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Sep 2017

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Asian Insurers: Greater Expectations!

Source: Asia Insurance Review | Sep 2017

Asia Bangladesh India Pakistan Singapore Sri Lanka Taiwan Vietnam Reinsurance People

Reinsurers play an increasingly important role in most insurance markets in Asia and each year the expectations grow. So this year, in our coverage to kick start the renewal season with Monte Carlo, we polled a team of “seven wise” insurers around the region from big and small markets to gauge their expectations. Reinsurers have big shoes to fill. The market awaits. 
By Anoop Khanna
 
 
Asia has often been described as the growth engine of the global insurance industry. While the developed insurance markets are experiencing a plateau phase in their life cycle currently, the Asian markets are on a robust growth track. This uptrend in Asian has been aided by the all-round economic progress that Asian countries have made in the recent decades.
 
   The economic progress has boosted domestic consumption. Governments are pouring in massive investments in infrastructure development; bourses are booming and populations are enjoying improved standards of living. The growing middle class, although economically better off, is also better aware of insurance as a means of risk transfer. All these factors are driving the demand for insurance.
 
   These encouraging aspects however, have a depressing angle as well. According to Swiss Re sigma No 3/2017, Asia accounted for the world’s largest share of economic losses in 2016. At US$83 billion, this was 47% of global $175 billion total, but insured losses were just 16% of the total global insured losses of $53.7 billion. 
 
   The boom and growth of Asian countries can come to nought if the protection gap between economic and insured losses continues the way it is. Asia’s protection gap stood at $74 billion in 2016, more than double from $31 billion in the previous year, as economic losses drastically outgrew a modest appreciation in insured losses.
 
   So there is still a wide penetration gap in the region. For insurers, narrowing this gap is a key aim and they will need reinsurance support for it. 
 
More than capacity requirements
Mr Tapan Singhel, MD & CEO, Bajaj Allianz General Insurance Company, India, said: “Reinsurance is an important component of the capital structure of nearly every insurance company. Reinsurers setting base here would not only supplement the increased capacity requirements, but shall also bring along global skill sets, wider range of international insurance product offerings and heightened assistance in latest models of technical, underwriting and claims redressal.” 
 
   Echoing this, Dr Jagath Alwis, Director (Technical) and Chief Technical Officer, Ceylinco General Insurance Limited, Sri Lanka, said: “Insurers have now moved on from looking at reinsurers as capacity providers alone.” He added that insurers expect reinsurers to deliver innovative risk transfer solutions and be competent guides on ERM, RBC, Nat CAT modelling and much more. 
 
   For Mr Paul Faulkner, Regional Chief Risk Officer, MSIG Holdings (Asia) Pte Ltd, Singapore said: “We seek out reinsurance partners who are able to deliver a high standard of service”. He added that in a tough market, “cost effective protection is also one of the main factors for consideration of a reinsurance partner”. 
 
   In Pakistan, the China Pakistan Economic Corridor Project is likely to bring an investment of $55 billion from China over the next two decades. This investment will give a boost to several infrastructure projects in Pakistan. 
 
   “The Pakistan insurance industry would require huge capacity to underwrite these huge risks, which it lacks, hence we look forward to capacity and knowhow of the international reinsurers”, said Mr Tahir Ahmed, Managing Director & Chief Executive, Jubilee General Insurance Company Limited, Pakistan. 
 
Long-term commitment and transfer of knowhow
Mr Ngô Trung Dung, Deputy General Secretary, Insurance Association of Vietnam, wants reinsurers to have long term commitments with local insurers and be consistent, instead of participating when the market gives good results and withdrawing when the market has bad results.
 
   He said: “Apart from the transfer of know-how, information about the new trends of international markets and of course sufficient market capacity, the Vietnamese insurance industry also expects training relating to new products like cyber liability, terrorism and kidnap & ransom.” 
 
