Protectionist regimes are a challenge to reinsurers targeting growth in Asia
Asian regulators are continuing to enhance and improve their regimes, and several Asian countries are adopting protectionist measures to expand their domestic reinsurance market, Christopher Han, associate director at Fitch Ratings, told SIRC Today.
“Localisation is a prevalent theme that we observe in certain countries,” he said, citing Indonesia, India and China.
In Indonesia, a domestic cession policy introduced in 2014 has led to an increase in domestic reinsurance, he noted.
In India, regulators are requiring insurers to cede to reinsurers according to a prescribed order that prioritises local reinsurers, explained Han.
In China, Han referenced the new China Risk Oriented Solvency System (C-ROSS) framework, which is creating an incentive for ceding to onshore reinsurers by having more punitive risk charges for cessions to offshore reinsurers.
A July 2017 Fitch Ratings report, Structural Demand to Spur Asian Reinsurance Activity, suggested that these approaches may benefit domestic markets in the long term, but could limit foreign interest, knowledge transfer and risk diversification in the near term, especially in catastrophe-prone countries.
“We do not observe any particular change to reinsurers’ strategies as they continue to commit resources to Asia. Nonetheless, there may be greater risk-awareness among cedants, particularly after the series of hurricanes in the Atlantic earlier this year,” added Han.
Wan Siew Wai, senior director at Fitch Ratings, explained that the protection gap in Asia continues to be significant.
Wan explained: “China, Indonesia and India in particular continue to be structurally attractive as insurance penetration remain relatively low and the respective insurance markets should benefit from the consistent growth in the domestic economies. However, regulatory barriers remain a challenge, especially to foreign entrants.
“Smaller countries such as Vietnam, Malaysia and Philippines also offer attractive growth propositions, as the markets continue to develop and mature.”
Wan and Han were also the authors of a Fitch report published in July called Asian Reinsurance Markets—Structural Demand Creates Attractive Growth Proposition, which also touched on the issue of protectionism.
The report noted that protectionism remains a common stance adopted by many Asian countries. “This may alter risk-reward dynamics and the extent of foreign interest in local markets, limiting the diffusion of knowledge, pricing know-how and risk diversification—key ingredients for stable long-term market expansion,” the report said.
It mentioned some specific examples of the impact of such regulations. It noted that Indonesia’s cession policy, introduced towards end-2015, increased domestic reinsurance premiums, which swelled by 38 percent in 2016 against a compound annual growth rate of 29 percent in the four years prior.
Consequently, the industry’s retention ratio dipped to 67 percent in 2016 (2015: 71 percent), implying some degree of capital constraint as reinsurers dealt with elevated premium volume.
“Recognising this, the government has planned for a series of capital injections into state-owned reinsurers over the next few years. This may be positive in the long term, but the localisation of risks may affect the solvency of capital-starved domestic reinsurers during times of adverse claims development or catastrophes,” the report said.
It also noted that India imposed “order of preference” regulations for reinsurance placement in January 2017. These require local insurers to cede business to reinsurers according to a prescribed order, essentially giving local reinsurers and branches of onshore foreign insurers the first right of refusal.
“This could challenge the government’s commitment towards opening up the insurance sector and may affect reinsurance costs and insurers’ underwriting capacity, creating an impediment to reinsurance market growth, albeit in the short term,” it said.
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