Leading re/insurers in East Asia explain their operations and the future
Gerling Global Re
Gerling Global Re is active in all East Asian markets, especially on the non-life side, where we usually rank among the top five or six reinsurers. We are active everywhere in all types of business: proportional and non-proportional treaty, and in facultative reinsurance, mostly proportional but also non-proportional. We write basically all classes: property, engineering, marine, liability/casualty, health, and life reinsurance, including financial reinsurance. In life and health reinsurance only, we are concentrating on certain markets and selective clients.
Gerling Global Re has a branch in Kuala Lumpur, Malaysia, with 24 staff, and another in Singapore with 36 staff. We have also liaison offices in Seoul, Taipei, and Tokyo, and a new representative office in Shanghai. Our approximate premium income in the region will be over DM 250 million. The major business comes from property (58%), motor (17%), marine (20%) and liability/casualty (5%).
Undoubtedly China and India present the biggest mid- and long-term insurance growth perspectives for the industry. This is due to the demographic structure of their populations, with a large and growing middle class of younger people. Further, liberalisation in these countries will yield serious changes and a big opportunity for growth. Personal lines products are the most promising in the years to come in those markets.
However, with recovery from the Asian financial crisis progressing, albeit slowly, and with the resultant strengthening of economies, we should see an increasing demand for insurance in the other Asian markets, led again by personal lines products. In addition, infrastructure projects that were put on hold or postponed during the crisis are now, slowly, being restarted. With the recovery of the economies I see this trend continuing. Good examples are the various plans for new airports, such as in Bangkok and Seoul, and for railway lines. As far as reinsurance is concerned, forthcoming mergers will lead to bigger insurers with larger net retentions, but with an increasing need for non-proportional covers from the reinsurance market.
I think the most critical issue for insurers is clearly the extremely keen competition everywhere in Asia. Underwriting profits – which were quite the norm in the past – are shrinking, or nearly disappearing, which is particularly critical as investment income becomes much more difficult and uncertain. The competition is so fierce that direct premium income is often shrinking, which means the impact of rate reductions is stronger than the growth of the newly generated business. Obviously exposure is growing for everyone, and thus operating results get more and more vulnerable.
Another critical issue is the challenge created for local insurers by liberalisation. Foreign companies entering Asian markets or buying all or part of local companies increases competition for the remaining, often small local players. In one scenario, various companies, especially small or less profitable ones, will not survive for long. Technological innovation in IT will also force insurers to show their ability to adjust quickly: B2B and B2C will bring significant changes to existing distribution channels.
Finally, restructuring through local mergers or acquisitions is not automatically paving the way to a good and profitable future. M&A has to be managed and implemented successfully, which in many cases will pose a big challenge for management: merging not only business volumes, but computer systems, distribution systems, company cultures, different people, etc.
For reinsurers, I see a problem in the continuing persistence of over-capacity, especially in Asia. It seems that the markets here are generally still softer than in other parts of the world. Many reinsurers continue to look at Asia – despite the crisis and the increasing losses and loss ratios – very much with a long term view. Many have opened up in Asia, or opened additional offices in the region, only within the last one or two years. Therefore many of them are still volume-oriented. Although some reinsurers – including Gerling – try to stop the further erosion of terms, no one really knows when this will finally change significantly. It may be only after we see another few catastrophic losses. Further, we reinsurers face limitations in controlling or influencing the terms. Cut-throat competition is often seen in personal lines products, and in classes such as motor, which in some markets is nearly unreinsured, or not at all reinsured.
The soft, competitive market situation in Asia is especially paradoxical as it becomes more and more difficult for reinsurers to identify promising and profitable partners, especially in those markets with a great deal of change forthcoming. Which local company will survive? Which merger will be successful? How can reinsurers identify the appropriate company to provide capacity for, or to finance? This challenge is particularly difficult for those reinsurers that lack adequate resources and market intelligence in the region.
Over the next five years, I am confident that Gerling Global Re will maintain or even strengthen our position as one of the leading reinsurers in Asia, not only in the traditional non-life area, where we are already quite strong, but also as a potential leading player in life reinsurance, life financing, and ART. We have built up our teams here during recent years, are well positioned in terms of local presence, and have a more individualistic and tailor-made approach than some of our big competitors. I believe we have proven also that we can often act faster than others.
Another reason for our confidence is the high percentage of Asians in our local management. This enables us to communicate more easily with the local companies, and to win their confidence. Markets will change rather dramatically, and insurers and reinsurers will have to follow these changes and adapt quickly. Those that cannot will have problems, but the ones which can anticipate developments and respond proactively will benefit enormously. Five years from now many existing direct and reinsurance companies will have disappeared, and the survivors will operate on a clearly result or return-oriented basis.
Dr Peter Hugger, Regional Head, chief executive, Singapore Branch.
QBE has been actively involved throughout Asia for many decades, as a direct insurer writing traditional products such as property, household, motor, and liability for both commercial clients and personal consumers. More recently we have diversified, adding specialist line products such as professional indemnity, trade credit, financial risk products, and exceptional marine covers, having identified emerging needs for these covers in Asia, and marrying those needs with the specialist resources and expertise available within the QBE Group.
We started in Singapore in 1889, and have had operations in Malaysia and Hong Kong for over 100 years. Today we have 12 operations in 11 Asian countries, with strong branch representation in most of those countries. We are writing nearly A$250m in premium income, with property and motor making up about 50% of our book in Asia. Marine and liability are also substantial classes for QBE in Asia.
