Growth of China reinsurance industry an opportunity for ILS: Moody’s

by Artemis on September 24, 2015

Some high-profile losses, persistent growth pressures and regulatory advances signal rapid growth for China’s reinsurance market in the coming months, not to mention a vast opportunity for insurance-linked securities (ILS) players, advise Moody’s.

Global insurance and reinsurance ratings agency, Moody’s Investor Services, predicts accelerated growth in the Chinese reinsurance market over the next 12-18 months, despite the firm’s expectation of subdued economic growth during the period.

One of the drivers for this growth spur, notes Moody’s, is developments with regulation and persistent growth in the direct insurance market.

“Furthermore, recent high-profile loss events will add to the sense of urgency surrounding implementation of policies expand the insurance industry’s capacity in managing large and catastrophe perils, which argues in favour of rising cession behaviour ahead,” said Moody’s.

Insurance penetration in China, as with most of Asia is dangerously low, and the region is vulnerable to a range of natural disasters, including flooding, earthquakes and wind losses, hindering economic sustainability and expansion when catastrophe events occur.

To tackle this issue and build insurance and reinsurance penetration in the country, the China Insurance Regulatory Commission (CIRC), the industry’s regulator, has developed and is in the process of implementing China’s Risk-Orientated Solvency System (C-ROSS), the nation’s Solvency II equivalent regime.

“Under the new regime, insurers will be required to hold capital for catastrophe risk, the calculation of which will provide credit to the use of reinsurance programs,” said Moody’s; stressing that full implementation of the new regulation will drive higher reinsurance usage.

A global effort to build disaster resilience efforts in vulnerable parts of the world by leading organisations, including the World Bank, the Geneva Association and the UN, and the international re/insurance sector, has and will continue to lead to developments in the region’s financial services industry.

As insurance penetration levels hike so to will the demand for reinsurance, signalling an opportunity for insurance-linked securities (ILS), catastrophe bond and other alternative reinsurance capital providers.

“Separately, the CIRC, has also included non-traditional reinsurance, which we interpret as likely to constitute financial reinsurance, as one of the five new funding channels available to insurers,” advised Moody’s.

Signs of expansion opportunities for ILS players was brought to light recently following the issuance of Panda Re Ltd. (Series 2015-1), the first ever catastrophe bond covering Chinese risk.

Regulatory organisations in China recently signed an agreement to increase and accelerate the use of catastrophe bonds in the region, again highlighting a desire in the region to boos insurance and reinsurance penetration and better support the transfer of Chinese risks.

And catastrophe bonds are just one example of how capital market participants can access Chinese risk; other methods include typical reinsurance programmes and the establishment of catastrophe risk financing pools.

Furthermore, as large-scale global reinsurers gain confidence in the Chinese reinsurance market and look to match the risk with the capital, including third-party reinsurance capital, a wealth of fully-collateralized reinsurance sidecars and other special purpose insurance (SPIs) vehicles could also be launched in the region, further capitalising the sector.

Moody’s echoes this point; “The importance of this requirement in driving reinsurance demand will rise over time, as more companies expand in rural areas where catastrophe risks are higher than other locations in China. Meanwhile, recent high-loss events also continue to raise overall awareness and demand for policies with catastrophe protection.”

The surge of merger and acquisition (M&A) activity in the global reinsurance market could also increase reinsurance and ILS demand in the region, notes Moody’s, as China “continues to appeal to global reinsurers which still face soft market conditions.”

There’s clearly vast room for expansion, innovation and development in the Chinese reinsurance market. But as the global reinsurance sector remains flooded with capacity, competition and pressures, entry into new geographies and business lines is always something investors and sponsors are willing and able to do.

It will be interesting to see just how rapid the growth of the Chinese catastrophe bond and reinsurance market really is, something that only time will tell. But with the expertise, knowledge, capacity and skillsets of the traditional and non-traditional players, plus the efforts of world leading organisations to increase insurance take-up globally, it’s certainly something we’ll be keeping an eye on here at Artemis.

Also read:

2015 China flood losses at $18.5bn, further highlights protection gap.

Panda Re cat bond an “important breakthrough” for China Re.

China regulators agree to accelerate use of catastrophe bonds.

The prospects for catastrophe bonds in China: Willis.

China catastrophe re/insurance demand rising: Munich Re.

Chinese insurers could use cat bonds as a capital tool: Moody’s.

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