The Asia-Pacific region holds out the promise of substantial growth for reinsurers, but they need to take care, warns Paul Collins
In their quest for global diversification, established reinsurers are increasing their focus on the emerging nations of Asia-Pacific. For example, a major European reinsurer recently demonstrated the deliberate increase in its property/casualty underwriting in Asia while reducing focus on other territories. New reinsurers are also seeking opportunities in the region. The reason for their interest is the huge level of economic growth being experienced in some countries, particularly in emerging nations where insurance penetration is currently low, but steadily increasing.
It is hard to make generalities about the Asia-Pacific region. Every country and every market are different - ranging from Japan, the second largest market in the world, to Guam with 150,000 population and 70 insurers.
The mature insurance markets in Australia, Hong Kong, Japan, Korea, New Zealand and Singapore have high insurance penetration and the insurance product is highly valued by local populations. On the other hand, countries such as China, India, Indonesia, the Philippines, Thailand and Vietnam have much lower insurance penetration and a lower awareness of the product on the part of citizens. In general, however, the region is grossly underinsured.
There is one factor that many emerging nations in the region share - their potential for growth - although the pace of that growth varies across the region. And as these countries increase their participation in the global trading system, their economies will continue to grow, as will the middle-class population and the number of potential customers interested in protecting lives, businesses, reputations and property. Clearly, the growth potential for insurers and their reinsurers is high. However, the wide differences in the scale of development in the region mean that reinsurers venturing into these countries must take heed of the potential pitfalls.
At one time, making money in Asia was easy for reinsurers. Many markets had tariff systems whereby the governments permitted fixed prices; reinsurers merely followed whatever cedents did. Deregulation across many emerging nations in the region has ended a lot of the tariffs, but there are still some remaining, plus many 'recommended rating' structures.
For example, Thailand has heavy regulatory oversight for many insurance classes, such as personal lines, property, statutory motor (or third party liability) and marine cargo. Malaysia, on the other hand, has a more limited number of tariffs (for fire and motor), although these are quite strict.
In the Philippines, tariffs exist for only some lines, such as motor, bond and surety. Until recently, a limited number of tariffs remained in China; they have disappeared with regulatory deregulation, due to the country's entry into the World Trade Organisation. Japan and Australia employ a system whereby industry bodies compile loss-cost statistics that form the basis for recommended minimum ratings. It is common in most economic markets that deregulation leads to declining profitability in the short term as competition intensifies, which is something that reinsurers need to watch out for.
China is one of the most potentially lucrative markets in the Asia-Pacific region. It is in the midst of an extraordinary economic boom, experiencing in 2003 a 9% increase in gross domestic product, the highest GDP growth rate in the region, according to figures published in September 2004 by the United Nations Conference on Trade and Development.
Such is the growth being experienced by China that it is currently consuming nearly 30% of global steel output, according to figures released by steel manufacturers and the International Iron and Steel Institute. It has become one of the manufacturing hubs of the world, with an enormous amount of cargo shipped from China, which is fuelling global trade and the need for insurance and, hence, reinsurance protection.
Another driver of reinsurance growth is the tightening of financial standards.
Insurance regulators all over the world are taking stock of the viability of the global insurance industry: the boom-and-bust cycles, major downgrades by ratings agencies, risk management and the need for greater corporate governance. Regulators in Asia-Pacific have an additional reason for prudence.
The much-publicised collapse of Australia's HIH Insurance Group in 2001 attracted considerable criticism of Australian regulators. As a result, many regulators in emerging markets in the region have implemented risk-based capital requirements for their insurers, a move which has led to the need for more reinsurance from major reinsurers.
All around the world, insurers are required to maintain a statutory minimum equity that is calculated on more diverse aspects of the business than occurred in the past, such as risk exposures accepted, investment risks, catastrophe risks and exposure to reinsurance recoverables, to name a few. The level of solvency and regulators' reporting requirements are also much more stringent. Japan and Australia have had comprehensive solvency measurements for some time and all Asia-Pacific markets have followed.
Such rules can create more opportunities for reinsurers when ceding companies in emerging markets in the region seek to substitute reinsurance for extra capital.
For example, at the end of 2002, Taiwan regulators instituted minimum capital requirements of NT$2bn. This led to changes in ownership of some local companies, which divested a portion of their holdings in order to meet capital requirements.
Ironically, the higher minimum capitalisation requirement in Taiwan was designed by the government as a way to get local insurers to retain more, but that did not work initially. Changes in company ownership and risk-based capital solvency requirements introduced in 2003 increased retained premium particularly in classes not traditionally reinsured. However, the need for reinsurance in classes requiring high capacity remains strong.
Regulators in some developing nations in the region recognise the need for strengthening the financial strength and technical expertise of their domestic insurance markets. As a result, they have created an opportunity for greater penetration by foreign reinsurers by deregulating their markets.
Competition laws and agreements with bodies such as the World Trade Organisation and the Association of South East Asian Nations (ASEAN) create a demand for new (and larger) insurance products, some of which are unfamiliar to Asian markets. This also has created opportunities for reinsurers, building on their expertise and capacity. Indeed, reinsurers sometimes provide training on reinsurance methods that are more sophisticated than the preferred Asian structure, which is generally proportional reinsurance.
The level of insurance awareness is growing among the people and domestic companies of emerging market countries, another development that will increase market demand for capacity. In many nations there has been a degree of under-insurance of commercial risks, particularly in respect of natural catastrophes, partly due to a weak risk management culture.
However, that is slowly changing. In mature markets, insurance industry bodies are actively campaigning against under-insurance. If these campaigns are successful, they will increase required market capacity.
Cause for caution
Despite the wide opportunities in the region, there is certainly cause for reinsurers to be cautious. Much of Asia-Pacific lies in the world's earthquake 'ring of fire'. And many countries in the region are situated in zones with high exposures to typhoons, hurricanes and cyclones. As well as the catastrophe events that can cause mega-losses, there have been significant losses from 'minor' perils, flood, hail, riots, etc.
In addition, while increased awareness of insurance will increase market penetration, a problem lies in the growing trend of litigiousness. This, combined with often unreliable or non-existent claims data, could be a recipe for disaster, if reinsurers are not careful.
Adding another combustible element to the mix is the fact that some countries in the region are experiencing increased exposure to US product liability claims through obligations under WTO obligations, free trade agreements and the like.
Further, estimations of future premium are always difficult and even more difficult in a market that experiences major growth. The management of growth presents its own difficulties. For example, does the portfolio of the past accurately portray the much larger portfolio of the future?
Finally, there is some concern in certain countries that regulators have not been sufficiently stringent about policing their financial requirements and that transparency is not as complete as it could be. Insurers are welcoming reviews by reinsurers with transparency and trust being enhanced for cedent, reinsurer and regulator alike.
In contemplating their Asian dilemma, reinsurers are hopeful that the focus on Asia-Pacific will not slide into the murky depths of over-competition experienced in past years. There are encouraging signs. In 1996, there were about 50 licensed reinsurers in Singapore, a reinsurance hub. Today there are 24.
Despite the problems that exist in Asia, the region abounds with opportunities for foreign reinsurers, as long as they are patient, do their homework and take care to establish long-term relationships with insurers in the region as well as government policymakers, to assure that they comply with local requirements.
- Paul Collins is treaty underwriter, Asia Pacific, GE Insurance Solutions.