Challenges bring opportunity for (re)insurance in Asia

The silver lining to any challenge is the opportunity it brings, and, in Asia, reinsurers may be on the cusp of unlocking significant potential, says Fitch’s Jessica Pratiwi and Siew Wai Wan.

Siew Wai Wan (top), senior director and Jessica Pratiwi, senior analyst at Fitch Ratings

In a vast and varied region where nations are at different stages of development, the prevailing tight measures intended to control Covid-19 have meant – at least for now – minimal disruption to reinsurers’ everyday business. So far, pandemic-related claims have been relatively contained.

Of course, there has been some impact. Based on statistics available from selected Asian reinsurers, we estimate their premiums increased by more than 10% in 2019, something we do not expect to repeat in 2020. Individuals and businesses in all sectors across the region are tightening their belts until the pandemic eases.

But the disruption to everyday life the pandemic caused may have focused many minds on the benefit of insurance in a market that has traditionally suffered from a lack of penetration. Despite having almost four times the population of the Emea region, the US dollar value of non-life premiums was 16% lower in Asia in 2019, our figures show, with Japan and China appreciably dominating the numbers.

It is here that we believe there is a huge opportunity for reinsurers – and the sector more generally – to push further into many markets, as they develop economically, and demonstrate their potential to support and add value.

Notably, an element of protection in the region coming under increasing focus is catastrophe cover against the damage and disruption wrought by natural disasters.

Asia accounted for the world’s largest share of economic losses from catastrophes in 2019, at $66bn or 45% of the global total. Typhoons in Japan caused losses of $24bn over the past two financial years, with this year’s losses from severe floods in southern China amounting to $10bn by 10 July.

Elsewhere in the region, including Sri Lanka and Australia, reinsurers are also increasingly in demand as the frequency and ferocity of catastrophe events seems to be intensifying.

Optimising strategies

However, with existing good capitalisation levels, we believe Asia reinsurers will be well positioned to absorb losses both from the pandemic and increasing catastrophe claims. This is because, in recent years, they have begun to seriously focus on capital management and building buffers.

This activity continues, and we see some shifting of investment portfolios towards riskier assets in search of higher yield in a sustained low-rate environment. Although we do not expect this move to be aggressive, as this is a relatively conservative sector. Additionally, slower business growth is likely to offset insurers’ need to inject additional capital, allowing some breathing space and avoiding the need to ramp up investment risk significantly.

With such a patchwork of jurisdictions across the region, each reinsurer will need to consider local solvency margin requirements, as investments in riskier assets require higher capital charges under regulatory frameworks. Most are also seeking to optimise their business strategies to balance the investment challenges in terms of assets and liabilities – and often working with international partners to gain insight and experience.

We see regulatory changes in several Asian markets that could shake up how reinsurers currently operate, but we consider these to be manageable. They may even be derisible, as they should push companies to develop internal capabilities and risk management frameworks that can manage external impacts.

An area we also see as ripe for expansion in Asia is insurance-linked securities. These instruments are useful in developing countries where insurance penetration is typically low and governments have limited financial reserves, meaning losses from catastrophes can derail fiscal budgets and roll back development gains.

Catastrophe bonds can mitigate the impact of natural disasters on fiscal accounts while expanding reinsurers’ capacity and diversifying their sources of capital. We see growing momentum behind these ILSs, but their success will hinge on whether investors have favourable catastrophe loss experiences.

Against such a rich backdrop, there are few regions that hold the potential offered in Asia, where even amid a maelstrom of current challenges, there is opportunity for reinsurers to prove their value.