enabled high volumes of claims to be processed following a large-scale event such as hail. Real-time pricing engines, underwriting dashboards and risk-based pricing enable the use of client data to support the portfolio management process.

Qin: The main focus is placed on the insurance distribution channel in the area of personal line products. The products have been designed to meet consumers’ fragmented needs, often distributed via social media apps and with an online payment/claim system.

Big data and situational insurance are the popular entry points for insurance innovation and technology applications. Situational insurance focuses on enterprises’ and individuals’ demand for coverage in some specific situations, where they need customised, unique and specialised cover.

Most commonly seen are sports-related insurance, supplemental medical cover and shipping return insurance. Many tech giants are looking into this sector, as they have alternative data and scenarios to identify and assess insurance needs.

There are continued efforts on the processing side such as policy administration and claims, such as artificial intelligence-based image recognition and anti-fraud solutions for auto insurance.

In mainland China, with recent catastrophe events, local re/insurers are investing more in technology to empower their existing core business; a good example is China Re’s EQ model.
In Taiwan, several weather index products and UBI policies were developed. However, the application of new type of products is still carefully considered by the regulator.

Moore: Across the world, catastrophe claims estimation has proved challenging when events are materially larger than or different from prior experience. This makes it difficult to manage stakeholder expectations.

To help address this, Aon has developed a unique claims estimation service in Japan. We combine real-time event observations, together with a proprietary database of all buildings and chance-of-loss curves developed by Impact Forecasting, Aon’s in-house modelling firm.

This provides clients with an immediate view of the number of buildings damaged by an event, which can be embedded in their own products, processes and services for a variety of purposes.

Our clients have used this innovation to help them in a number of ways ranging from increasing customer awareness of catastrophe risk, to helping with claims management and improving loss reporting.

How is this changing the way they do business?
Qin: Insurers either invest significantly in IT themselves, or choose to partner with third party advisors to keep up with the competition.

Insurtechs empowered the online channel for insurance, which is supposed to have operating leverage due to lower acquisition cost. However, this is no longer true in China, with large ecosystems dominating the online traffic. Although they are strong in identifying specific insurance needs and promoting products, the downside is they also demand high commissions.

De Souza: The market is yet to experience a true influx of disruptor insurance products and most product offerings remain homogeneous across the market. Through the use of technology the aim is to enhance the customer experience and optimise retention rates.

Are there any regulatory changes on your agenda?
De Souza: Following the completion of the Australian Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry a total of 76 recommendations were handed down by the commissioner, with the majority being applicable to banks and financial advisors.

Insurance-specific recommendations focused on claims handling, the selling of add-on insurance and the commissions paid to distributors of these products. The overall result was positive for the industry where no major systemic issues were identified.

Qin: In China, C-ROSS phase II is expected to roll out by mid-2020. There is no major impact on reinsurance market given the focus is on the asset side, but there are some discussions on a higher reinsurance capital charge, so it might drive some reinsurance demand.

On life insurance regulatory tightening in China, in 2018 life insurance premium experienced a relatively mild growth in comparison to the rest of the insurance market. This is due to the fact that the regulator has restricted saving products and encouraged protection insurance since the end of 2017, thus improving the product mix in the life insurance industry.

At the same time, the definition of critical illness (CI) has been revised and will be launched soon by the regulator. CI business, which is the major part of protection insurance, will have less anti-selection risk.

In Hong Kong, RBC is expected to complete by 2022, with a big focus on cat in the recent Quantitative Impact Study Phase 3. This might generate new demand for cat protection and also change insurers’ assessment on inward business across the Asia region.

In Taiwan, the implementation of IFRS 17 has been postponed from 2022 to 2025, due to its major impact on life insurers. Historically, Taiwan sold a lot of high interest rate life products. Now, IFRS 17 requires insurers to realise the losses up-front under the current low-interest rate environment, hence most life insurers will be short of capital.

Attard: There is an increased focus on adoption of IFRS 17 by multiple jurisdictions in Asia, particularly Korea, where we are assisting through training with a particular emphasis on reinsurance implications and optimisation and implementation of our proprietary enterprise risk management and risk modelling tools ReMetrica and PathWise.

There is a continued evolution of solvency regimes across the region including a planned shift from solvency towards RBC (India), and a further strengthening of the existing RBC framework (Korea, Philippines), and from RBC to RBC2 (Singapore, Thailand).

For life, ongoing regulatory capital frameworks evolution in mature markets (Korea, Singapore) is resulting in insurers’ shifting focus from capital-intensive savings products to protection products

How are the risk transfer needs of clients changing?
Qin: The market still has plenty of supply of traditional reinsurance capital, purely on risk transfer and capacity play.

There is a clear shift in direct insurers’ demand, from traditional reinsurance capital, to those reinsurers with a stronger partnership role. Clients now often prefer reinsurers with additional support on product development, training, innovation, and/or technology.

Reinsurance cessions are often arranged on a quota-share basis to those reinsurers specifically helped to develop the product or assistance in certain areas.

Due to the increase in popularity for health business among P&C insurers in China, more smaller insurers have growing needs of reinsurance for the health line, while larger players have more incentive and ability to retain the business.

Attard: This varies on a client-by-client basis reflecting their financial objectives, portfolio risk profile, risk appetite, growth strategy and regulatory environment.

Generally, we have observed an increased appetite for structured solutions in the current competitive market environment as clients look to manage capital adequacy and earnings volatility and also support mergers and acquisitions activity.

In addition, with the continued investment in catastrophe models in the region, recent events and increased discussion of climate change, clients are increasingly focused on protection informed by modelling that reflects their portfolio risk profile.

We work closely with our clients to develop and deliver unique, value-added advisory support and solutions focused on effective and efficient capital and earnings volatility management.

De Souza: In a highly regulated and high natural perils part of the world our clients have a robust understanding of using the international markets to manage capital and risk. As we experience higher frequency years for catastrophe losses, earnings volatility protection remains front of mind when communicating with shareholders.

The needs of our clients in the Pacific continue to be focused around understanding the landscape of capital while maintaining suitable levels of counterparty risk.