Tuesday, December 12, 2017

Reinsurers drawn to Asian growth

Speak to reinsurers for long enough and you’ll soon hear complaints about a shrinking pie, accompanied by repeated use of words such as “innovation” and “solutions”.

It is true that the premium pie is dropping, but this is clearly a consequence of the continued soft market and the relatively benign loss environment of the past few years. Exposures continue to rise and, while many see the soft market as a new normal rather than a cyclical phenomenon, the view in Asia is often less pessimistic about the potential for a bigger pie.

“Foreign counterparts recognise Asia’s business potential and have increased their focus and commitment to the region,” said Fitch in a recent report. “Asia remains an appealing destination for global reinsurers.”

Swiss Re announced in April that it is setting up its general reinsurance business regional headquarters in Singapore. Munich Re began restructuring its Asian operation in September last year to strengthen its presence in Tokyo, Beijing and Singapore, with an eye on potential expansion to India.

Domestic players are ramping up too. In China, PICC Re, Taiping Re and Qianhai Re received approval from the China Insurance Regulatory Commission to set up reinsurance operations last year.

“Fitch expects competition in China’s reinsurance market to intensify,” the ratings agency said. “This may benefit non-life insurers by providing them greater ceding options and flexibility given the current undersupply of reinsurance capital.”

Indeed, the market in China is still largely untapped, with most exposures focused on short-tail risks such as motor, property and engineering — typical indicators of a growing economy. On the life side, much of the demand is focused on investment-type products rather than risk transfer, leaving considerable room for growth.

As demand for more sophisticated products grows, the Chinese reinsurance pie is likely to catch up to Japan and the US rapidly during the coming decades.

Even before then, China’s belt-and-road infrastructure plan is driving expectations of higher reinsurance demand worldwide. The initiative is expected to involve more than US$900 billion in infrastructure spending across more than 60 countries, with insurance premiums from already-announced projects potentially reaching US$7 billion, according to Swiss Re.

Fitch expects that the infrastructure boom is also likely to give a boost to reinsurers in South-East Asia. Indonesia plans to increase its budgeted infrastructure spending by 22% during 2017, to more than US$26 billion, and Thailand has increased infrastructure spending to up to US$25 billion for the year.

“These large-scale projects will have to be covered against substantial risks and catastrophes throughout their construction and operating cycles,” says Fitch. “Direct insurers are unlikely to have the capacity to underwrite such exposures alone and reinsurers will have opportunities to step in and address this gap.”

While there are concerns about the growth of protectionism in markets such as India and Indonesia, the overall size of the opportunity is attractive enough to encourage continued investment by the world’s biggest reinsurers.

After all, strong underlying growth is a cure for many ills — including the need to be overly concerned about such elusive concepts as innovation.

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