Major reinsurance companies in the Asia-Pacific region experienced a significant increase in return on equity (ROE), which rose to 9.2% in 2023, up from 0.1% the previous year, according to a new report from AM Best. The improvement was attributed to a more stable investment environment and lower-than-expected catastrophe activity.
The report highlights that reinsurers in the Asia-Pacific region, which have historically focused on traditional property lines and proportional treaties, have seen less direct benefit from global reinsurance rate hardening.
However, these reinsurers have maintained stable operating performance over the years. Expanding their business overseas has been one approach to improving profitability, though China faces challenges as its post-COVID economic recovery remains weak.
AM Best's composite, which only includes companies reporting under IFRS 17, showed that Asia-Pacific reinsurers posted a combined ratio of 91.6% in 2023. This represents a 2.9-percentage-point improvement from the previous year.
The increase in ROE was driven by a recovery in realized and unrealized investment losses and higher investment income amid a higher interest rate environment, with China being the exception. Improved underwriting results also contributed to the positive performance.
Christie Lee, senior director and head of analytics at AM Best, noted that the underwriting strategies for 2024 will vary depending on each reinsurer’s ability to secure retrocession capacity and manage the underwriting cycle.
Large reinsurers in the region have adjusted their catastrophe capacity in home markets, reducing exposure to potential losses, while others are focusing on mature markets to benefit from rate increases.
The report also pointed out that the capital position of major reinsurers in the Asia-Pacific region remains strong. Diversification continues to be a core strategy, with many reinsurers expanding their geographic reach and shifting from traditional property treaties to liability, life/health, and specialty lines of business. This strategy is expected to help reinsurers better manage the reinsurance cycle.
Chris Lim, associate director of analytics at AM Best, said that reinsurance renewals in the first half of 2024 were more orderly compared to 2023, largely meeting market expectations. There has been renewed interest in lower-layer reinsurance coverage in South and Southeast Asia, reflecting growing confidence in rate adequacy.
However, Lim also emphasized that climate risks remain a concern, and reinsurers are likely to continue closely monitoring risk assessment and pricing.
In China, the reinsurance market has seen smoother placements in 2024 compared to the previous year. This improvement is attributed to the strong support from onshore reinsurers and primary insurers with inward treaty books, which have provided stable capacity for the non-life sector.
There has also been an increase in lower-rated reinsurers underwriting business in China through fronting partners, while medium-sized primary insurers are expanding their portfolios into inward treaties after obtaining credit ratings.
Taiwan's insurers face a decision on whether to allocate reinsurance budgets to higher layers to manage the RBC ratio and balance sheet or invest in lower layers to address frequent, less severe events to rebuild capital.
Japan’s non-life insurers experienced relatively benign natural catastrophe activity in 2023. The magnitude 7.5 earthquake on Jan. 1, 2024, had limited impact on reinsurance renewals, and the catastrophe excess-of-loss (XOL) treaties remained largely unaffected.
With wind XOL rates having more than doubled since 2018, reinsurers were eager to maintain or expand their market positions during the April 2024 renewals.
South Korea's non-life insurance market saw significant adjustments in 2023 following several man-made and natural catastrophe losses. The property treaty reinsurance market experienced sharp increases in premium rates and retention levels for XOL covers, while commission rates for pro-rata reinsurance were reduced. These changes reflect a market responding to recent loss events.
Reinsurers based in Singapore and other parts of South and Southeast Asia posted favorable earnings in 2023, supported by strong investment returns amid rising interest rates and improved underwriting performance. Tightened monetary policies in the region, particularly in Singapore, led to higher interest rates from mid-2022 to early 2023.
While the rising rates resulted in unrealized losses in 2022, they also generated strong interest income from newly purchased fixed-income instruments. Effective portfolio remediation measures further improved underwriting results for reinsurers in 2023.
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