APAC reinsurance market is stable: S&P

The Asia-Pacific reinsurance market remains on stable ground, bolstered by improved earnings and sustained capital strength, even as it navigates the complexities of market growth and risk exposure, according to S&P Global Ratings.

Trupti Kulkarni, associate director of insurance ratings at the agency, told SIRC Today that the stability in Asia-Pacific’s reinsurance market stems from an observable improvement in earnings and robust capital retention.

“Over the past year, reinsurers have managed to maintain their capital strength, particularly the rated players in the region,” she said. This, combined with steady underwriting performance and profitability, supports the rating agency’s stable credit view.

The sustained capital strength, despite external pressures, indicates the sector’s resilience. Kulkarni noted that the expected combined ratio for rated Asia-Pacific reinsurers will hover between 99 and 101 percent, underpinned by cautious and selective underwriting practices.

However, Kulkarni warned, aggressive risk-taking purely for competitive edge could disrupt this balance. “Any aggressive expansion or elevated risk-taking to meet competition could put pressure on earnings,” she said, reinforcing the importance of a disciplined approach to underwriting.

Kulkarni projects modest premium growth rate in the range of 2 to 5 percent through 2025. This expectation aligns with the growth potential seen in several emerging Asia-Pacific markets, such as China and India, alongside more mature markets in the region.

“We see a continued effort among reinsurers to fine-tune their portfolios.” Kulkarni

While there is potential for expansion, reinsurers remain cautious about the quality and composition of their portfolios, especially in catastrophe-prone areas. “Rate hardening persists, particularly for loss-making accounts or those prone to higher losses,” Kulkarni pointed out.

Lower cat exposure

Wenwen Chen, director of insurance ratings at S&P Global Ratings, highlighted the fact that the Asia-Pacific market’s cat exposure is lower than in many other parts of the world. Many global reinsurers have increased their cat exposures over the period of 2023/24, including in Asia, which makes them less susceptible to underwriting volatility.

Equally, many Asia-Pacific reinsurers have sought diversification via writing more business overseas. Kulkarni noted: “We see a continued effort among reinsurers to fine-tune their portfolios and balance their exposures.” This includes reviewing peak zones and spreading exposure more effectively.

Chen underscored the importance of portfolio structure, stating that Asia-Pacific reinsurers’ portfolios are predominantly proportional treaties. “These treaties allow Asia-Pacific reinsurers to align more closely with the primary market’s performance,” she explained. But this alignment means that reinsurers are susceptible to the economic fluctuations of their primary markets.

Climate change poses a significant, long-term challenge for the Asia-Pacific region, particularly in closing the protection gap—the difference between insured losses and economic losses.

“In China insurance coverage of cat-related losses is only about 10 percent, compared to a global average of 30 to 40 percent,” Chen said. This gap indicates a potential area for growth and collaboration, particularly with governmental bodies.

Partnerships with governments are crucial for addressing climate resilience and infrastructure. “We’ve flagged the increasing cooperation with governments on climate change agendas,” Chen pointed out, noting that such collaborations are essential for mitigating the impact of natural catastrophes and enhancing protection schemes.

A reliance on investment returns was another theme discussed by Kulkarni. While underwriting remains a significant pillar of profitability, investment income continues to play a substantial role. “Sustaining investment returns is key, but we do see a potential gradual reduction,” she added, cautioning that potential interest rate cuts in certain Asia-Pacific markets could impact earnings.

Kulkarni noted that while these challenges persist, reinsurers’ focus on underwriting discipline has allowed them to maintain profitability. “The focus on underwriting has supported underwriting profit margins and will be crucial through 2024 and 2025,” she said. This vigilance, however, is necessary as any deviation from disciplined practices could shift the balance and impact financial performance.

Economic conditions in primary markets inevitably affect reinsurance performance. Chen explained how economies with slower growth affect reinsurers. “Less construction and reduced consumer confidence are reflected in lower premium incomes,” she stated. This economic interdependence emphasises the need for strategic diversification and adaptability within reinsurers’ portfolios.

APAC vs the rest of the world

Simon Ashworth, managing director and chief analytical officer at S&P Global Ratings, drew a comparative line between the Asia-Pacific and global reinsurance sectors. While Asia-Pacific reinsurers’ combined ratios are estimated at 99 to 101 percent, global reinsurers are forecast at a healthier 92 to 96 percent.

“This difference reflects variations in diversification and exposure structures,” Ashworth explained. Global reinsurers have adjusted their strategies post-2023, shifting terms and conditions to reduce their exposure to higher-frequency catastrophe risks.

Despite the differences, the overarching view is that Asia-Pacific and the global reinsurance markets are stable, albeit with different risk profiles and strategies.

“Asia-Pacific reinsurers’ closer alignment with primary market trends creates distinct challenges and opportunities, making their approach inherently different from that of their global counterparts,” concluded Ashworth.

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