Evolving risks, regulations fuel demand for alternative capital solutions: Guy Carpenter
November 1 2024 by InsuranceAsia News
Asia Pacific’s emerging risk landscape, regulatory regimes and companies’ efforts to balance growth and volatility are driving the need for capital optimisation and creative reinsurance, according to Justin Ward, head of capital advisory, Asia Pacific, Guy Carpenter.
“Demand for capital advisory remains strong, as clients continue to focus on better understanding the evolving risks—climate (including secondary perils such as hail, flood and wildfire), cyber, geopolitical, pandemic—and their impact on growth, volatility and capital,” he said.
Growth is a “clear mantra” for insurers, and the need for capital advisory solutions gains significance, particularly in the context of exploring solutions that fuel growth without inadvertently introducing more volatility to the organisation, he said.
“Volatility remains omnipresent for many of our clients as the nature of risk changes, insured values grow, retentions are raised and the cost of risk transfer escalates,” according to Ward.
As the operating environment becomes more complex and tensions arise across various stakeholders, advisory engagements and bespoke solutions will become more frequent.
Key considerations for companies in the region are prioritising carefully selected lines of business and distribution channels; ensuring prudent risk management practices; identifying segments for exit to align with growth strategy and optimising the capital structure for the challenges ahead.
“These discussions are prompting the senior management to explore differentiated business models, creative reinsurance and alternative capital solutions, often combining all three for a richer dialogue,” he said.
“Demand for capital advisory remains strong, as clients continue to focus on better understanding the evolving risks—climate (including secondary perils such as hail, flood and wildfire), cyber, geopolitical, pandemic—and their impact on growth, volatility and capital.” Justin Ward, Guy Carpenter
Regional landscape
From a macro perspective, the capital needs and solutions vary little when adjusted for the regulatory environment, Ward said, adding: “At the end of the day, the execution of a capital solution is fairly standard.”
“Solution design needs to be a differentiator in collaboration with the client. Differentiation is driven by ideation and thinking outside the box with the client – understanding their needs from various perspectives and delivering strategic counsel that enables them to clarify their goals and outperform their peers in the market,” he said.
Within the region, balance sheets are strained due to increased losses, higher retentions and operating model pressures (i.e., IT investment, regulatory change). This is compounded by many jurisdictions that have transitioned or are transitioning to a risk-based capital environment and/or IFRS17.
However, regulatory changes afoot in the region naturally impact the immediate need for specific solutions.
Risk-based capital arrangements have recently been introduced in Hong Kong. Japan has come through a period of significant regulatory interventions from a consumer perspective. Indonesia will transition to IFRS17 in January 2025, with ongoing discussion about the development of the third-party motor vehicle market.
“This has occurred in Hong Kong, while capital is emerging as a “hot issue” in Indonesia, given proposals to increase minimum capital requirements and the potential to make some liability product compulsory (i.e., motor),” he said.
“We often view this variation as a catalyst for strategic conversations with clients regarding preparedness, how they create competitive advantages and the opportunities to build a strong balance sheet and enhance capital management capabilities upon transition,” Ward said.
“Notably, these conversations will always extend to the consumer sphere – something that, prima facie, you would not think could occur.
“Often, it will involve moving product offerings to run-off and exploring how reinsurance may assist with de-risking, as well as how clients might deploy excess capital given changes in shareholding structures to remove value chain or industry conflicts of interest, whether perceived or real. It is always varied but interlinked,” he said.
The challenge often arises in relation to industry inertia and agency risk across the value chain, said Ward, noting that the industry often receives feedback about being “fast followers” as opposed to “leading the change”.
“A key role of Guy Carpenter’s capital advisory function is to educate and inform, ensuring that decision-making becomes increasingly evidence-based and incorporates external perspectives –from an insurer, geographic, line of business or ownership perspective. This is key to addressing the challenges of a volatile market,” Ward said.
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