Regulatory advances create reinsurance & ILS opportunities in Asia

Advances with insurance and reinsurance regulatory frameworks in China and India are reforming both countries’ reinsurance markets, a move that could provide global reinsurers and insurance-linked securities (ILS) players with ample opportunity to access new peril regions.

During 2015 both China and India made significant steps towards improving their domestic insurance and reinsurance industries, seeking to expand the number of reinsurance entities that write business on their shores and improve the security and solvency of their re/insurance markets and players.

“A number of regulatory actions in Asia are changing the market landscape. Key regions like China and India are seeing reform implemented that will likely bring new market players and potentially create reinsurance supported opportunities for insurers in the market,” says reinsurance broker Aon Benfield in its latest reinsurance market outlook report.

As with Europe’s new Solvency II regime, China implemented C-ROSS in January 2016, the country’s second-generation solvency framework and, while certain specifics on the application of C-ROSS regulation are forthcoming new regulations could increase reinsurance demand.

Under the new regime insurers are required to hold capital for catastrophe risk, reserve risk, premium risk, and credit risk, which could result in greater use of reinsurance by firms that require additional capitalisation in order to meet C-ROSS solvency requirements.

Aon notes that in China credit risk factors vary substantially between “reinsurance assets associated with domestic reinsurers and off-shore reinsurers,” adding that should off-shore reinsurers provide collateral the gap could be narrowed somewhat.

“As such, we may see the use of collateralization in China in future renewals,” said Aon.

It’s unclear exactly what form of collateralization Aon is referring to, but it certainly brings to mind the potential for collateralized reinsurance players to participate in the space, although additional regulation might require firms to be rated, hence fronting partnerships are likely to be key for ILS in these new markets.

Further, new regulation introduced in China in January ensures that, “Only those reinsurers who have required international rating can write business from China cedants (certain exemptions may apply),” says Aon.

It’s possible, but unclear if collateralized reinsurers are those excluded from requiring ratings, however, collateralized reinsurance ILS funds and managers could utilise a rated fronting carrier to successfully enter the region.

The collateralized reinsurance market is one of the fastest growing sub-sectors of the expanding ILS market, again increasing its share of the overall reinsurance marketplace in 2015.

The market is predicted to continue to gain traction in the coming months absent meaningful entry into the Chinese market, highlighting the potential for further growth of the sector into new peril regions should China prove a viable market.

It’s possible that China’s new C-ROSS regime favours domestic reinsurance firms, suggests Aon, a notion that’s somewhat supported by the establishment of three new China domiciled reinsurers in the first-quarter of 2016 alone.

Taiping Re China, PICC Re, and Qianhai Re all received regulatory approval during Q1 2016, significantly increasing the number of local reinsurers from one, being China Re, to four.

“Other local reinsurers are being expected as off-shore reinsurers are applying to open branches/subsidiaries in China, and Lloyd’s syndicates are utilising Lloyd’s China’s platform,” said Aon.

China continues to be one of the most rapidly developing countries across the globe, but its insurance penetration levels are dangerously low for a region that has a substantial population and high exposure to a variety of natural catastrophes.

The landscape in India isn’t too dissimilar from that of China, a vast population that is dangerously underinsured, as highlighted by the substantial economic losses as a result of the Chennai floods in 2015, of which a reported 10% was insured.

But as in China the Indian government and regulatory body has made significant steps to increase insurance penetration levels in recent times, via new regulatory advances that serve to improve the Indian re/insurance industry.

Following the passing of a law in 2015 foreign reinsurance companies are now allowed to establish branches in India, with initial regulatory approval already granted to Europe’s big four, being Munich Re, Swiss Re, Hannover Re, and SCOR.

India is an extremely large country that citizens often rely on agriculture to earn a living, something that requires adequate and affordable insurance solutions to protect livelihoods against the impacts of extreme weather events.

By establishing a branch in the region it’s expected that foreign reinsurers will be better equipped to assess risks in the Indian market and therefore broaden their scope, providing ample opportunity for peril and region expansion.

“Beyond improved underwriting of currently reinsured risks, it is anticipated that reinsurer expertise and support will play a key role in insurance companies being able to broaden insurance offerings in the market, particularly looking to increase penetration in the midmarket and lower income segments,” said Aon.

New regulation in both China and India clearly supports the growth of the regions’ insurance and reinsurance markets, while also ensuring that the markets operate in a secure and solvent manner.

As more and more reinsurers enter India and China in the coming months the capital flow of their re/insurance industry is expected to increase, which could enable re/insurers to increase penetration and ultimately economic stability by offering more efficient, adequate solutions.

Furthermore, the scope for insurance and reinsurance market expansion in both regions is vast, meaning that it’s likely ILS structures, features, and capacity will be required and utilised to create a sound risk transfer market in both China and India.

With the global reinsurance market remaining under significant pressure desirable rates are proving difficult to come by, meaning the ability to enter new regions and access new risks is as important now as ever to global insurers, reinsurers, and ILS players.

If you want to learn more about ILS in Asia please register for our ILS Asia 2016 conference, held in Singapore this July.