Regional reinsurance firms in Asia-Pacific are expected to be able to withstand global competitive pressures, such as increasing reinsurance capacity and pricing pressure, better than peers in Central and Eastern Europe, the Middle East, and Africa (CEEMEA).
Ratings agency Standard & Poor’s says that it believes that regional reinsurers located in Asia-Pacific are more resilient to the industry headwinds facing the reinsurance market, than regional peers in the CEEMEA region.
Asia-Pacific regional reinsurers benefit from longer-established market positions, greater size of capacity and revenue streams than their peers in CEEMEA, said S&P in its latest report on the reinsurance sector. By contrast, CEEMEA regional reinsurers face a more fragmented market and greater investment risks.
As a result S&P believes that the regional reinsurance firms in the Asia-Pacific region stand a better chance of navigating the challenging reinsurance market conditions, brought about by the excess-capital, greater competition and the inflow of capital markets money in the form of insurance-linked securities (ILS), than their CEEMEA peers.
The CEEMEA region is dominated by large global reinsurers, which can make survival difficult for regional reinsurers in this area. These smaller reinsurers are at risk of being marginalised and sit in a precarious position. By contrast, the Asia-Pacific regional reinsurers have significant market shares, giving them more established and better defensible competitive positions, said S&P.
As a result, ratings on some Asia-Pacific regional reinsurers are generally higher than their peers elsewhere, which S&P puts down to an ability to better withstand the current reinsurance market challenges.
Global reinsurers are increasingly expanding into regional markets, but expansion into Asia-Pacific has always been more of a challenge. The solid relationships that regional reinsurers in Asia-Pacific have built over time are more difficult to erode and compete with, making entry into these markets more challenging.
At the same time pressure on regional reinsurers is growing, as reinsurance buyers increasingly look to consolidate renewals and centralise reinsurance buying across groups. This favours the larger, global reinsurers and can challenge the regional markets. Regulation could also increase pressure on regional reinsurance players, as risk-based capital requirements increase which again favours the larger, global players.
Retrocession is also attracting global players into regional markets, but in this case the regional reinsurers can use the capacity available from retro markets to help themselves extend their own capacity at this challenging point in the reinsurance cycle, when expansion through earnings growth is difficult.
The regional reinsurers with sufficient capacity can exploit their proximity advantage with clients, S&P notes, but the smaller average sizes of CEEMEA reinsurers puts them in a more difficult position than the typically larger Asia-Pacific players. The proximity and local knowledge, however, is the one thing that stands in a regional reinsurers favour and if leveraged this can help these reinsurers to sustain themselves.
The challenges that CEEMEA regional reinsurers face leads S&P to conclude that there will be little rating upside for these players over the next three years. Conversely, regional Asia-Pacific reinsurers stand more of a chance of maintaining their strong business positions and ratings over the years to come.
S&P closes its briefing by saying; “In our view, regional reinsurers can remain relevant to regional insurers by offering day-to-day technical support, and through their unwavering deployment of resources in good times and bad.”
Regional reinsurers in Asia-Pacific are also likely better able to withstand the competition from the insurance-linked securities (ILS) and capital markets entrants. Catastrophe bond penetration in Asia is still only a small part of the market and while expected to grow it is unlikely to erode much of the regional reinsurers core business.
The collateralized reinsurance market however could erode some of these regional reinsurers core renewals, however, as it often targets small to mid-sized clients in order to avoid direct competition with the global reinsurance giants. That could encourage ILS managers deploying capital in collateralized reinsurance renewals to increasingly compete with regional reinsurers around the world.
The ILS market also searches for diversification, so these regions such as CEEMEA, Asia-Pacific etc are very attractive to ILS players and this again will encourage more competition. Again, this will likely impact the CEEMEA regional reinsurers first or hardest, given the greater difficulty to enter the Asian market that S&P describes.
Over time however it is expected that reinsurers at the regional level will increasingly find themselves competing directly for renewals with collateralized sources of ILS sourced reinsurance capacity. That may keep the pressure on regional players at a time when the global reinsurance giants are also trying to target their core markets.
This latest report from S&P continues to drive home the fact that the reinsurance market is challenging at all levels and all regions. These challenges show no sign of abating and regional reinsurers may increasingly become targets of mergers and acquisitions, as larger reinsurers look to use M&A as a way to grow and expand into new markets.
You can access the press release and a copy of the S&P report here (login or subscription may be required).
Also read other coverage of recent S&P reinsurance reports: