Weak economy triggers credit claims but Lloyd’s Asia boss remains bullish on potential

The persisting economic uncertainty, which has hit some sectors particularly hard, is leading to an increase in credit claims on a scale not seen since the 2008 financial crisis, Kent Chaplin, chief executive officer, Lloyd’s Asia-Pacific, told EAIC Today.

He noted two recent examples of large companies getting into difficulties, which could lead to more claims. Swiber, the Singapore-based offshore oil and gas services group, hit financial problems in recent months partly due to low oil prices; and Hanjin, South Korea’s biggest shipping company, sought bankruptcy in September leaving hundreds of ships and their crew stranded at sea.

“In Singapore, Swiber is a prime example of difficulties in the oil and gas sector, as is Hanjin in South Korea for the transportation industry,” Chaplin said.

“At Lloyd’s there has already been a steady rise in claims among our credit risk portfolio in recent years. As commodity prices have fallen, most notably in oil, aluminium and steel, there has been a material increase in the number of claims notified to the market in trade credit insurance not seen since the 2008 financial crisis.”

Since 2013, the average number of new claims advised under the credit risk code has increased by around 40 percent year on year. In the same period, the average value of claims paid by Lloyd’s has increased by around 70 percent year on year.

More broadly, the market in Asia is facing similar pressures to those seen in other regions of the world, said Chaplin, who highlighted the wider pressures facing re/insurers.

“We continue to see soft market conditions with low interest rates, increased regulatory oversight and excess capacity putting pressure on pricing,” he said.

Opportunity ahead

That said, the combination of low insurance penetration rates in many countries within the region and high risk exposures particularly from nat cats, with the good economic growth forecasts and increased awareness of insurance and the growth of the middle class, means there remain significant business opportunities for growth.

Singapore is a successful underwriting hub for Lloyd’s in Asia, with more than 200 underwriters representing 23 syndicates (22 service companies). Premium income has tripled since 2009 to reach $680 million in 2015, with a combined ratio of 93.6 percent last year.

Four new syndicates (Antares, Aspen, Brit and Standard) have joined the Lloyd’s Singapore platform in the last 12 months. Lloyd’s Asia offers local underwriting authority in 47 classes of business—property, marine, energy, cargo, and terrorism are Lloyd’s largest lines.

Chaplin said that while Lloyd’s is well placed in the region from a licence perspective, he also warned that regulatory protectionism is on the rise and that the regulatory burden and cost of doing business have been increasing.

As part of Lloyd’s International Vision 2025 strategy, Malaysia and India were two countries identified as having opportunities for growth for the Lloyd’s market.

In India, the government has taken steps to further liberalise its insurance market and this year passed regulations to allow Lloyd’s to establish its market structure in India.

“This will enable Lloyd’s managing agents to set up service companies in India and access Indian reinsurance business. Lloyd’s has submitted an application for an onshore reinsurance licence and we hope to receive approval shortly. Following receipt of our approval, we will be working with our managing agents to establish their presence locally,” Chaplin said.

In Malaysia, Lloyd’s has applied for a tier 1 onshore reinsurance licence this year which will enable Lloyd’s to contribute greater capacity and specialist underwriting expertise in emerging and complex risks to serve the growing demands of the domestic insurance sector.

“Lloyd’s sees the potential for Malaysia to develop as a commercial re/takaful hub and construction insurance market, especially driven by infrastructure projects resulting from the country’s Economic Transformation Project initiatives,” he said. “Lloyd’s unique market structure makes Shariah compliance possible.”

Lloyd’s currently serves the Malaysian market as a tier 2 reinsurer through its nine Labuan Service Companies and as a cross-border reinsurer primarily from London and Singapore.

“Lloyd’s onshore presence will help to protect Malaysia’s economic growth by supporting the expansion of insurance penetration and, in so doing, limit the economic impacts of catastrophes and other major events that can otherwise result in substantial costs for the state and the taxpayer,” said Chaplin.

Long-term vision

Regarding Lloyd’s future in the Asian market, Chaplin says its approach is multifaceted.

“Lloyd’s has a long history of paying every valid claim, but we see our role as larger in identifying new and emerging risks, quantifying these and providing a market environment conducive to new product development to help address the underinsurance problem in many countries in the region,” he said.

In a fast-changing world, businesses are facing new risks and are seeking new insurance products from the insurance industry to protect their assets. Lloyd’s believes the first step in new product development is to identify new and emerging risks and quantify those risks, and that is the rationale behind Lloyd’s emerging risk report series.

“The Lloyd’s City Risk Index has proved to be an invaluable source of data since its launch in September last year. We partner with institutions to look at different emerging risks; we are part of a cybersecurity initiative in Singapore called CyRIM, and have just completed a project with the UK Met Office that analyses the extent of the interconnections between extreme weather events,” Chaplin said.

“In a separate study with the UK Met Office and Guy Carpenter we are looking to develop index-based insurance solutions for natural hazards such as drought, combining scientific understanding of natural hazards with sophisticated risk modelling capabilities.”

Lloyd’s has also launched a disaster risk facility, a working group comprising a number of syndicates pooling capital and expertise aiming to provide capacity and expertise to develop reinsurance solutions to address nat cat risks in emerging economies.

“The group is working to coordinate with underwriters operating in the Lloyd’s market in Singapore to identify strategic initiatives in Asia-Pacific,” said Chaplin.

In addition, Lloyd’s has partnered with Parima (the Pan-Asian Risk Manager Association) to host the Lloyd’s-Parima Professional Development Programme, a series of two-day masterclasses designed to build knowledge and expertise for risk managers.

“The programme launched in Singapore in August, the next masterclass will be held in Hong Kong in November. It is similar to the dedicated Lloyd’s programmes run for brokers and regulators,” he concluded.