Alternative reinsurance capital pressures ASEAN insurers: S&P

The influence of alternative reinsurance capital and growing insurance-linked securities (ILS) capacity in the global re/insurance market, is now so widely felt that even the ASEAN insurance community is feeling increased competitive pressures as a result of it.

As the capital markets increase their share of global reinsurance capital, applying pressure to the traditional reinsurance and now also insurance players and forcing them into making moves to shore up their returns, the over-spill effect has been spreading that pressure more widely.

Ratings agency Standard & Poor’s believes that this pressure is now being felt by insurers in the ASEAN region of southeast Asia.

The growth of ILS and alternative reinsurance capital and its expansion into new classes of business and even into insurance capital provision, has pushed established global re/insurers into moving into emerging markets and targeting new regional ventures, S&P explains.

The Association of Southeast Asian Nations (ASEAN) are particularly exposed to this increase in competitive pressure, from insurers and reinsurers looking for opportunities less exposed to the influence of ILS and alternative capital.

Southeast Asia features lower insurance penetration along with higher rates of economic growth and expansion, making the region a natural target for capacity looking to avoid the areas most exposed to competition from ILS and alternative capital providers.

These markets offer insurers the growth potential they are seeking and their investors or shareholders the upside they look for. As a result an increasing number of global re/insurers are acquiring companies in the region or setting up subsidiaries.

Additionally, S&P says that as large industrial corporations move operations into the ASEAN region the global non-life insurers and reinsurers are following behind.

Finally, S&P notes that “the influx of alternative capital into the reinsurance market has caused traditional reinsurers to deploy their capital more aggressively.”

The result of this greater capacity available for some primary insurers, benefiting from capacity being diverted, or thanks to the cheaper reinsurance capital enabling them to free up capacity for underwriting.

The growing capacity of primary insurers targeting the ASEAN region is heightening the competitive pressures faced in primary markets across southeast Asia, S&P explains and has also resulted in an increase in ceding commissions.

With asset values rising at the same time as insurance penetration, the insurable value at risk in southeast Asia is increasing too. This will result in more opportunity for alternative reinsurance capital and ILS to make its presence felt, not just due to the pressure and over-spill of capacity seen today, but by becoming more directly active in the ASEAN region as well.

The ASEAN region will provide significant opportunity to the ILS market for the deployment of collateralized reinsurance products in years to come, as the values at risk rise and insurance penetration increases. Hence many ILS managers are already active at reinsurance renewals in the region, with plans to become more so as the opportunity presents itself.

S&P warns that those companies, traditional or alternative, who succumb to competitive pressure and seek to grow too rapidly in the region, or who don’t manage their underwriting, could face issues, including rating actions for those in the S&P universe.

The other interesting angle about the ASEAN region is the increasing regulatory sophistication, emergence of prudential standards and gradual moves to risk-based capital regimes.

These moves will encourage insurers in the region to use their capital more carefully, but could also encourage greater use of reinsurance in some cases too, providing potential avenues for deployment of alternative and ILS capital in years to come.