Startups will change landscape in Asia

The proliferation of startups in Asia shows no sign of abating and will change the reinsurance landscape in the region for the long term, says Philip Chung, director at S&P Global Ratings.

The profusion of reinsurance startups emerging from Asia in recent years is being driven by a mixed bag of factors that mean the trend is unlikely to abate any time soon, and will ultimately change the reinsurance landscape in Asia.

That is the view of Philip Chung, director at S&P Global Ratings, who outlines four key factors driving the formation of startups.

The first is government initiatives across Asia to develop insurance hubs and strengthen the development of reinsurance capabilities to support domestic growth and demand. For example under the New Nation Ten Guidelines, the Chinese government signalled a focus to accelerate the development of reinsurance markets to enhance domestic insurance companies’ ability to provide insurance coverage for onshore activities such as agriculture, energy and infrastructure projects.

The second factor is simply the growth opportunities that are apparent in the region. “As insurance penetration within Asia increases, we believe the demand for reinsurance will likely follow suit,” Chung said.

The third is the wider attraction of the industry to investors because it is uncorrelated with other investments.

“Reinsurance had often been regarded as one of the investment strategies that bears little correlation to the financial markets. As an outcome, it provides diversification benefits to investors amid volatile capital markets conditions,” Chung said.

Finally, he notes that some governments have another objective in encouraging such startups. “The development of local reinsurers also facilitates ‘maximum local retention’ objectives of governments, retaining premiums and capital within the economy,” he said.

Chung stresses that the backers of these ventures are mixed. They often involved a combination of state-owned enterprises and the private sector. “This reflects the joint effort of both private and public sectors in the establishment of insurance hubs,” he said.

Beyond the factors outlined above, there is also the wider picture of anticipated growth on the back of an expected increase of insurance penetration in the region. “That also serves as an attractive lure for investors,” Chung said.

He added: “In our view, reinsurance provides diversity from capital markets volatility and is highly attractive to private investors as it allows the investors to benefit from potentially higher returns amid market sell-off.”

Governments, as investors, may also have another way of looking at reinsurance ventures, he said. “We speculate that governments may consider the float from the insurance industry as a good funding source for economic development. Additionally, having capital and assets in the country may be seen to enhance policyholder protection.”

A focus on China

Chung notes that China in particular has seen a lot of new companies registered, with three new reinsurance companies—PICC Re, Taiping Re (China) and Qianhai Re—being formed since November 2015. He also expects more players to be granted reinsurance licences by the China Insurance Regulatory Commission.

S&P considers PICC Re and Taiping Re (China) to have had prior exposures into the Chinese reinsurance markets, reflecting their already established insurance parent shareholders. Only Qianhai Re is a truly new player in the market at the moment, he said.

“We expect these players to remain focused on the domestic Chinese reinsurance market given their stronger knowledge on the local market. While they may have aspirations for international businesses, some investors have resorted to purchasing international reinsurers to gain quick international access and facilitate knowledge transfer.”

For global reinsurers previously eyeing Asia as a land of growth and opportunity, this should not curtail those ambitions in the short term, Chung said. He stressed that the new players will need to develop their systems, process and procedures as well as relationships with brokers.

“However, these startups will expand reinsurance capacity and as such we see higher competition for international players who are interested in local Chinese business,” he added.

“Under C-ROSS, the new solvency system, the use of offshore reinsurers by the direct insurer is subject to higher risk charges. We expect this to weigh heavily on the choice of reinsurers by the direct insurance companies. We believe this will lead to more international players establishing local operations within China to remain as an attractive reinsurer.”

The long term is a different picture. S&P believes the reinsurance landscape in Asia will change dramatically as insurance penetration increases.

“The Chinese economy is massive and growing at a healthy pace compared to developed economies. Together with the strength and connections of the backers of these startups, we believe these reinsurers could become sizable competitors in the global landscape,” said Chung.

“While there are currently ample opportunities for startup reinsurers to prosper in China, we believe that these reinsurers have regional or global growth ambitions which they will execute when the circumstances are ripe,” he added.

“Given the size of the market and the focus on governments to create financial centres, we could see the emergence of insurance hubs across the region which will feature a concentration of insurance companies as well as insurance professionals—lawyers, underwriters, actuaries, loss adjusters, etc—in these respective locations.”

Philip Chung is a director at S&P Global Ratings. He can be contacted at: philip.chung@spglobal.com