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Reflections & Projections: The regulations spark

Source: Asia Insurance Review | Jan 2016

Regulations rank high on the list as industry leaders reflect on the most significant developments in 2015 and project the key trends in 2016. They also share with us their key strategic focus for the new year.     
 
 
One of the developments in 2015 that caught the industry’s attention was of course the spate of M&A deals. 
 
   As Mr Malcolm Steingold, CEO of Aon Benfield Asia Pacific, said of the increased M&A activity: “Scale became perceived as a critical success factor. What is significant is not only the number of deals but the size of these deals, particularly that of the ACE/Chubb merger. Other deals of note were Catlin/XL, Renaissance Re/Platinum, Endurance/Montpelier and Tokio Marine/HCC.” The deal between ACE and Chubb was agreed for US$28.3 billion in cash and stock. 
 
   The most interesting deal from a regional perspective is the acquisition of Amlin by MSIG and the continued acquisitive trajectory of Chinese investors like Fosun and local insurer Dongbu, he said, adding that M&A activity was coupled with the (re)insurance industry accessing alternative capital as a means of optimising use of its own capital. 
 
Growing cyber risk awareness
On the cyber front, there was the heavily reported cyber hack of “Ashley Madison”, the “anonymous” online dating service targeting people who are married or in committed relationships with its slogan: “Life is short. Have an affair.” In July, hackers stole all 37 million of its users’ data – including their sexual fantasies. 
 
   Even the US Office of Personnel Management (OPM) was not spared. The department responsible for holding sensitive information on federal employees past and present suffered a data breach, exposing over 21.5 million names, addresses and social security numbers, including those of the FBI Director. 
 
   Mr Jose Hernandez, President and CEO, AIG Asia Pacific, said: “The growing awareness of cyber risk among business in Asia – both large and small – was a key development in 2015 as there were so many high-profile cyber attacks, proving that cyber risk is truly global.” 
 
   “The risks faced by companies in Asia are not unlike those faced elsewhere in the world and the trend is likely to continue as hackers become more sophisticated. Initially, cyber insurance was slow to get traction in Asia, but as leaders gain a better understanding of the threat and the product, it has gained in popularity. I would say cyber risk is an issue that requires the involvement of all key stakeholders from the board level down,” he added.
 
Large-scale disasters
There were also notable large-scale disasters last year which impacted the market, with the Tianjin blasts in August most often cited. So far, Tianjin’s insured loss estimates provided by insurers have already exceeded $1.5 billion. Some analysts expect the final bill to exceed $3 billion with contamination from chemicals factored in. 
 
   Mr Alain Flandrin, CEO, Asia Pacific, PartnerRe, said: “The major explosion in Tianjin is revelatory of the weak enforcement of regulations for manufacturing and storing of dangerous, explosive products in China. At the same time, it clearly shows the absence of risk-mapping of both insurers and reinsurers to trace their exposure accumulations across different lines of business. This explosion is probably wiping out the accumulated profits of many offshore reinsurers since the last meaningful CAT event – the snow storm of 2008.”
 
   Toa Re President and Chief Executive Tomoatsu Noguchi added: “It may also be time for (re)insurers to reconsider managing non-CAT accumulation risks across multiple lines of insurance.” 
 
    Mr Michel Blanc, Chief Underwriting Officer, Asia-Pacific, Global P&C, Treaty, SCOR, said the Tianjin blasts confront the P&C industry to underwriting issues “in terms of data and information quality and accuracy”. It is important to keep in mind that over the past five years, the global reinsurance industry has faced a large number of severe CAT and man-made loss events in Asia Pacific and, as such, experienced poor results overall, he said.
 
    Massive CAT events in the region in 2010/11 and the recent large man-made loss events in China bear witness to the ever-increasing concentration of assets and exposure in Asia and complex supply chains that the industry writes without having the proper data and tools to quantify and price the risks, he said. 
 
   “The challenge for insurers and reinsurers is to be able to adequately assess, quantify and price the risks in order to remain in their risk tolerances and bring in more capacity for the long term. The difficulty for the industry is also to translate the premium growth into a profitability that is commensurate with the investments that are required and the risks that are carried.”
 
All eyes on regulations
But the most significant trend in 2015 was “regulations” according to the industry leaders polled. So significant is the development that regulations continue to be high on the leaders’ watch list this year. 
 
   Among the regulatory changes highlighted were the introduction of China Risk Oriented Solvency System (C-ROSS), Indonesia’s move to promote greater reinsurance premium retention, and the liberalisation in India removing caps on foreign investment.
 
   Mr Hernandez also mentioned some major policy shifts occurring such as the inauguration of the ASEAN Economic Community “which should result in stronger links between member countries”, and “the opening of trade restrictions and advancement of TPP-style trade deals will help cement Asia Pacific as a consuming region, not simply a low-cost producer”.
 
China
Mr Noguchi said: “Regulatory changes will continue to significantly affect and impact the behaviours of market participants, just as in 2015. The introduction of C-ROSS in China is attracting the greatest attention, as it will give rise to changes in the reinsurance needs of direct insurers in China and the underwriting approach of offshore reinsurance companies.”
 
