Upcoming renewals should ‘maintain balance’: Munich Re

November 4 2024 by

The reinsurance markets have achieved a balance and Munich Re believes it should “maintain that balance the market has currently found”.

“Terms and conditions and structures are likely to remain stable because most of the wordings and the issues on structures were taken care of in the last couple of years,” according to Hitesh Kotak, chief executive for Japan India, Korea and South-East Asia.

However, the market is not without its challenges. The South-East Asian markets that have seen nat cat losses is a case in point, where Kotak anticipates a “stable to hard renewal”.

‘For South-East Asia, it’s actually not been a great year because of Typhoon Yagi in Vietnam, the losses could add up to about a decade’s profit for the industry. Almost 85-90% of those losses are coming to the reinsurance industry,” said Kotak.

“The market effects of Yagi will not be limited to Vietnam, it’s a global business and it will spread over,” he said.

“I expect the Southeast Asian renewals to maintain the trend of last year, overall I think it will still be a stable to hard renewal,” Kotak added.

Each market has its own peculiarities, in Indonesia for example, there’s a lot of correction happening right now as the regulator there has raised the capital requirements to make the market more sustainable.

This will bring more discipline in the market because a lot of losses are taken locally. Similar with the Philippines which is a very Nat cat exposed market as well.

Market overview
However, Kotak is positive on the growth trends in Asia because the under-penetration in most Asian economies is still relatively high compared to developed market and the market is catching up.

“A combination of under penetration, correction of inflationary adjustments and infrastructure and economic growth is driving demand in the region,” he said.

A lot of new risks are emerging: renewable energy, cyber, climate change solutions. We are also seeing a lot of these areas getting a fillip, according to Kotak.

However, he said it is not growing as rapidly as one would have wanted it to be, because affordability is still a challenge across all the segments.

The other big challenge, Kotak said is, “because there is so much growth, competition across the industry, insurance and reinsurance, is causing an imbalance on what we could achieve as a sector”.

“Some players are focusing too much on growth at any cost and that kind of hampers the overall profitability or attractiveness of the industry,” he said.

Primary market softening
The growing competition has also meant that primary markets are seeing prices stabilise or even soften, a trend that Munich Re takes note of.

“We do see a softening in the market and we are concerned by that because as a sector, we have still not built enough reserves or enough return on capital,” he said.

“I have seen many cases where the margin making happens at the claim stage and not at the underwriting stage, which is not a good trend for our industry because then we lose reputation, we lose trust. The only way to prevent this is to price the risks adequately.”

“The reinsurance industry had a good year, but out of the last seven years, four years, it has not even recovered its cost of capital. Some market participants expect that after a good year there should be bounties but one good year is not enough,” Kotak reminded.

“We support and encourage the trend of shifting from proportional to non-proportional treaty structures to the larger insurance companies who have built the underwriting capabilities and the right tools to manage their exposures.” Hitesh Kotak, Munich Re

Structural changes
“We support and encourage the trend of shifting from proportional to non-proportional treaty structures to the larger insurance companies who have built the underwriting capabilities and the right tools to manage their exposures,” said Kotak.

If more of the underwriting responsibility shifts to the primary insurance companies themselves, it’s better, because it’s more sustainable in the long term.

“We advise our clients to tackle this actively in calm waters instead of waiting for a large event to trigger the change,” he added.

“Start increasing your retention, your capabilities, putting the right pricing tools in place, putting the right accumulation tools in place because when you are forced after an event, it’s very difficult to make the transition,” Kotak said.

“Many clients are already doing this transition and we partner with them in their journey.”

Munich Re strategy
“We want to grow, if the price is adequate and if terms and conditions are adequate. Munich Re has been growing its business in Asia every year. We’ve demonstrated sustainable growth in the market,” said Kotak, adding that Munich Re’s setup in Asia ensures client proximity.

“Every office is more empowered to take underwriting decisions now with the new set-up that we have established in July. Every office has ability to recognise demand and support the growth of our clients with our capacities.

“However, if the market is not showing the right discipline, we are ready to step back and take a pause. We are not greedy for growth, we only want to grow if it’s sustainable,” he said.

“We will not grow for the sake of growth,” Kotak said.

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