Capital management, technology key to adapting to changing reinsurance landscape: Fitch
November 4 2024 by InsuranceAsia News
Reinsurers in APAC have seen a sustained improvement in equity levels, shareholders’ equity and return on equity on the back of stronger underwriting performance and rebound in investment gains.
“The quality of shareholders’ equity is satisfactory and the equity level is increasing, supported by retained earnings,” said Jeffrey Liew, head of insurance, APAC.
This stability is particularly evident among reinsurers in Asia, where several companies in Japan, South Korea, China, and Hong Kong have successfully implemented IFRS 17.
These firms report “stable-to-improved returns on equity (ROE), driven by improved underwriting performance and investment gains.”
Regulations
The regulatory shifts in Hong Kong and Indonesia are expected to have moderate impacts on reinsurers’ strategies.
“The new RBC regime, effective from 1 July 2024, aims to enhance financial stability by being more responsive to each insurer’s risk profile and aligning with international standards,” Liew said.
This will likely prompt reinsurers to adopt more rigorous risk management and capital allocation practices to ensure compliance and maintain solvency.
In Indonesia, the increase in minimum equity requirements will likely reduce the number of operational companies, fostering a healthier competitive landscape.
“Reinsurers will need to bolster their capital positions to meet these new thresholds, which could lead to consolidation or exits by smaller players,” Liew said.
In Indonesia, tougher minimum equity requirements are set to reshape the competitive landscape.
“The tougher minimum equity requirements for Indonesian insurers are likely to reduce the number of companies operating in the sector and encourage a healthier competitive landscape,” Liew said.
By 2026, insurers must meet a new regulatory threshold of IDR 500 billion, with a higher requirement of IDR 2,000 billion by 2028.
Currently, “one out of the eight reinsurers in Indonesia has not met the new regulatory requirement,” prompting concerns about market consolidation and operational viability.
Capital management
Reinsurers must focus on disciplined risk selection and prudent investment portfolios to remain profitable in a tighter regulatory environment.
This may involve a strategic shift toward lower-risk investments that require less capital buffer.
Additionally, “several reinsurers increase their use of retrocession by ceding more risk to retrocessions,” which supports them in reducing the capital required to cover higher risks, particularly those arising from natural catastrophes.
“Rising awareness of cyber risk protection is driving potential premium growth, but reinsurers face challenges in exercising proper risk management and underwriting practices to effectively mitigate this emerging risk.” Jeffrey Liew, Fitch
ILS
Liew anticipates a gradual increase in insurance-linked securities (ILS) transactions across Asia, stating that this growth is “supported by rising investor interest and emphasis on climate change mitigation.”
Besides that, the establishment of an ILS hub in Hong Kong in 2021 is expected to bolster market growth and stability.
However, challenges such as “the need for further development and increased participation from Asian investors” have emerged.
Cyber risk
“Rising awareness of cyber risk protection is driving potential premium growth, but reinsurers face challenges in exercising proper risk management and underwriting practices to effectively mitigate this emerging risk,” Liew said.
Recent ransomware attacks and cybersecurity incidents, such as the CrowdStrike outages in July 2024, highlight the systemic nature of cyber threats.
Liew said that “the reinsurers’ ability to manage the systemic nature of cyber risk has not been established,” emphasizing the need for robust reserving and pricing policies.
Reinsurers can enhance their data analytics capabilities and collaborate with cybersecurity firms to better prepare for potential cyber catastrophes.
Improved data on cyber incidents will lead to more accurate reserving and pricing models.
Implementing cyber risk models and conducting regular stress testing can help assess vulnerabilities and ensure that reserves are adequate.
“Clear and updated policy terms are essential to reflect evolving threats,” while conservative pricing strategies can help manage the inherent uncertainties, Liew said.
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