   Mr Steingold concurred that C-ROSS will continue to be one of the most significant factors in 2016, “resulting in a substantial onshore reinsurance market in China”. “Lloyd’s, for example, has the expectation of having up to 39 syndicates writing Chinese reinsurance business on the Lloyd’s platform. If we include the company market, this will bring the number of reinsurers operating onshore in China to potentially 45 to 50 players. This development will impact other reinsurance hubs writing domestic Chinese reinsurance,” he said. 
 
   He added that this factor will be complemented by the continuing development of home-grown Chinese reinsurers – such as Pacific Re, PICC Re, Qianhai Re and Tomorrow Re – seeking to develop global reinsurance books from China.
 
India and Indonesia
On India, Mr Blanc said: “Substantial operational costs will be added to foreign reinsurers electing to operate locally with the hope and trust of having, as a reciprocity of their investment in the local economy, a levelled playing field with the domestic (re)insurers and an ability to access business in priority compared to offshore reinsurance markets.” 
 
   As for Indonesia, he said the proposed new regulatory framework for reinsurance, “which is aimed at protecting the emerging domestic reinsurance industry, puts local insurers at risk and prevents foreign reinsurers from investing in the country”.
 
Coping with regulatory changes
Mr James Beedle, Senior Managing Director, Willis Re Asia, said of the region’s regulatory changes: “Reinsurers have to respond with strategies to access business in the most efficient manner, complicated by the fact that the guidelines underpinning these regulatory changes continue to evolve. Other regulatory changes planned for Malaysia in 2016 and beyond will also impact results for several years to come in one of Asia’s largest markets.”
 
Being prepared for a faster changing landscape
Other than the “substantial regulatory changes”, Mr Roland Eckl, Munich Re, CEO Asia Pacific, responsible for Japan, Australia and India, gave his view on what he expects to be significant in 2016: “We have changes resulting from new technologies, new distribution channels, services and demands. I believe, these will become more apparent and alter the risk landscape much faster than many anticipated. This drastic shift will challenge our industry.”
 
   Looking at cyber insurance, he said: “Besides hacking, every new software update can change the associated risks entirely. Worldwide, insurance premiums for cyber protection are estimated to surge to about $6-8 billion by 2020, from $3 billion in 2015. There are many unknowns surrounding cyber risk, making it tough for insurers to determine how much to put aside for potential losses. We are all forced to tackle the systemic nature of cyber risks, think differently and to find new ways for risk assessment and pricing. Worldwide partnerships, leading know-how and accumulation management are further pillars of cyber risk management.”
 
Enhancing profitability
The subject of profitability ranks high on many of the players’ minds of course. 
 
   Mr Eckl said: “Many insurers in Asia are currently struggling with the profitability of their property portfolios. To help insurers’ improve their performance and stimulate their growth potential, we are establishing a property consulting unit. Similar to our motor consulting team, this unit is dedicated to jointly develop products, solutions and offer consulting services that help our clients to successfully grow along the insurance value chain.”
 
   Mr Beedle added: “We fully expect prevailing market conditions to continue into 2016 and possibly beyond, with ample capacity maintaining a favourable buying environment for insurers. As a result we see the macro themes which have emerged over the past couple of years continuing, namely soft pricing, further merger and acquisition activity and reinsurers actively managing their economic capital against increasing pressure on ROE targets.”
 
   Mr Flandrin also brought up the topic of profitability. Giving the example of China, he said: “Existing abundant capacity plus new domestic reinsurance capacity will contribute to further deterioration in the profitability of the Chinese market.” 
Highlighting the need for profitable growth, he added: “Worldwide profit erosion of (re)insurers is squeezing the margins which were used to subsidise expansion in Asia and especially in China. Asia cannot be a loss leader; it needs to be a viable marketplace today in order to continue being an investment target for the future.”
 
Strategic focus for 2016
 
Industry leaders share with us their strategic focus for the new year. 
 
Innovate with IoT or disappear
“The Internet of Things (IoT) is an exciting revolution that will change the face of entire industries. Globally, we are at the start of something great that only happens once every few generations. Today, there are 10-20 billion IoT devices. In five years’ time, we expect this number to grow to 40-50 billion. AIG sees the potential of technology to improve safety, efficiency and productivity.  For instance, the IoT will create new cyber, liability and privacy risks. But these risks will create amazing benefits by improving safety and creating new economic opportunities for companies in all industries.
 
   The IoT is a great opportunity and risk for business, no matter its nature. However, there is an extraordinary opportunity for risk managers to guide their company through a revolutionary period. The next 5-10 years will yield amazing applications that we haven’t even imagined and companies will need to either innovate with IoT or disappear.”
 
r Jose Hernandez 	President and CEO, AIG Asia Pacific
Mr Jose Hernandez
President and CEO, AIG Asia Pacific
 
 
Continue to invest in analytics and talent
“We take a long term view in our planning process and, while we have specific initiatives to take advantage of any opportunities provided in 2016, the question is really what are we doing to ensure we remain a market and thought leader in the longer term. 
 