   As for the non-life insurance industry in Bangladesh, which is growing  at around 8% y-o-y and is currently valued at BDT2,800 crores (US$345.5 million), it expects reinsurers to provide ample reinsurance capacity. 
 
   Ms Farzana Chowdhury, Managing Director & CEO, Green Delta Insurance Co. Ltd, Bangladesh said: “In addition to capacity, we need strong guidance and cooperation to align with proper risk minimisation strategies and development of skilled manpower, which we lack.”
 
Mature markets have different expectations
Expectations differ with the level of development and maturity of the various markets. The Taiwan insurance market is a relatively mature and small one and most of its general insurance companies have sufficient capital and some are even over-capitalised due to regulatory requirements.
 
   Mr Roland S.C. Yen, Senior Vice President of Commercial Insurance Product Departments, Fubon Insurance, Taiwan, said: “Taiwan’s exposure to natural catastrophes is very high. Our needs from reinsurers are mainly  focused on peak and volatile risks transfer to stabilise business portfolio, instead of a capital relief function.” 
 
   The Taiwanese insurance industry is also keen to explore the impact of self-driving cars on the insurance industry. Mr Yen said: “Though we do not yet know how the public will react to self-driving cars, we wish to move early to be able to respond to the new opportunities as and when they arise.”
 
Looking for fair renewal and increased capacity
Insurers across Asia found the 2017 renewal terms easy and soft with a few exceptions where CAT events dictated marginal increases in reinsurance premiums. Their expectations for the next renewals are also very fair and normal. They expect smooth sailing, and yes, with increase in demand for capacity. 
 
   Mr Singhel said: “In the recent past, the Indian insurance industry has suffered various catastrophe claims such as Chennai floods, Hudhud cyclone & J&K floods. These have put stress on the industry’s profitability, hence last year’s renewal was relatively more challenging as compared to the earlier years.” 
 
   “We foresee reinsurers becoming selective in providing capacity, depending upon the performance of each insurer, potentially bringing the focus back to prudent underwriting.” he added.
 
   Reinsurance renewals in Taiwan were also quite soft this year, though the rates increased by 10% to 15% for the property class due to earthquake and some more CAT losses. 
 
   Mr Yen said: “The softening market makes profitable underwriting increasingly difficult to achieve. Reinsurers may look forward to another demanding year, where luck will play an even larger role in determining their final results.” 
 
Soft market still
Mr Faulkner said: “Last renewal season went well and the direct market is still very soft. Of course, we need support in these challenging times and although the reduction in prices has decreased over the years, reinsurers are still producing reasonable returns on equity.”
 
   Although Sri Lanka suffered heavy flood losses in May 2016, it is still a soft market. Dr Alwis said: “Companies that are operating on proportional treaties still got higher capacities and reasonable commissions with reasonably high event limits.” 
 
   He added: “I don’t feel this would continue in the next renewals and it is likely that the reinsurers will push direct companies to move from proportional to non-proportional treaties. The direct companies will be compelled to increase their retentions as well.”
 
Profitable markets
Mr Ahmed noted that Pakistan’s insurance industry in the recent past has seen a rare run of underwriting profitability, due to an absence of major catastrophic losses and improved law and order conditions. He said: “With this backdrop and provided the existing benign conditions, both internationally and locally, remain as they are, I expect the forthcoming renewals to be smooth for traditional business.” 
 
   The Vietnam market performed better last year compared to previous years. Mr Dung said: “By and large, international reinsurers have understood the difficulties of Vietnamese insurers and at a certain level, have adjusted to the realities of this growing market.” The adjustments are due to better risk management and therefore good underwriting results of local primary insurers. Mr Dung expects the forthcoming renewals to bring more international reinsurers to participate in the Vietnamese market and make it more competitive. 
 
   Ms Chowdhury said: “Renewal in Bangladesh insurance market during the last season was pretty smooth. We didn’t experience anything negative which needs to be addressed immediately, but there’s always scope for smoother executions.” 
 
