Asian reinsurance demand poised for growth: Fitch

Regulatory developments and advances across Asia has the potential to drive an increase in reinsurance demand in the region and, with insurance penetration being amongst the lowest anywhere in the world there’s ample opportunity for growth, according to Fitch Ratings.

As emerging insurance and reinsurance markets go, many in the industry feel Asia holds perhaps the greatest potential for increased insurance, reinsurance, and also insurance-linked securities (ILS) participation.

In an effort to improve the resilience of Asian countries and the wider Asian economy against the increasing threat of natural catastrophe events and to improve financial sustainability, regulatory advances are starting to take shape throughout the continent.

“Fitch believes that various regulatory initiatives in the region could lead indirectly to greater demand for reinsurance, as direct insurers rethink risk-management strategies and appetite. Asian regulators have implemented – or are in the process of implementing – a range of measures that would alter the operating and business climate in the region,” said Fitch, in a new report on the Asian reinsurance industry.

Interestingly, the expectation of increased reinsurance demand in Asia was discussed by reinsurance broker Aon Benfield earlier in 2016, which, like the Fitch report, discussed steps taken by both China and India towards improving their domestic and foreign re/insurance capabilities and operating landscape.

Furthermore, and again supporting how topical Asia has become when discussing increased demand and participation of re/insurance and ILS capacity and features, speakers at the Artemis ILS Asia 2016 Conference highlighted the vast potential for growth in the region.

“Legislative changes in Indonesia, Vietnam and India are trending towards more protectionism in nature, with attempts to increase the percentage of insurance business to be placed with domestic reinsurers.

“Local reinsurers are being constantly challenged in their ability to improve their risk-management sophistication and controls, to keep up with the upcoming surge in premium volume,” said Fitch.

China’s new risk-based capital framework, the China Risk-Oriented Solvency System (C-ROSS), is more likely to drive greater demand for reinsurance within the local marketplace as opposed to overseas, as the nature of C-ROSS encourages the placement of reinsurance within the local market.

And similar approaches can be seen in Indonesia and Vietnam, with the former revolutionising its reinsurance market landscape to favour reinsurance business to be underwritten by domestic players. “They have traditionally been heavily reliant on international reinsurers for their reinsurance arrangements,” explains Fitch.

Vietnam is following a similar path as Indonesia, explains Fitch, announcing in the second-quarter of this year that it will look to control the volume of reinsurance premiums underwritten by foreign reinsurers, with the goal of retaining more business in the country.

In contrast to this, but a move that could still boost reinsurance and ILS demand in the region, the International Regulatory and Development Authority of India (IRDAI) has actually opened up its reinsurance market to foreign players, which has resulted in a number of key industry players looking to establish a branch in the region.

However, as seen with regulatory changes discussed in China, Vietnam and Indonesia, the developments do still look to favour domestic players.

Foreign entities are required to retain a certain amount of reinsurance business within India, and also primary Indian insurers must give priority to a local reinsurer over a foreign company, something that has caused some controversy among those looking to enter the market.

“The increase in protectionist measures in various emerging markets to retain more reinsurance premiums within the local markets will affect the opportunities for business growth and participation of foreign reinsurers in these markets,” says Fitch, but it could also result in the establishment of more domestic reinsurers as companies look to capitalize on the new, favorable regulatory landscapes.

Fitch underlines the potential for more local players in Asian markets, saying that it expects competition to intensify in China following the establishment of several new reinsurers, including Qianhai Re and PICC Reinsurance from The People’s Insurance Co of China (PICC).

“Fitch believes there is solid business potential for the Asian reinsurance market to flourish. This consequently gives rise to a wave of M&A activities as well as new reinsurance set-ups in the region, to tap into the vast business growth opportunities,” said the ratings agency.

The protection gap in Asia did improve slightly during 2015 but this was a light catastrophe year and penetration in Asia remains dangerously low for all peril regions. As a result of this Fitch believes there is ample opportunity for reinsurance to flourish in these markets, which, as noted by Artemis before typically means a greater chance for ILS capacity and features to play a role too.

The ILS market already deploys capital into Japanese catastrophe bonds covering earthquakes and typhoons, in the past there has been a Taiwan quake cat bond and the first China quake cat bond, Panda Re Ltd., was issued in 2015.

Aside from cat bonds though, the ILS fund managers of the world are increasingly allocating capital to Asian reinsurance programs, on a fully collateralised basis, and reinsurance sidecar vehicles all include some Asian risks.

Hence any increase in demand for reinsurance capacity will result in some increased opportunity for ILS fund managers and investors to access Asian catastrophe risks.

Furthermore, Fitch discusses the potential for regulators to develop earthquake insurance schemes in their respective catastrophe-prone regions, something that will also contribute to an increased demand for reinsurance and ILS capacity.

There is clearly ample opportunity for insurers, reinsurers, and ILS players to play a greater role in Asian markets, and as new regulatory frameworks come to fruition and evolve with the risk landscape it will become clearer where foreign and domestic participants can have an influence.

But one thing is certain. In the current market dynamics an increase in demand for reinsurance is needed to counter the glut of supply from both traditional and alternative sources, and could ultimately help to alleviate some of the pricing pressure that’s ongoing in the sector.

For further insights into the Asian market download our post-event report from the recent ILS Asia 2016 conference held by Artemis in Singapore.

Artemis ILS Asia will be held in Singapore in July 2017. Please attend for insights into the ILS market growth opportunity in Asia-Pacific.

Download the ILS Asia 2016 post-event report here.