As insurers and reinsurers continue to navigate the softening reinsurance market, RBC Capital Markets (RBC) predicts that European players will increasingly look to emerging market opportunities for business.
Analysts at RBC recently discussed the sustained impact the soft reinsurance market environment is having on the balance sheet expectations of European reinsurance firms, and what this means for the sector.
“As a result, we expect that European reinsurers will focus more and more of their efforts into developing their business in emerging markets,” said RBC, in a recent report.
The report continues to explain that this expectation lies mainly with the non-life re/insurance sector, “as this is the largest source of earnings for the European reinsurers.”
With pricing in the sector showing signs of stabilisation in recent months, albeit it at a structurally lower level than before, and the abundance of alternative and traditional reinsurance capital still flooding the market, deployment of capital into emerging, vulnerable markets is likely exactly what the re/insurance space needs.
The issue now with the glut of capital in the sector is that it tends to focus on developed business lines, where competition is high due to excess capacity and a lack of demand.
RBC notes; “Reinsurers already have substantial operations in emerging markets (the definition varies by company), and actually write more of their non-life business in emerging markets than their primary European peers.”
Despite already having a strong presence in some emerging markets and reaping the premium benefits from this, RBC feels there’s an opportunity for greater insurance penetration levels in some regions, including China, Brazil and Indonesia.
Improved technology, analytics and catastrophe modelling platforms combined with the abundance of re/insurance capital enables a chance to innovate in emerging markets.
In return the product set will grow and so to will penetration levels, resulting in an uptake of premiums for re/insurers that take the step.
RBC expanded on the emerging market opportunities; “Although many commentators focus on the under-insurance of catastrophe losses Worldwide, we believe that this understates the potential global opportunity.”
Adding; “Based on analysis of penetration levels, if underpenetrated markets reach the global average of 2.7%, this suggests a $450bn non-life opportunity, not taking into account GDP growth. We assume that the reinsurance opportunity is 10% of this, and totals $45bn.”
And the opportunity is there for reinsurers and primary firms notes RBC, stressing that as it’s easier for reinsurers to operate offshore, primary insurers will likely need the help of merger & acquisition (M&A) activity, or would benefit greater from a longer-term, more organic growth approach.
Commentary in the sector often turns its focus to emerging markets, particularly at times when the market is softening and participants are faced with numerous challenges.
But the lack of insurance penetration in emerging markets represents a viable opportunity for European and other global re/insurers to add to both top and bottom line earnings.
In fact, according to RBC emerging markets now account for 20% of every dollar spent on reinsurance internationally, a 37% increase from 2009, and predicting this to rise to 25% by the year 2020 in regards to non-life premiums.
So whether primary insurers seek mergers in emerging markets of the globe, or reinsurers launch local offices to access the business, the knowledge, tech, analytics, capital and skill-set of the European re/insurers and beyond provides ample opportunity for growth and developing in the world’s emerging re/insurance markets.