Expertise on emerging new-age risks 
Emerging risks are exposures that have arisen because of changes or development in technology, science, or legal theories and which are likely to become actual claims in the near future. 
 
   Cyber security and climate change and its deleterious impact are examples of emerging new-age risks. Some other upcoming trends that are also key, include nanotechnology, IoT and autonomous cars, which will be a reality in future. 
 
   But how do the insurers view these emerging risks and what do they expect from the reinsurers? 
 
Cyber threats
Asia today houses 53% of global internet users. Countries like India are going digital in a fast-forward mode. Online and mobile penetration is increasing rapidly. Cyber security infrastructure is, however, woefully lagging. 
 
   According to Fitch’s Asian Reinsurance Markets’ Report released in July this year, Asia is world’s most vulnerable region to cyber-threats. Cyber insurance premium in Asia is only 6% of the total global cyber insurance premium. 
 
   Mr Faulkner said: “Cyber threat is real, especially with several high-profile cyber security breaches over recent months, but there is limited publicly available information on the scale and financial impact of cyber attacks. Insurers will be looking to reinsurers to provide expertise for such products since they have the scale and their breadth of view is wider.”
 
   He said: “For reinsurers, these are opportunities and challenges, to create solutions to help manage and mitigate even the most complex risks to help insurers grow and evolve in this environment of disruptive technology.”
 
   The risk of cyber crime is relevant to all businesses. Mr Singhel said: “The focus of insurers is to understand how cyber risks can lead to losses for both their clients and themselves. This is not a new risk, but it remains difficult to underwrite as the impact of a cyber attack can vary dramatically, depending on how malicious the attack is and the speed with which it is identified and rectified by the target company.” 
 
   “We would therefore expect the reinsurers to step in and provide their expertise in the domain of cyber liability insurance coverage from their experience and their ability to spread the risk,” he added. 
 
Nat CATs
Reinsurers also have deep experienc in mitigating risks associated with natural catastrophes because of their international exposure and are helping domestic insurers increase their understanding of climate change impacts and preparation for these events. 
 
   Mr Singhel said: “India has faced many Nat CAT events in the last decade, especially the ones lashing the eastern coastline. Hence, tools for managing/monitoring exposures along with new products offering Nat CAT protection like index based covers would be welcome.” 
 
More reinsurers based in Asia
Asian insurers feel that with the advent of Lloyd’s syndicates first in Singapore and Hong Kong, and now in India, there is no dearth of capacity in the Asian market. 
 
   This should be able to fulfil the growing demand for emerging risks like cyber and also Nat CATs. Dr Alwis said: “Reinsurers operating from Asia have a better understanding of the regional markets and they could be competitive. Most of the reinsurers operating in the region have technical know-how to handle such risks and advise their clients.”
 
   Mr Ahmed said the reinsurers have a critical role to play in the Asian markets. With their vast experience and data collected over many countries and long periods of time, “we would expect the reinsurers to adapt their knowledge to the local conditions in each region or country.” 
 
   Small markets like Vietnam want the reinsurers to combine the underwriting of emerging risks like cyber risks within a region to get a “large number”. Mr Dung said: “The reinsurers can therefore make an appropriate reinsurance programme with adequate regional features which will help save costs and meet the requirements and benefits of the regional related primary insurers.”
 
Increase CAT insurance penetration
For Taiwanese insurers, they would prefer the reinsurers and insurers to focus on how to find solutions for regulators to increase catastrophe insurance penetration, examine the current financial solutions to manage disaster risks and close catastrophe protection gap in Asia. “Products innovation toward parametric approach with reinsurer support may create a new demand,” said Mr Yen.
 
   He said: “Insurers need knowledge from reinsurers’ markets to translate risks with high uncertainty into a quantifiable measure. That would help us to analyse our portfolio and improve underwriting quality for this complex risk, thereby enhancing our business profitability.”
 
