APAC reinsurers face profitability, diversification, and risk management challenges: S&P Global
November 7 2024 by InsuranceAsia News
Wenwen Chen, director at S&P Global discusses key factors influencing the profitability of APAC reinsurers, the impact of retrocession costs, and strategic approaches for diversification and risk optimisation amid rising weather-related losses and economic volatility.
IAN: What are the main factors affecting the profitability of reinsurers, besides retrocession costs? How can they overcome the burden of retrocession costs that cannot be passed to direct insurers – in terms of underwriting quality and risk selection?
Chen: For most APAC reinsurers’ domestic portfolio, proportional treaty constitutes the bulk of their book, the underwriting results are therefore closely associated with the performance of primary insurers. Reinsurers have been looking into tightening terms & conditions and adjusting sliding scale arrangements.
We also anticipate that reinsurers will take the initiative to be involved in helping stakeholders across the value chain to strengthen risk management from risk prevention perspective.
The increased retrocession costs, while likely narrowing reinsurers’ insurance margins, are a reminder for reinsurers to review the effectiveness and efficiency of their risk mitigation plan. Another point to note is APAC reinsurers’ profitability remains dependent on investment income.
IAN: What strategies can reinsurers use to diversify their books and reduce volatility in their underwriting? Do you see a shift to specialty and casualty and exit from aggregate covers?
Chen: We’ve seen examples in both geographic and business line diversification. As regional reinsurers maintain their home market advantage, they are also seeking diversification through growing into other markets. Meanwhile, reinsurers could be revisiting their peak zone exposure and consider balancing out their portfolio.
Yes, we do see a gradual shift to specialty and casualty, and believe market participants could be ramping up expertise in some business lines in these segments. The supply of aggregate covers remains limited.
IAN: How can reinsurers optimise their portfolio risk as they reassess their risk appetites to navigate the uncertainty amid higher weather-related losses and volatile economic conditions in the region?
Chen: From risk appetite perspective, reinsurers could be revisiting their appetite on natural catastrophe exposure following their review of loss experience.
On economic conditions and geopolitical tension, we anticipate reinsurers will conduct more customised stress scenario (in addition to what they’re required to perform) to support the refinement of their risk appetite.
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