   We will continue to invest in analytics and talent, so that we have the right tools and appropriately qualified people to empower our clients to achieve their objectives in a market undergoing structural change. There is, for example, a high level of interest by Chinese investors to invest in the global (re)insurance markets. 
 
   We have developed an M&A capability on the ground in the region to assist potential investors – whether they are state-owned insurers or private equity investors – to achieve these aspirations. This team is supported by Aon’s global database, unique knowledge of global markets and analytics capability.”
 
Mr Malcolm Steingold CEO of Aon Benfield Asia Pacific
Mr Malcolm Steingold
CEO of Aon Benfield Asia Pacific
 
 
Never-before-seen opportunities
“Munich Re continues to increase awareness on disaster resilience and reducing the insurance gap of natural catastrophes. 2016 will also see the development of more cyber risk products together with our clients and we will continue to invest in the use and development of data analytic tools. Another fascinating area is the evolution of liability led by autonomous driving. Complexity of technology and liability issues require constantly new risk assessment and quickly adaptable solutions.  
 
   Overall the continuous search for innovative risk solutions together with our clients and with partners from other sectors is opening up never-before-seen opportunities in all lines of business. A recent example was the quick development of a cover against the outbreak of MERS for tourists travelling to South Korea.”
 
Mr Roland Eckl Munich Re, CEO Asia Pacific, responsible for Japan, Australia and India
Mr Roland Eckl
Munich Re, CEO Asia Pacific, responsible for Japan, Australia and India
 
 
Further commitment in Asia
“Asia is important for PartnerRe’s long term business development, which is why we have created a fully capitalised platform in Singapore. We have been reinforcing our local resources and expertise to better support the evolving needs of our existing and prospective clients and brokers in the region. 
 
   For the same reasons, we have also decided to become a fully capitalised onshore reinsurer in China and have just recently submitted our license application to the Chinese regulator. This is an important step for PartnerRe, anchoring our operations in China and demonstrating our strong, long-term commitment to building business relationships in the market and providing technical expertise, product development and capacity to our clients, brokers and the market at large.
 
   Overall in Asia we see an increasing demand for expert support in specialty lines, such as credit & surety, agriculture, energy and marine, as well as in life and engineering facultative, given the increased investments in infrastructure. Our clients in Asia can now benefit from access to our expertise in these lines locally. Also, the fragmentation of some markets combined with new risk-based capital regulatory requirements are pushing some clients to review the way they manage risk and buy reinsurance.”  
 
Alain Flandrin CEO, Asia Pacific, PartnerRe
Mr Alain Flandrin
CEO, Asia Pacific, PartnerRe
 
 
Region still key area for reinsurance demand
“SCOR has a long history in APAC, which accounts for nearly 20% of its P&C business, and we will pursue our development in the region. 
 
   Over the past eight years, risk awareness in APAC has increased significantly, along with risk knowledge and the level and quality of information. Efforts in this regard need to continue, and the cooperation between the private and the public sectors needs to be intensified. Considering the low insurance penetration rates and the in-depth transformations undergone by the main economies in the region, we strongly believe that the APAC region will remain a key area of demand for reinsurance and we are keen to take part in the sustainable development of insurance in the region. 
 
   We have confidence in SCOR Global P&C’s prospects in the region, particularly in those markets where we have established a local presence in order to better share our underwriting expertise, transfer our know-how and bring new products, reinsurance solutions and underwriting & risk management best practices to selected clients.” 
 
Mr Michel Blanc Chief Underwriting Officer, Asia-Pacific,  Global P&C, Treaty, SCOR
Mr Michel Blanc
Chief Underwriting Officer, Asia-Pacific, Global P&C, Treaty, SCOR
 
 
Strengthening ERM essential
“We define our function to contribute to the sound growth of the insurance market through accurately identifying client needs and providing stable reinsurance capacity, reinsurance solutions and value-added services. Fully cognisant of its function, we will not simply pursue short-term, top-line growth, but will as always build stable, long-term business relationships with clients to achieve steady growth in our Asian business.
 
   In addition to the above initiatives, we have recognised that strengthening ERM is essential in promoting group strategies. We will comply with the regulatory requirements of ERM and ORSA from the outset and use them as tools in management decision-making to maintain soundness and improve profitability.”
 
Tomoatsu Noguchi President and Chief Executive, Toa Re
Mr Tomoatsu Noguchi
President and Chief Executive, Toa Re
 
 
Enhancing Asia’s resilience
“In a highly competitive market place Willis Re’s core focus will remain on providing our clients and prospects with industry leading capabilities in our core areas of analytics, placement execution and post placement servicing.   
 
   Beyond that we will continue to develop our global focus on areas of underinsurance, working with stakeholders and capacity providers to design affordable solutions which will add resilience to communities and cities in Asia.”   
 
Mr James Beedle Senior Managing Director, Willis Re Asia
Mr James Beedle
Senior Managing Director, Willis Re Asia
 

 

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