Emerging risks
Bangladesh by its geographical location on river delta is exposed to all kinds of hydrological risks almost every year. In addition, the country’s insurance industry, as it grows online, is compromised by cyber-crimes. 
 
   Ms Chowdhury said: “We look at potential cyber risks as well as Nat CAT and other emerging risks very seriously. Natural catastrophes can take quite a toll on the insurers and the timely reinsurance protection can protect both the victims and the direct insurers. Same goes for cyber and other emerging risks.” 
 
What insurers are looking for
To sum up as the global reinsurers pack their bags for Monte Carlo to kick off the 2018 renewal season, these thoughts of Asian insurers give them a bird’s eye-view of what they should look forward to! 
 
   Long term relationships, adequate capacity, new products for emerging risks and with market specific specialties and non-interference in their domain are just what the insurers are looking forward to. A 
 
Are you on my turf? 
 
Reinsurers’ knowledge and expertise across industries and geographies have always helped insurers understand, protect and anticipate the risks that corporates face. These are basically large specialised risks where rates, terms and conditions are primarily reinsurance driven. 
 
   However at times, insurers react to reinsurers getting on to their turfs very differently. Reinsurers providing corporate solutions and dealing with corporates directly, evoked varied reactions from the Asian insurers. 
 
   “I am not in favour of this trend,” said Dr Jagath Alwis, Director (Technical) and Chief Technical Officer, Ceylinco General Insurance Limited, Sri Lanka. “Reinsurers should work with direct companies and should provide such solutions through them. Direct companies know the turfs in their home country better where the patches and cracks are.”
 
   Mr Paul Faulkner, Regional Chief Risk Officer, MSIG Holdings (Asia) Pte Ltd, Singapore, said there is indeed some level of conflict of interest and “this is not a favourable trend for us.”
 
   Pakistan is still a small market and perhaps the reinsurers are not finding it worth their while to undertake such activity there. Mr Tahir Ahmed, Managing Director & Chief Executive, Jubilee General Insurance Company Limited, Pakistan, said: “However, one cannot rule out that this won’t happen in future as well and if it happens, the reinsurers may jeopardise the relationship of trust with direct insurers which is built over time.” He said the spirit of competition will consume the spirit of partnership.
 
   The Vietnamese insurance market also does not see this as a reasonable approach on the part of reinsurers. Mr Ngô Trung Dung, Deputy General Secretary, Insurance Association of Vietnam said: “Reinsurers in these cases are normally not the ones with high ratings, and they are usually not familiar with the Vietnam market.” He said reinsurers should fulfil their core function of providing capacity for the market/primary insurers and not get involved in discussions with prominent clients.
 
   Taiwanese insurers are not much alarmed about reinsurers intruding on insurers’ turf. Mr Roland S.C. Yen, Senior Vice President of Commercial Insurance Product Departments, Fubon Insurance, Taiwan, said: “We believe that this approach is a positive power for the industry because it will stimulate benign competition, which is welcomed by the insurance market.” 
 
   Mr Yen said what the insurers should be more concerned about is the new digital business model and FinTech insurance innovations, which will collapse the boundaries between insurance and reinsurance companies and they will probably be hard to define. “Besides, the new type of technology industry will join the insurance market to become competitors. This impact will be much greater than corporate risk solution activity from reinsurance market,” he added.
 
   Mr Singhel said: “Reinsurers’ interaction with corporates is positive as it gives them better understanding of the risk and mitigating measures that the corporates have in place.” 
 
   In Bangladesh, this is still a non-issue. Ms Farzana Chowdhury, Managing Director & CEO, Green Delta Insurance Co Ltd, Bangladesh, said: “There is only one local reinsurer, the state-owned Sadharan Bima Corporation. Foreign reinsurers haven’t started their operations in our country yet. But if any reinsurer comes forward and operates within the legal framework, we shouldn’t have any objections.” 
 
 
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