While Asia-Pacific remains the fastest-growing market for reinsurers, many of the region’s home-grown players are at risk of losing their dominance, according to an industry report by S&P Global Ratings.
According to the report, titled ‘Asia-Pacific’s Reinsurers: Evolve Or Dissolve?’, the reinsurers based in the region are facing a tough road ahead, as more complex pricing challenges – such as the hard-to-predict impact of urbanization and chaotic weather – and the need for risk diversification eat away at their advantages.
The report conducted a financial review of 18 regional reinsurers, which showed weakening returns and declining market share over the past three years. The reinsurers incurred underwriting losses for the past two years and had a lacklustre average return on equity of 2%.
According to S&P, part of this decline is cyclical: investment market volatility, higher compliance costs as regulations internationalise, and some major natural catastrophes. However, it also mentioned several structural challenges, such as mounting competition from all sides, technological disruption to business models, and the globalisation of regional players.
For the last point, the report gave examples in the acquisition of Chaucer Holdings by China Reinsurance (Group) Corp. in late 2018, or Samsung Fire & Marine Insurance’s plans to take a strategic stake in Canopius AG.
S&P said that the region’s large and domestically focused national reinsurers need to evolve their existing business models. The ratings agency expects more sophisticated pricing models, new distribution channels and products, and global diversification to set the tone for the next five years.
Invest in pricing, diversification, and technology
“In line with global trends, we expect underwriting pricing power for Asia-Pacific reinsurers to strengthen,” the report said. “This underpins our stable outlook on the sector over the next year or two, despite challenges. A soft pricing cycle, further market inroads by alternative capital, and a run of natural disasters have eroded profits for the region’s reinsurers.”
Its analysis of the 18 Asia-Pacific reinsurers showed the companies’ average net combined ratio rose above 102% in 2017 and 2018, compared to 96.8% in 2016.
According to S&P, while these reinsurers have advantages in Asia-Pacific, their concentrated risk exposures expose them to earnings volatility. This is why many are seeking geographic diversity –though with varying success to date.
The report also advised reinsurers to harness technology in order to reap its financial benefits.
“We forecast Asia-Pacific reinsurers will increase technology spending substantially across the board: from drones to assess crops to better distribution and client-outreach. These investments are necessary to lower expenses in the long run,” it said.
The 18 reinsurers studied were: Asia Capital Re, Central Re, China Re, GIC Re, Korean Re, Malaysia Re, MS&AD Insurance, National Re, Peak Re, PICC Re, QBE Insurance, Qianhai Re, Singapore Re, Sompo Holdings, Taiping Re, Thai Re, Toa Re, and Tokio Marine.
