Q&A: Aon Re’s Qin Lu on China’s ‘unprecedented’ digital opportunity

April 20 2021 by InsuranceAsia News Staff
Aon Re'sQin Lu

Aon Re’s Greater China chief executive Qin Lu, who is based in Hong Kong, recently shared his thoughts on important market developments and trends with InsuranceAsia News (IAN).

Among the market issues he discussed were foreign investment in China, reinsurance renewals, the rise of digital, the Greater Bay Area, and the impact of Covid-19 on an evolving P&C market.

IAN: How will China’s encouragement of greater foreign investment into the domestic insurance market impact reinsurers? 

Lu: Some international players are [currently] conducting market entry assessments — the key question is where the entry point is for new players. They can apply for the licenses and set-up office in China, and the alternative is whether they should consider playing as an offshore reinsurer and write China business. Different options are available for new players to evaluate.

For the existing foreign insurers, if there is a reinsurance need, they normally cede a large portion of local business to their parent company or through their regional program. Thus, the reliance on other reinsurers is relatively limited.

Benefiting from the government tailwind for foreign investment into China’s (re)insurance market in 2020, we also saw Axa XL Re receiving their license to operate in China, and Korean Re setting up [it started to underwrite]. Multiple onshore reinsurers obtained regulatory approval to substantially increase capital as well. This increases the dynamics of the onshore reinsurance market, providing more choices and capacity support to cedants.

IAN: What have been some of the key developments in China’s P&C reinsurance market over the last 12 months and how is the market evolving?

Lu: In terms of 2021 reinsurance renewals, most P&C reinsurance renewals saw a slight rate increase and treaty leaders took a firm view of terms. All treaties required communicable disease and cyber clauses.

Some offshore reinsurance markets pulled out or reduced their capacity in China, particularly on proportional treaties, due to historical loss performance and thin margins. Thus, the market share of offshore reinsurance markets was reduced.

For agriculture, additional reinsurance capacity from China Agricultural Re (established last summer) has materially changed how cedants arrange their reinsurance. Several cedants cancelled their existing proportional treaties during this renewal after arranging a quota share treaty with China Agriculture Re directly — the ceded premium to the open market was substantially reduced. Meanwhile, the international market capacity has been impacted by a significant improvement in reinsurance terms and a reduction of ceded reinsurance premiums.

Looking at regulatory impacts, the offshore reinsurance credit risk factors applied in solvency calculations is expected to be relaxed under C-ROSS Phase II. This regulation may also impact reinsurance demand due to the structural change of premium risk and reserve risk factors — the direction dependent on specific insurers’ portfolio composition and scale. Such changes would allow the reinsurance market to become more dynamic and robust. 

Motor insurance reform is continuing in China [and] . . . has created pressure on ticket size and profitability at the policy level. For 2020, motor insurance recorded only 0.7% annual growth — and a 10.4% drop in Q4. Facing this challenge, P&C insurers tended to focus more on non-motor lines, particularly short-term health, agriculture and liability products. All these achieved 20%+ growth in 2020 with the backdrop of Covid-19 and a strong government tailwind. Thus, this is creating a great demand for reinsurance protection for these risks.

This is also challenging for those reinsurers writing whole account business, which is dominated by motor business. The potential deteriorating performance of whole account business might weigh on reinsurers who cross-subsidise other treaties of the same cedant.

During the 1/1 2021 renewals, although the capacity from these reinsurers was still adequate . . . we have seen their urge to seek ways to transform and diversify their portfolios going forward.

IAN: How did Covid-19 disrupt China’s insurance market?

Lu: Covid-19 has brought an unprecedented opportunity for digital insurance sales.

In 2020, the total health insurance market grew by 15.6%, and online health recorded a 58.8% increase (vs. a total insurance industry increase of 6.1%). At the same time, regulators are modernising their policies to keep abreast of the latest trends. For example, in November 2020, for the first time in 13 years, new industry standards on critical illness definitions were published reflecting the industry’s rapid development and changing consumer needs.

All of this change created opportunities, as well as higher requirements for the insurance and reinsurance industry in terms of product development and underwriting capacity support.

In terms of claims, Covid-19 hasn’t had a noticable effect on the primary and reinsurance markets. Very little business interruption coverage has been bought and consequently there is little exposure to loss. However, Covid-19 aroused the market’s great interest for business interruption coverage. China insurance practitioners are learning from the experience overseas, for example, the Financial Conduct Authority’s test case in UK, to promote and develop coverage based on the local needs of Chinese clients.

IAN: How can the Greater Bay Area (GBA) help the reinsurance market? What important issues need resolving? 

Lu: The Hong Kong government and other authorities are working out several key measures to strengthen the SAR’s role as a regional (re)insurance hub.

Reinsurance is a crucial element for the GBA’s development — measures like tax relief and regulator facilitation have already promoted reinsurance and captive insurers in Hong Kong. The Insurance (Amendment) Bill 2020 was passed by the Legislative Council last year. This means a new ILS regime which will help to maintain the city’s competitiveness as a (re)insurance hub and enable the industry to capitalise on new GBA business opportunities. 

The development of the GBA, however, faces traditional risks like typhoons but also new emerging risks such as cyber. The GBA initiative also presents opportunities in the life and health space.

Hong Kong and the mainland Chinese authorities are hammering out details for the introduction of an “Insurance Connect” scheme as the next major step in insurance integration. There is a great need for innovative insurance solutions and it requires a combined effort from the (re)insurance industry in this region.

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