Reinsurance growth does not reflect the evolution of the exposures in Asia

While insurers in many Asian markets are enjoying solid growth, reinsurers are lagging behind in this regard as they also grapple with overcapacity putting downward pressure on rates—but some rate corrections are now expected after the heavy losses in North America, William Ho, head of reinsurance, Asia, MS Amlin, told SIRC Today.

“There is an impressive rate of underlying organic growth across most Asian markets as the insurance markets continue to develop and mature. This growth, however, is not as rapid in terms of reinsurance, which unfortunately lags behind this underlying growth,” Ho said.

He added that MS Amlin has been forced to become more selective in such market conditions.

“While penetration rates and exposures grow, challenges remain on the adequacy of the primary rating. This is due to the markets being competitive and this directly impacts the quantity of reinsurance being purchased.

“In 2017 the oversupply of reinsurance capacity and softening of rates has continued. This has pushed some of the business below technical adequacy and some reinsurers, including MS Amlin, have been compelled to decline these areas of business. MS Amlin has been consolidating the portfolio during the course of this year.”

Ho said that MS Amlin’s main strategy to counter these challenges, in line with its approach globally, has been to focus on client relationships, selecting clients in different regions and focusing its capacity with them.

“We demonstrate with these clients how we differentiate ourselves from the market: excellent claims paying ability, quick service, lead capability and knowledge-sharing to build our client intimacy and establish better relationships,” he said.

“We believe in long-term support and we are here to build longevity into the relationship with our target clients in the region.”

He believes that the 2017 catastrophe events in North America will have an impact on the Asia-Pacific region and that the losses will lead to rate increases on some lines of business.

“The magnitudes of these events are very significant and the reinsurance market is a global business. We will inevitably be seeing rate correction on programmes which warrant correction.

“Our priority focus, however, will be to ensure we engage with our target clients early and achieve a satisfactory outcome for both parties for all renewal business,” Ho said.

This comes against a wider backdrop of the needs of cedants changing in the region. He believes that many cedants’ reinsurance structures are in need of correction and programmes must better reflect the underlying exposures insurers are taking on.

“As exposures, penetration rates and primary business continue to grow in the Asia-Pacific region, there will be a tipping point when the reinsurance structures protecting these portfolios will need to fall in line,” Ho said.

“Currently the culture considers reinsurance a cost management issue. This should not be the case as we are seeing the lower end of programmes getting more loss frequency and that is simply because the underlying growth is increasing.

“These reinsurance structures will eventually have to come in at appropriate retention levels, as well as buying to a relevant return period. In other words, increase retention levels and increase limits purchased.

“The less painful way for cedants to do this is through building smaller restructures every year until they reached the desired level, rather than wholesale structural change in one renewal.”

Buyers in Asia still tend to buy reinsurance for needs that are different from those elsewhere in the world: in more mature markets, it is used to protect capital and improve solvency margins; in Asia cost management is often a primary objective of buyers.

“In more mature markets, reinsurance is purchased to protect capital, improve solvency margins and have financial models in place to show the benefits of reinsurance against their capital.

“The Asia-Pacific developing markets are, however, still developing their knowledge and their approach to reinsurance purchasing,” Ho said.

“Focus remains on cost management regardless of whether the structures in place are adequate to cover their portfolio.”

He noted that the limits required in most Asian markets are still relatively small when compared to the mature markets. The largest programmes purchased in a number of the Asian territories pale into insignificance when compared to those of mature buyers from US, Japan, Australia and parts of Europe.

“This makes it relatively easy for a cedant to pursue cost savings, knowing that it is possible replace the existing capacity if they can get a better price,” he said.

“This challenge will lessen when programme purchasing increases, but cedants need to see the true benefits the reinsurance has on their portfolio before they can convince their senior management to buy more reinsurance—or in simpler terms, to spend more money on reinsurance,” Ho concluded.

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