Reinsurers increasing discipline in Asia after catastrophes, capital markets could benefit

The high catastrophe losses experienced in Asia in recent years, which reached a peak in 2011 after the Japanese earthquake and tsunami event and the flooding in Thailand, are prompting reinsurers to become more disciplined in the region. Reinsurers have been prompted to look closely at their portfolio and to re-evaluate their underwriting approach and risk appetite, putting them in a better position to whether the next spate of catastrophes in Asia, according to an article from Fitch Ratings.

Fitch believes that reinsurers in Asia (and those operating there) are becoming more risk-focused as they seek ways to recover from the financial battering that the catastrophes of 2011 delivered. 2012 has seen some loss events which continue to push this agenda for discipline and change, including typhoons and flooding which have caused hundreds of millions of dollars of insured losses in the region in recent months.

Asia is the scene of two influences which are forcing reinsurers to raise their game, increasing frequency and severity of catastrophe events, combined with an increasingly developed and insured landscape. These two factors will continue to influence the region for years to come and as a result insured and reinsured losses from catastrophes are set to rise, in turn increasing the need for reinsurance or risk transfer capacity in the region.

Fitch has noticed a number of growing trends among reinsurers in the region as they look to tighten their underwriting procedures and increase discipline. Reinsurers have been gradually reducing their participation in proportional reinsurance business but increasing their non-proportional business. This allows them to be more certain of when they are facing losses as they will only be affected should the direct cedents or insurance companies’ insured losses exceed a certain predetermined level. This is leading to the use of attachment metrics and a general re-evaluation of what type of cover fits best for cedents and the reinsurer themselves. Deductibles are also being increased, meaning that cedents manage a portion of their risk before reinsurers step in to take over. Fitch says this could help reinsurers become more profitable in the region, although perhaps reducing top-line premium growth. Reinsurers in Asia are becoming more proactive at looking at accumulations of risk and as a result have been imposing event limits to attempt to cap losses. This has been a direct reaction to the way the Thai flood losses built up. On the cedent side, they are beginning to seek out more reinstatement premiums, often two or three, from reinsurers particularly for catastrophe reinsurance coverage. Reinsurers are granting these selectively on a cedent by cedent basis.

So quite a lot of change is occurring in the Asian reinsurance market and it will all add to the disciplined manner in which risk will be ceded and underwritten. Fitch believes that the recent catastrophes, which have forced the market to look hard at the way it manages and underwrites risk, will open new opportunities for reinsurers and the capital markets in Asia. Increased reinsurance rates are already helping reinsurers to profit from business in the region and this increased discipline means that reinsurers can more safely take on risk while still profiting due to the hikes in rates.

For the capital markets an opportunity exists as more Asian market players are exploring the option of catastrophe bond issuances, rather than solely relying on their catastrophe reinsurance programs. Fitch cites the 2012 Zenkyoren cat bond, Kibou Ltd. (Series 2012-1) as an example of Asian insurers returning to the cat bond market, there was also Akibare II Ltd. in April of this year as well. The capital markets ILS investors are in need of more diversification opportunities and it will be interesting to see whether any more Asian risks are issued in cat bond form during the remainder of 2012.

The increased discipline from reinsurers could also help capital market backed sources of collateralized reinsurance to become ever more active in the Asian region. A number of collateralized reinsurance writers are already very active in Japan, but given the increasing trend for traditional reinsurers to cap limits, put attachment points in place and generally re-evaluate what level of risk they assume, there could be an opportunity for risk-hungry collateralized writers to participate in the top-layers of reinsurance programs. Generally we believe that the Asian reinsurance market is going to follow the trends of the rest of the world and we’ll see more of an involvement from the capital markets, both through collateralized reinsurance and instruments such as cat bonds and ILWs over the coming years, as they take advantage of growing demand for reinsurance.

Fitch expects the momentum of the Asian reinsurance markets will continue to be strong, with both increasing risk awareness and continued market demand by the cedants. Reinsurance is only going to become more important in Asia as the economies develop, infrastructure increasingly modernises, cedents are increasingly pressured to monitor their capital adequacy and the need for reinsurance grows as a result. Fitch notes that data and modelling is still an issue that challenges reinsurance in Asia and while this will continue to be challenging it will improve over time as the market compiles better statistics on catastrophe events and losses.