Alternative reinsurance capital firmly on the radar in Asia

Capital from alternative and third-party sources as well as the insurance-linked securities (ILS) sector may not yet be making huge waves across Asia but it is firmly on the radar of attendees at the 12th Singapore International Reinsurance Conference this week.

As we wrote last week, alternative reinsurance capital and ILS is beginning to add to reinsurance capacity across the Asia Pacific region, as it seeks out opportunities in well-modelled, peak catastrophe zones, such as Australia and Japan. As new capital from ILS and alternative sources flows into those markets it boosts overall catastrophe reinsurance capacity in the region and shifts traditional capacity to other areas, helping to keep the level of capital in the regions reinsurance market buoyant.

At the SIRC event this year alternative capital has certainly arrived in terms of conversation, even if it is not yet operating alongside every reinsurers balance-sheet in the region. As a concept it is firmly on the radar of the Asian insurance and reinsurance market, with some Asian life insurers even investing in the ILS space, according to one source.

The expansion of alternative capital into new regions and perils is largely held back by a lack of historical insured loss data, risk models which are not mature and developed enough to encourage deployment of capital, as well as a lack of reinsurance itself in some areas due to lower insurance penetration.

All of this is set to change and participants at SIRC have heard much from the world’s largest reinsurers about how the market will seek to grow into developing economies, helping them to close the gap between GDP growth and insurance uptake. This will translate into an increase in the volume of reinsurance capacity required in the region and as a result alternative and third-party reinsurance capital will get its chance to participate.

The Qatar Financial Centre (QFC) Authority published a report on the Asian reinsurance market, timed to coincide with the SIRC event, in which it says that the long-term opportunity for reinsurers in Asia outweighs any challenges they face in entering the space and creating new markets.

The report also discusses pricing in the region and says that both it and profitability show signs of waning as the reinsurance market in the region becomes well-capitalised and the beginnings of an influence from alternative capital begins to show.

The QFC’s report suggests that reinsurance exposure and reinsurance premium growth will both outpace GDP in the region. An opinion that differs to some reports which suggest that the gap has widened in recent years. Looking forwards though, the gap is sure to narrow as Asian economies reach a tipping point of acceptance for insurance and reinsurance covers and uptake grows rapidly.

The report suggests that Asian reinsurers and global reinsurers operating in non-life reinsurance face reduced profits as capital continues to flow into the global market and begins to look for opportunities in new regions. At the moment respondents to the QFC’s survey suggest that terms and conditions remain tight on business underwritten in Asia, but that may change as the market becomes better capitalised and alternative capital continues to knock on its doors.

Alternative reinsurance capital is just one of the factors which is raising the profile of the Asian reinsurance market. Traditional reinsurers, some leaving once core markets like Florida property catastrophe in search of new opportunities, are increasingly focusing on how they can build markets in regions such as Asia.

The rise of alternative capital in global property catastrophe reinsurance is helping to drive this trend. In addition to traditional reinsurers looking for new opportunities, alternative capital itself is increasingly looking to regions such as Asia and pondering how it can become more involved in reinsurance markets there.

Alternative capacity is already emerging in Asia, according to the QFC report, the well-capitalised reinsurance market in Asia, replenished with capital both traditional and increasingly alternative since the 2011 natural catastrophe losses, looks set to see declining prices over the next year.

This is putting alternative capital firmly on the radar of Asian insurers, reinsurers and also institutional investors. However, the heightened profile of alternative capital does not mean it is playing a major role yet, capital from pension funds and other institutional investors needs to find ways to access the markets and as Asian markets mature, and catastrophe models improve, it is expected to play a greater role.

One interesting comment in the QFC’s report comes from Michael Marx, Managing Director of the Treaty in Division Asia Pacific at Hannover Re. Commenting on capital and pricing in the Asia reinsurance market Marx said; “Asia’s reinsurance markets remain highly competitive and many new players solely compete on price. This, together with the inflow of alternative capital, has the potential to destabilise the market.”

This is a concern that has been reiterated to Artemis by contacts across the Asian region. Having seen how insurance-linked securities (ILS) and alternative capital has pushed down rates and pricing in the U.S. catastrophe reinsurance market, there is some concern that as capital finds ways to enter Asia it could push down rates without fully understanding the risks due to a lack of mature modelling tools.

ILS and alternative capital is making its presence felt in Asia and is firmly on the radar of market participants, however it will take time for it to begin to contribute a major percentage of the total risk capital in that market. A slow and steady flow of capital into the region is likely as opportunities emerge, insurance penetration increases and markets require more reinsurance protection, the alternative reinsurance investors look set to contribute a growing share of this.