As they endeavor to outpace international reinsurers’ competitive pricing and bolster profitability, insurers within the Commonwealth of Independent States (CIS) are expected to expand their reinsurance business significantly – but that comes with risks, Moody’s reports.
Given the more favorable risk-adjusted prices offered by international reinsurance compared to primary insurance markets in the CIS region, a surge in exposure to international reinsurance is predicted in the upcoming year.
A report revealed that limited growth opportunities in the CIS region’s primary insurance markets serve as an additional motivation for this shift. Notably, insurance penetration in the CIS, excluding Russia and Belarus, remains low, with total annual premiums surpassing $4 billion.
Challenges such as poor data quality, which affects pricing and risk management, and underdeveloped legal and regulatory frameworks, further complicate the landscape.
This pivot towards reinsurance is expected to enhance CIS insurers’ profitability and diversification. With international reinsurance prices having seen a significant increase in 2022-2023 and expected to stay well above those in the domestic CIS markets, local insurers are finding a strong incentive to venture into reinsurance.
In a related development, some insurers are strategically increasing their reinsurance operations in Bermuda, either through subsidiaries or independent ventures to better manage risks relating the life and annuity segments.
Moody’s explained that CIS insurers, particularly those in Uzbekistan and Kazakhstan, are actively broadening their international reinsurance market presence. This expansion is partly due to global reinsurers retracting from certain markets amid rising catastrophe claims and the departure of Russian reinsurers following the onset of the Ukraine conflict, which previously contributed annual reinsurance premiums of $400 million.
The year 2023 witnessed a 40% increase in international premiums in Uzbekistan and Kazakhstan, a trend that is forecast to outpace the growth of primary insurance premiums in the next 12-18 months.
Moody’s anticipates that this expansion will not only diversify insurers’ geographical and business scope but also positively impact their profitability, contingent upon careful management of their international growth and avoidance of major catastrophe claims.
Nonetheless, as CIS insurers extend their reinsurance operations, Moody’s warns of unfamiliar and potentially more severe risks. These include increased natural catastrophes, climate change-related losses, geopolitical tensions, and foreign exchange volatility.
Such exposure will challenge their risk management capabilities, potentially leading to larger single losses and more frequent catastrophe-related claims compared to their domestic operations.
Moody’s warned that this rapid expansion into international reinsurance could complicate insurers’ risk profiles and possibly negate the benefits of business diversification. Particularly, growth in long-tail business lines, such as casualty reinsurance, poses significant challenges, as the risks associated may not emerge until years after the policies are written.
Effective risk management practices will be essential for insurers to navigate, manage, and mitigate these risks to ensure financial stability.
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