A sobering new report by S&P Global Ratings is calling for Asia-Pacific’s insurers to “revamp” their business strategy approaches in order to steady their profits.
In a report entitled “Asia-Pacific Insurers Adjust Strategies In Face Of Typhoons, Trade Wars, And Tightening Regulations,” the global business data firm outlined that the industry’s profitability in the Asia-Pacific market “has been weighed down” by factors such as typhoons, unpredictable investment markets, increasing competition in the region, and rising compliance costs.
S&P Global Ratings considers investment market volatility as the top risk for insurers in Asia-Pacific. The firm noted insurers’ increased exposure to less-liquid and long-duration infrastructure and real estate assets, in response to recent low interest rates. However, a revaluation of the assets could result in capital losses.
“Asia-Pacific insurers could become secondary casualties to the credit cycle, given their fixed-income holdings,” commented S&P Global Ratings insurance analyst Eunice Tan. “Insurers are exposed to heightened credit risk because of the potential disorderly unwinding of debt-leveraged positions and elevated asset prices within the region’s capital markets [built up over the past decade].”
In terms of regulation, insurers in the region continue to strengthen risk management and enhance regulatory capital framework, S&P Global Ratings noted. However, investing in actuaries, financial reporting personnel, dedicated risk officers, and such can be very costly and hurt profitability.
The unprecedented strength of recent typhoons – namely Typhoon Jebi and Typhoon Mangkhut – has also left its mark on the insurance industry. In particular, Japan, Hong Kong, and China all face non-life insurance underwriting losses resulting from storm-related property damage and auto insurance losses.
S&P Global Ratings has also ascertained that many insurers and reinsurers continue to use “less-robust” models to determine risk pricing and reinsurance covers. Despite updates to address catastrophe perils in the region, the still-limited risk awareness has led to a slow uptake.
“We anticipate the awareness around flood risk to increase, after record storm surges in coastal cities [such as Hong Kong, Macau, Shenzhen, and Guangdong] prompted greater uptake of insurance and reinsurance coverage,” Tan concluded.
