Midyear P&C market roundup - P&C markets strong but balancing act needed


Source: Asia Insurance Review | Aug 2013 Categories: Cover Story

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Asia’s P&C markets are generally growing strongly, with motor seeing better-than-expected growth and commercial liability witnessing a rising demand. But rates in the primary markets have remained soft, and with a downward trend in treaty renewals in some cases, a reinsurer calls for a balancing act. Reinsurance capacity continues to flow into the region, a development one reinsurer believes will undermine efforts to maintain sustainable pricing and terms. Others note though that it has had a stabilising effect on the industry and that clients welcome the extra capacity.
By Manuelita Contreras
 
The region’s primary markets continued their growth in the first half of 2013 following a good 2012, albeit with a somewhat reduced speed compared to 2011 and 2012. P&C primary insurance premiums in emerging Asia currently grow on average by 11% annually, twice as high as the second fastest growth region, Eastern Europe, said Dr Tobias Farny, Munich Re’s CEO for Asia Pacific, responsible for SE Asia, Greater China and Korea. 
 
The strong performance of the region’s P&C markets is not surprising considering the favourable economic, social and regulatory developments in Asia, pointed out Dr Reto Brosi, Principal Officer of Asia Capital Re. A soft recovery of Asia-Pacific economies in the first half of 2013 has helped to underpin P&C insurance demand. And this was further reinforced by sustained government fiscal spending on such areas as infrastructure construction projects, said Mr Clarence Wong, Swiss Re’s Chief Economist Asia.
 
However, Mr Hashim Harun, President & CEO of Malaysian Re, said it is unlikely that insurers will be able to achieve their projected premium income for the year as the economic growth of most Asian countries has declined relative to the previous year, resulting in a decrease in insurance premiums. 
 
He cited the case of Malaysia, whose GDP growth went down to 4.1% in the first quarter of 2013 from 5.6% in 2012, indicating reduced economic activities in recent months, which have impacted the market’s insurance growth. This, he said, was evident in the lower non-life premium growth of 8.3 % in the first quarter of 2013, down from the previous year’s 8.8%.
 
Motor growing better than expected
Looking at certain segments, insurers in many of the region’s markets are having better-than-expected growth and profit margin from the fast-growing motor business, and this contributes to a continued soft primary market generally, said Mr Bengt Johnsen, CEO of UIB Asia Reinsurance Brokers.
 
While still a white spot, commercial liability in Asia Pacific is experiencing a growing demand, noted Dr Farny. 
 
“Construction liability, environmental liability, product liability and professional indemnity are needed and offer business opportunities in the region,” he said. Private casualty, on the other hand, remains a limited line of business in the region. 
 
Capacity remains ample
Reinsurance capacity in general remains sufficient, as major international players continue to focus on expanding their portfolios in the region, said Mr Wong. He noted that some players have entered the market to capitalise on more favourable terms and rates after the series of Nat CATs in 2011. 
 
“Overall, low interest rates and increasing contribution from alternative channels like CAT bonds are having a positive effect on reinsurance capacity,” he said. 
 
The substantial influx of capital into the region has had a stabilising effect on the industry and has allowed reinsurers to cope with recent large events quite comfortably, said Dr Brosi. Despite the strong capital deployment, he believes industry players have been disciplined with terms and conditions. 
 
Similarly, Mr Marc Haushofer, CEO Asia Pacific & EVP at Validus Re, said he got the impression that “regardless of some interesting new entrants to a number of Asian markets, clients did welcome the additional capacity with thoughtfulness in order to maintain certain market discipline and underwriting excellence”.
 
Undermining existing reinsurers’ efforts
Mr Mohammad Rais Abu Noh, President/CEO of Labuan Re, however, believes the influx of reinsurers along with the flow of new capital and underwriting capacities will undermine existing reinsurers’ efforts to maintain sustainable pricing and terms. 
 
“Even without the influx of such new capacities, it is already a great challenge to maintain a pricing level in the light of the much improved reinsurance underwriting performance and keen competition amongst existing reinsurers in the region,” he said.
 
Insurance buyers benefit
Insurance buyers, already enjoying a remarkably favourable risk-adjusted rate environment, continue to benefit from the flow of capacity into the region, said Mr Mark Shumway, Guy Carpenter’s Managing Director, Global Business Intelligence – Singapore. “At the same time, insurance buyers across the region continue to grow in sophistication, with sharply higher awareness around risk management and technical expertise following the extremely destructive catastrophes of 2011.” 
 
Higher demand resulting from this shift in risk awareness has absorbed much of the new capacity, he said, hence contributing to the stability currently seen in most of the region. 
 
Rates are generally softening
Given the highly competitive environment for both the primary and reinsurance markets across practically all lines of business, overseas markets where Labuan Re is active generally experience rate softening, said Mr Mohammad Rais. 
 
“Even in CAT-exposed markets, the primary markets’ premium rates and terms continue to soften while the pricing and terms in the reinsurance markets range from being stable to soft in most classes,” he said.
 