With economies currently recovering from the Asian crisis, we expect growth in business opportunities across the board, and we are particularly excited at the prospects and opportunities in the tailored, specialist line product areas. However, increased competition in many of the more established Asian markets, through entry of new players, is straining profitability to well below acceptable levels. There is, in addition, a need for greater sophistication in pricing many of the traditional products such as motor and employers' compensation in some of these markets.
QBE is actively committed to the Asian insurance world, and has acquired a number of companies or portfolios over the last couple of years. This further adds to the extensive network of operations that QBE has in the region. We will continue to service and develop business in the more traditional lines of insurance, offering the level of quality and service for which we are proud. At the same time, we will look to expand our businesses through acquisition, as well as controlled organic growth. We will also continue to develop our specialist lines operations with the objective of being a recognised leader in many of these lines of business.
Alan Jones, Assistant General Manager, Technical, Asia-Pacific Operations.
Sydney Re in Singapore writes business in most Asian countries, and is supplemented by offices in Japan, Korea, and India to provide service to local clients. Most traditional classes of business are underwritten on both a treaty and facultative basis, with a significant proportion being in the property classes. Sydney Re now reports to QBE International Insurance Ltd - European Operations, based in London, where plenty of expertise and capacity is available, and as a consequence can access many speciality lines.
While Sydney Re is incorporated in Australia, the Singapore office provides management control for the entire operation. Representative offices are established in Tokyo and Seoul, and combined with the Singapore office handle all the company's Asian business. Offices in Sydney and Melbourne are responsible for the Australia, New Zealand, and Pacific Islands business. Staff total more than 50, with around half covering the Asian region, and the remainder Australasia/Pacific. Current premium income is approximately A$80m, with more than 50% attributable to Asia (including Japan, Korea and India). The biggest line of business is property, which currently is weighted more towards pro-rata, but with excess of loss facultative and treaty increasing in importance.
Sydney Re is endeavouring to shift its emphasis from pro-rata to excess of loss, and also is expanding non-property lines of business, including specialty and non-traditional lines. The continuing competitive direct markets in Asia are maintaining pressure on pro-rata results, particularly in the property area, and although the Asian economies are, in the main, recovering, there appears to be little beneficial effect as a consequence of this on our current book of business. Japan and China are growth areas for us, but we are expecting competitive pressures in these areas as well.
The most critical issues facing East Asian markets are competition in the various direct markets, and the ample capacity for the purchase of reinsurance, notwithstanding significant 1999 losses and major increases in reinsurers' retrocessional costs. Unless the reinsurance market hardens, the required incentive for direct markets to react upwards will not be present.
Having shifted the major Sydney Re office from Sydney to Singapore, we have demonstrated our commitment to the Asian region as its economies recover and develop again. Our previous home market in Australia does not have the potential to grow in the same way as we perceive for Asia. With a significant part of QBE Group's premium income now coming from reinsurance, and while we cannot, in the short term, contribute to the same degree as Europe and North America, we nevertheless see that business from Asia, particularly China, will within five years form a greater part of the reinsurance division's business.
Sydney Re is QBE's reinsurance operation in Asia, and jointly framed this response
We are a relatively new reinsurer, launched in 1999, so much of what we are doing is in the early stages. We are in the process of opening an office in Singapore, and in order to do so we have employed two underwriters and a secretary, and submitted applications to Lloyd's to operate as an underwriting agency under the auspices of Lloyd's Asia. That approval, acquired between Lloyd's and the Monetary Authority of Singapore, is expected very soon. The intention will be to write reinsurance business from territories throughout Far East.
In addition, we have a representative office in Japan staffed by three local people who report directly to Danish Re in Copenhagen. They have been operating for nine months, so for us the region includes everywhere you would except Japan. Because we are just getting established, our volume of East Asian business is nil, at least at the moment. Our intention, in the first instance, is modest: to write a broad spread of non-life reinsurance business. The likelihood is that, in the beginning, that business mainly will be treaty, with a small amount of facultative.
The economic crisis has been effecting insurers for the past few years, and a major challenge for them lies in finding ways to protect themselves against future macroeconomic fluctuations of the type which have affected Asian countries from Japan on down. The Japanese have been thinking long and hard about their ageing society; other countries will want to determine soon what role private sector should play in their health sectors. In Taiwan, following the quake, it was discovered that few private individuals have earthquake protection for their dwellings, which affects not only families but mortgage banks. There are a lot more specific examples.
Reinsurers face the challenge of helping to cater to their clients' needs in coping with these specific situations. Reinsurers will look to develop products in lines such as healthcare, and to provide capacity, for example for earthquake cover, allowing the equitable pricing of risks, and carrying them. In short, there is enormous potential in the region.
Danish Re hopes to develop into a leading reinsurer in East Asia. We aim to do it everywhere on the globe - and we think having a physical presence there is particularly important, because it is very difficult to do from the other side of the globe. On the macro side, we expect to see the economies come out of the trough, and thus see growth rates come up again. That will affect the overall market as we go forward. Technical standards could be raised, and we would be delighted if that happened. Also, we tend to wish for better and more precise information from cedants. Information collected by insurers and passed on to reinsurers should improve, and certainly will as IT develops. Finally, a large number of offices are writing business in Asia on behalf of global organisations. The impact they will make on the markets will be felt by everyone.
Henrik Bay, the underwriter responsible for Japan and the Far East, Danish Re, Copenhagen.