Alternative reinsurance capital impact in Asia muted beyond Japan

by Artemis on November 10, 2015

A lack of available and adequate data limits the impact alternative reinsurance capital has on the Asia Pacific (APAC) outside of Japan, but industry executives and analysts predict moderate growth for the regions aggregate reinsurance capacity.

The rise and expansion of alternative reinsurance capital in the global reinsurance space has been a well-documented, hot industry topic in recent months, particularly as it really started to gain critical mass, with recent estimates putting its share of the market at $68 to $70 billion.

At the same time the APAC insurance and reinsurance markets and economy is enduring a period of rapid growth, driven in part by a rising middle class, urbanisation, increased asset values and a growing understanding of the benefits of insurance protection against the region’s high vulnerability to catastrophe risks.

With this in mind it wouldn’t be too surprising to see some of the excess alternative reinsurance capacity being increasingly deployed across APAC via existing, or innovative, new structures to mitigate the significant, and growing catastrophe exposures throughout the region.

However, data from the first Asia Reinsurance Pulse, a new annual research publication based on interviews with regional and international reinsurance executives, reveals that many in the sector feel the impact of alternative capital in APAC, outside of Japan, will be muted in the coming months.

“The majority of interviewees expect a moderate increase in aggregate APAC reinsurance capacity over the next 12 months. Alternative capital, however, is not believed to make any direct impact beyond well-modelled Japanese catastrophe exposures,” explains the report, sponsored by the Singapore Reinsurers’ Association (SRA) and launched at the 13th Singapore International Reinsurance Conference.

To give some colour on the utilisation of alternative capital for Japanese risks, data from the Artemis Deal Directory shows that over $2 billion of outstanding catastrophe bonds currently focus on Japanese exposures.

This includes roughly $1.55 billion of Japanese earthquake cover, $230 million of Japanese typhoon cover, and more than $300 million of excess mortality protection, the latter of which also covers mortality risks in France and the U.S.

It’s important to note here that alternative reinsurance capital does exist, albeit limited, across other parts of the APAC via collateralized reinsurance agreements and traditional reinsurance cover.

Furthermore, earlier this year China Property and Casualty Reinsurance Company (China Re) launched Panda Re Ltd. Series (2015-1), the first ever catastrophe bond focused on Chinese risk, covering china earthquakes.

Boon Chuan Tay, Underwriter Treaty Reinsurance, Tokio Marine Kiln Singapore, and a respondent to the survey, echoed the views of many executives; “Across the Asian markets that we operate (i.e. outside of Japan), I do not see any noticeable impact from alternative capital on Asia so far.”

But while its presence is limited and predicted to remain so, there has been growth in recent times and should ventures like Panda Re prove successful for sponsors and investors alike, this could spark an increased use of insurance-linked securities (ILS) to cover APAC exposures.

One of the greatest obstacles for the entry of alternative reinsurance capital, and the most relevant perceived weakness of the APAC reinsurance space, according to survey responses, “is a lack of available quality data.”

The report expands on this; “It is still comparatively difficult to assess exposures and model loss scenarios. This is a particular challenge for risk-adequate pricing in a dynamic market environment.

“On the other hand, some interviewees point out that these deficits have so far prevented alternative capital from making any noticeable inroads into APAC markets.”

Outside of the impact, or lack of alternative reinsurance capital across the APAC and a need for improved and higher quality exposure data, executives noted that excess capacity in the space continues to intensify competition and results in minimal levels of priced profitability.

Chief Executive Officer (CEO) of Korean Re’s Singapore unit, Jong Seon Han, emphasised this point; “The additional supply of reinsurance capital has created excess underwriting capacity in Asian reinsurance markets, leading to fierce price competition and declining reinsurance pricing.”

Furthermore, the reports states tat 61% of survey participants feel current reinsurance terms and conditions in the APAC region are too relaxed, of which they also predicted this to become even looser over the next year.

Interestingly, highlights the report, “among them many of those who believe that rates have already bottomed out.”

So, responses from the survey reveal that most firms that operate in the region expect reinsurance capacity to grow in the APAC over the next 12 months, but expressed an opposing view to the impact of alternative, or third-party reinsurance capital.

As competition continues to intensify an the declining pricing trend continues across the APAC markets and the global reinsurance space, executives predict further loosening of terms and conditions coupled with lower reinsurance pricing.

It will be interesting to see how the APAC insurance, reinsurance and ILS market develops over the next 12 to 24 months, amidst a global effort to increase disaster resilience in the region and narrow the widening protection gap.

While alternative reinsurance capital structures such as cat bonds, sidecars and alike are limited in use outside of Japan, the launch of Panda Re and a concerted effort of global organisations, public and private, to establish disaster risk financing mechanisms should make way for greater utilisation of the benefits of reinsurance and ILS.

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