At insurance gatherings around the world this autumn reinsurers have talked of rising rates and improving conditions. The 20th Biennial Conference of the East Asia Insurance Congress was no exception: the hospitality suites and restaurants of the Westin Philippine Plaza were abuzz with conversations about the hardening market. The only difference: most discussions focused on the unfortunate reality that the turn has yet to reach the Far East.
Like any generalisation, particularly broad statements about entire continents, it is actually more complicated than that, but on the whole East Asia looks set to remain remarkably soft during the upcoming renewals (typically falling at the beginning of April in Japan). Virtually nothing is showing in the way of geographic or segmental hard spots, bar one of a different kind: the largest insurers in East Asia will be seeing the cost of their treaty programmes rise, perhaps significantly, for 2001. It is their leading reinsurers (and them only, it seems) which are intent on driving the market up.
“The major players are pulling back, which means imminent hardening for the biggest insurers in Asia,” said a long-standing reinsurance broker in the region. “[The majors] focus on the largest five to ten companies in each market, so [those large companies] will bear the brunt of the effort to raise rates. Fortunately many of them are well-capitalised, because they will have to increase their retentions.”
What of the rest? New entrants and smaller reinsurers are satisfying the balance of the market, which represents a significant share of the premium pie in many countries. In Philippines, for example, more than 100 insurers are licensed and operating, ranging from minutely-capitalised family operations with swathes of agents (and behaving in practice exactly like intermediaries, surviving on commissions), to larger commercial insurers with strong industrial connections. Most of these second- and third-tier players, which have escaped the interest of the big five reinsurers, are not anticipating anything remotely resembling a rate increase or deterioration of conditions for 2001. Indeed, so many reinsurers are banging on their doors that some expressed optimism about getting an even better deal at renewal.
“I expect the actions of the many will delay the hardening that the few are attempting to impose,” the broker said. “There is a whole lot of capacity here.” Part of the problem appears to be the way that capacity is deployed by reinsurers throughout the region, including by some of the 46 operating in Singapore. It is not that their parent companies do not wish for them to underwrite on a technical basis. On the contrary: the skills are there, and local staff tend to put the software delivered from head office through its paces. Ultimately, however, many local reinsurance underwriters will succumb to the temptation to ignore the outcome, and price their capacity based on commercial need rather than technical grounds.
In addition, there is a destabilising effect brought on by the national reinsurers present in almost every country represented in the EAIC. “They are not working to harden the market,” the broker said, adding that the reality of rising retrocession prices would hurt them this year, perhaps enough to instil discipline - but probably not. Meanwhile it is very unlikely that original rates will harden in the region, particularly in South-east Asia. Sums insured are usually minuscule, and most cedants' income bases are very low. With such a small pie to serve up, it is difficult to ask for a larger slice.
The writing on the wall
Two letters from reinsurers to their cedants were a hot topic of conversation among the delegates enduring Manila's heat, power failures, and the nation's embarrassing, near-cliché presidential crisis (which, to the dismay of local delegates, began just as the conference got underway, causing the value of the local peso to fall daily). The communiqués, one from Swiss Re to its Japanese cedants, the other from Munich Re to its clients in the Philippines, were driven by very different motives, but each sent an equally loud message to the conference.
Swiss Re's Diethard Kaiserseder, a client manager for Japan, describes his company's letter as a “technical memorandum” from the underwriting department. “The idea of the content is to inform clients, in a timely way, about the changes we intend to apply at the coming renewal.” The changes relate to natural catastrophe perils. The memo states, in no uncertain terms, that Swiss Re's rates for Japanese catastrophe exposure are hardening forthwith.
The memo on windstorm: “After five years of continuous rate reductions and increasing exposures, we are no longer willing to follow this trend... the current rating level of windstorm excess of loss treaties is still highly unsatisfactory. Before re-entering treaties, Swiss Re wishes to see substantial increases.”
The memo on earthquake: “The growth of aggregate exposures is of deep concern. We think that such a trend is not sustainable, and we have to find new solutions to cope with the growing demands of original policyholders. In order to secure global capacity, Japanese primary companies might think of adjusting rates to better reflect real exposures. Primary companies could retain more, thus better deploying their own surplus capital.”
The memo on the future: “Global capital, be it from alternative solutions or traditional reinsurance, can be attracted by adequate risk premium. In this context we suggest non-proportional solutions that allow controlled, healthy and sustainable growth for all parties.”
The rest of the memorandum describes possible measures Swiss Re will take on pro-rata renewals if individual clients are unable or unwilling to switch to excess of loss. Mr Kaiserseder stressed that Swiss Re is not withdrawing from Japanese proportional business, but said the company wants “to see more commitment from our client side.” He said the memo is intended to manage expectations, and to show that Swiss Re has technical help to offer.
