AM Best has reported that upgrades to long-term issuer credit ratings (Long-Term ICR) exceeded downgrades for Asia-Pacific re/insurers in 2023, with improved balance sheet strength and favorable operating performance driving most of the positive changes.
This was outlined in AM Best’s latest report, which highlighted eight Long-Term ICR upgrades and four downgrades during the year. The downgrades were attributed to declines in Best’s Capital Adequacy Ratio (BCAR) scores and weakening operating results. In addition to these changes, AM Best assigned 10 new ratings in the region in 2023.
According to the report, more than 75% of AM Best’s Long-Term ICRs for Asia-Pacific rating units were rated "a-" or higher, with stronger results skewed towards mature markets as opposed to emerging markets.
David Lopes (pictured above), senior industry research analyst at AM Best, explained that mature markets tend to benefit from stable economic conditions, more established risk management practices, and deeper market knowledge, which results in fewer underwriting risks.
“At the same time, emerging markets typically have simpler insurance products, resulting in lower probability of adverse claims development, and low insurance penetration,” Lopes said.
The report also compared rating drivers across mature and emerging markets, with a focus on catastrophe activity. Despite increased catastrophe events in recent years, 87% of the Asia-Pacific rating units maintained a stable outlook at the end of 2023, with a larger share of stable outlooks found in mature markets.
Most outlook revisions in 2023 moved from stable to positive, especially in countries like New Zealand and Singapore, further reflecting the regional divide in performance.
Asia-Pacific’s reinsurance sector saw strong non-life revenue growth and favorable earnings in 2023, supported by a more stable investment environment and reduced catastrophe activity.
AM Best noted that many reinsurers in the region have a traditional focus on property lines and proportional treaties, and while rate hardening and high interest rates have less directly impacted underwriting performance, the reinsurers’ operating performance stability has contributed to their overall success.
Looking ahead to 2024, underwriting strategies in the region are expected to vary. Reinsurers will focus on securing retro capacity and managing the underwriting cycle over the past two years. Some large Asian reinsurers have adjusted their catastrophe capacity offerings in their home markets to reduce exposure, while others are adopting growth strategies in mature markets to capitalize on rate increases.
Geographic diversification and expanding into lines of business beyond traditional property treaties, such as building liability, life and health, and specialty books, are also expected to help reinsurers manage the reinsurance cycle.
In terms of business profile assessments, most Asia-Pacific reinsurers fall into the Neutral or Limited categories. Over 50% of emerging market companies received a Neutral assessment, compared to 42% in mature markets.
Only 3% of Asia-Pacific entities received a Very Favorable assessment, including three companies from mature markets (Singapore, Japan, and South Korea) and one from an emerging market (China). These companies tend to be global (re)insurance groups with diversified operations across geography and product lines.
Emerging market insurers, while often holding strong positions in their domestic markets, tend to be smaller and less diversified compared to their global counterparts. Describing the challenges they face, AM Best pointed out that these companies are more reliant on third-party management and may experience higher levels of regulatory risk, given the competitive and evolving nature of their markets.
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