Primary insurers in Central and West Asia are increasingly entering international reinsurance markets to diversify beyond domestic operations and build a presence abroad.
While this shift offers a pathway to expand market profiles through potential profitable growth, it also introduces substantial risks, particularly for companies lacking the technical capabilities or understanding of the markets into which they are expanding.
According to a new analysis by AM Best, this trend is partly driven by the retreat of rated reinsurance capacity following the imposition of economic sanctions on Russia in 2022. Those sanctions effectively prohibited transactions with Russian insurers, removing a key source of affordable capacity that had previously served much of the region.
In response to this gap, local carriers are stepping in to provide reinsurance solutions. However, a concurrent increase in weather-related losses has reduced underwriting margins for many regional insurers, prompting several global reinsurers to scale back their involvement.
Combined with limited domestic premium growth opportunities due to small market size and intense competition, this environment has pushed insurers to look beyond national borders.
That said, while there are challenges, the performance of major Asian reinsurers showed improvement in 2023 and is expected to move the sector forward. This was driven by reduced catastrophic events and favorable investment returns.
An earlier report from AM Best showed 8.8% growth in insurance service revenue under IFRS 17 in 2023. Combined ratios improved from 94.5% to 91.6%, while return on equity rose significantly from 0.1% in 2022 to 9.2%. The improved performance was attributed to lower catastrophe activity and strong investment income.
AM Best said that this overseas shift brings new challenges for underwriters in the region. While some insurers have reported improved revenue from expanding reinsurance portfolios – helped by increased premium rates in the current hard market – many are new to this segment and may lack experience in pricing risks, drafting policy language, or negotiating coverage terms.
Without robust internal controls for managing loss aggregation and accumulation, insurers may face performance volatility. AM Best pointed out that retrocession protection is limited among regional reinsurers due to high cost, potentially increasing exposure to catastrophic losses.
In their international operations, insurers in the region often take on risk through facultative arrangements or by subscribing to a small portion of treaty programs. When participating on a follower basis, underwriting results largely depend on the quality of the lead underwriter's risk selection.
Another concern raised by AM Best is the high acquisition cost associated with writing reinsurance abroad. Profit commissions paid to intermediaries, including managing general agents, and additional expenses incurred through specialized platforms such as Lloyd’s syndicates, can significantly affect margins.
These challenges are compounded by risks to insurers’ balance sheets. Exposure to asset-liability mismatches and foreign exchange volatility is heightened in countries with inflationary environments or a history of currency devaluation.
AM Best observes that many regional insurers have responded by holding a larger portion of assets in foreign currencies to help manage currency risk.
While regulation across the region still lacks comprehensive solvency and risk monitoring tools, AM Best acknowledges progress in some areas. Kazakhstan has begun adopting risk-based pricing for mandatory lines and is working toward aligning with Solvency II standards.
The adoption of IFRS 17 reporting by insurers in Kazakhstan, as well as major carriers in Uzbekistan, Georgia, and Azerbaijan, has posed transitional challenges, requiring investment in internal systems and training. However, AM Best believes this development could support improvements in risk management and financial transparency, potentially improving the perception of these companies in global markets.
In the long term, insurers that maintain disciplined risk selection and invest in exposure management may achieve sustainable expansion. Conversely, companies that pursue top-line growth without attention to underwriting discipline may face increased volatility in earnings and capital strength.
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