Munich Re's letter related to its Manila representative office. About three weeks prior to the opening of the EAIC, Filipino clients received the news that the world's largest reinsurer is to shut down its local representative office at the end of March next year. “This decision has absolutely nothing to do with our determination to obtain better, more risk-adequate reinsurance prices, and to encourage better original rates in the region,” said Norbert Breböck, the member of Munich Re's executive management responsible for its Operational Division, Asia and Australasia.
The letter on Manila: “As a valued customer of Munich Re we hope you have come to know us as a dynamic company continually striving to improve the quality of our organisation and services... In this respect, we are pleased to announce that our office in Manila will be fully integrated into Munich Reinsurance Singapore Branch's operations... MR Singapore will be in a better position to serve our Filipino clients directly and competently... This will further contribute to our committed goal of being client-focused.”
Mr Breböck stressed again his company's intentions. “We will not close the office in order to withdraw our capacity and our services from our valuable clients in Manila,” he said. “Our Singapore branch has been supervising the small Manila office in every respect.” He said that in the increasingly deregulated environment, cedants need even faster response from reinsurers. “This is the reason why we are closing the Manila office, which has no underwriting authority.” Such a move would make business sense to most reinsurance company managers, many of whom are tightening their belts. But despite the intentions of Munich Re, the letter, delivered so soon before Manila welcomed the world, was interpreted by most delegates as a rebuke.
Perhaps they deserved a dressing down. “It is an insider market,” complained one senior reinsurer from the other side of the world. “Transparency is a real issue.” His company has been trawling through the Far East in search of an appropriate reinsurance vehicle to invest in, thereby expanding its global presence. But, he said, no suitable regional company appeared to exist, and even if it did, the reinsurers his team had examined so far were insufficiently credible. If one were to invest in a local reinsurer, he said, you would never really know how your money was spent, or what the company's true results were, even with positions on the board. Often companies' own directors don't get the true picture.
Compounding the problem, external supervision, albeit improving, is lax. “Indonesian risk-based capital [for insurers] is a good start,” the reinsurer pointed out, adding: “It is the right idea, but the level of risk-based capital is too low, and the timescales are much too long.” In addition, he suggested that those insurers considering following new regulations will have no way of knowing if they are the only company doing so, so many of them simply won't.
Yet Indonesia's RBC initiative is worth noting, if only because it breaks new ground in South-east Asia. In his Chief Delegate's report from Jakarta, B Munir Sjamsoeddin, Chairman of the Insurance Council of Indonesia and of Dewan Asuransi Indonesia, explained the plan. “In 1998 the government introduced risk-based capital, which came into effect this year.” Straying from his text, he explained the details. “The basis is initially very low [5%], but it increases to 120% in 2004.” However, he said that so far the regulations had not given rise to significant changes in the market or among the players. Improved internal controls have been “called for” under the system, he said, including the development of more sophisticated asset and liability management systems and increased retentions which end widespread fronting. But it is not happening yet.
Mr Sjamsoeddin then explained the trends for premium income in Indonesia, trends which are common throughout the region (see table). Predicting income in 2000 will be lower despite economic recovery, he said, simply: “The continued decrease in premium rates does not seem likely to end soon.” With reinsurers deploying their capacity at ever more attractive terms and conditions, his prognosis is almost certainly correct. Other chief delegates echoed the sentiment. “In the near term, many players will offer premiums way too low to make economic sense,” said Bernard Chan, Executive Director of Asia Insurance Co and Chief Delegate from Hong Kong.
The glum news continued. “Rating and commission wars and extensive bad debt within almost all insurers are eroding overall profitability,” said Chief Delegate Arnop Porndhiti of the Thailand Insurance Association. “Taiwan's non-life insurance industry has actually been seeing negative growth in all lines except aviation, casualty and motor,” reported Taipei Chief Delegate Frank Wang, Chairman of the island's non-life insurance association. And from Tokyo: “Thirty-four domestic non-life insurers' total net premium income in fiscal 1998 was
¥ 6,915bn, a growth rate of minus 4.2%, marking two consecutive years of negative growth,” said Ryotaro Kaneko, Japanese Chief Delegate and President of the Meiji Life Insurance Company.
The theme of the 20th Biennial Conference of the East Asian Insurance Congress was “Rebounding from the Asian Financial Crisis: Strategies for Continued Growth”. There is much reason for optimism. While north Asian countries continue the difficult and painful challenge of restructuring following the bursting of their ‘tiger economy' bubbles, many of the South- east Asian nations are doing very well, at least relative to their outlook two years ago. Yet around the world, insurance economies and national economies are connected in a strange, counter-intuitive way. Positive economic conditions often do not mean good times for insurers, in terms of the rating environment. As Asia, in general, makes a somewhat cyclical rebound from the financial crisis of the late 1990s, the ever-looming insurance cycle has made an appearance, ensuring that delegates meet in Tokyo for the 21st conference in 2002, Asian delegates will still be talking about recovery.
Adrian Leonard is a freelance insurance journalist and regular contributor to