Capacity should not make industry complacent
The abundant capacity available in the region should not make the industry complacent, said Mr Ashok Kumar Roy, Chairman-cum-Managing Director of GIC Re, as he noted that while the industry in Asia grows in tandem with the overall economy, insurers face increasing risks and challenges. 
 
“The recent devastation in India due to cloud bursts, torrential rains and the resulting landslides, the great floods in China, and the fires and building collapses in Bangladesh are pointers that as emerging economies grow, they also have to face the ‘wrath’ of God and also of their own making,” he said.
 
He urged emerging markets to use the abundant capacity as an impetus for stricter collection and use of data and for better loss prevention as well as risk management practices, and to become more customer-centric.
 
“The P&C markets in these countries have remained soft. In some cases there has even been a downward trend in the renewals of the expiring treaties and policies. We have quite a balancing act to do ahead of us,” he said.
 
Generally favourable outlook
Looking at the rest of the year, Mr Wong expects the growth of Asia-Pacific economies to improve further modestly in the second half of 2013, which will benefit insurance demand in general.
 
Assuming economies in Asia continue to grow 3-8% and the motor business remains good, Mr Johnsen’s outlook for the region’s P&C markets the rest of the year is favourable. “The key for many insurers and reinsurers this year is that we do not experience another major Nat CAT loss impacting the current results,” he said.
 
Mr Wong expects large industrial risk demand to continue to derive support from infrastructure projects rolled out earlier, and motor insurance to continue to see robust growth. Liberalisation and deregulation will also help improve the P&C sector’s efficiency, he said.
 
Similarly, Mr Roy expects the region’s P&C markets to get a boost in the months ahead from the large investments pouring into the infrastructure sectors of many Asian countries.
 
“There is a resurgence of insurance in the Asian markets. But I would like to ask, how long will the party last? We have to ensure that risk-based, actuarially-sound pricing is an essential component for the insurers to remain in good health,” he said. 
 
The year is still young
With fairly positive results in the first quarter of 2013, the current momentum seems to continue, said Mr Haushofer. He noted though that the year is still relatively young. “The early slice of the second three months produced visible risk losses from Japan and South Korea, and the typhoon season is yet to come,” he said.
 
Nonetheless, he believes the sub-regional dynamics in Asia will continue. “China renews differently from Japan, Korea and Taiwan. Clients will increasingly request to receive a fair deal for their respective liabilities and performance. But they also want to have trusted reinsurance partners with a strong financial strength and, importantly, an excellent reputation for claims payment.”
 
He also noted that the industry is still facing highly uncertain global economics tied with historically low interest rates. “On the other hand, we experience tightening regulatory requirements furthering corporate discipline in our region.”
 
Profit margins are squeezed
Primary insurers’ profit margins are generally thin and are being squeezed further under current market conditions, with a few exceptions such as Japan, said Mr Shumway.
 
Investment results will likely remain weak, and insurers throughout the region will generally struggle to earn their costs of capital. “Despite this, capital should continue to flow into the region during the second half, chasing growth opportunities, particularly in energy and financial lines,” he said.
 
Rates to remain steady or to soften? 
Rates will remain steady if CAT loss experience were to stay at 2012 lows, with reductions for insurance buyers with well-managed risks, said Mr Shumway. “With an increase in frequency or severity of losses, however, we would see some of the new capital pull back, contributing to harder terms and conditions. While we feel that much of the new capital is in the market for the long term, there is also a speculative element that is quite sensitive to conditions.”
 
Mr Mohammad Rais, on the other hand, believes the region’s P&C markets will continue to soften for the rest of the year, especially if there is reduced incidence of Nat CATs in Asia. Nat CAT occurrences in the US and Europe will have little impact on the Asian reinsurance markets given the high levels of underwriting capacity and capital available in the global reinsurance markets in general and in Asia in particular, he said.
 
 Likewise, Mr Hashim said treaties will likely be renewed with flat or softer terms, particularly for profitable treaties. He also expects reinsurance capacity to remain in the region given the potential for growth in the long term.
 
In the highly competitive primary market, he expects rates to remain the same for the rest of the year, except those for risks that are claims-free and with good track record, which he believes will drop further.
 
Be aware of the distinction
The region is currently in the limelight and offers higher growth prospects than more established markets. Its markets are maturing and it is necessary that the industry develop products and services that can cater to this development, said Dr Farny. 
 
Reinsurers can strongly support this development, but clients have to be aware of the distinction between pure capacity and service provider, he said.
Note to Regulators: Cooperate to create sustainable development
 
While the region is moving forward with the adoption of risk-based solvency regimes and improved regulations to protect consumers, it needs better regional cooperation and coordination among regulators, as insurance and financial regulations become more fragmented and complicated, said Mr Clarence Wong, Swiss Re’s Chief Economist Asia. 
 
Cooperation among different regulatory bodies across markets is necessary to create sustainable market development across the region, said Dr Tobias Farny, Munich Re’s CEO for Asia Pacific, responsible for SE Asia, Greater China and Korea, adding that regulation needs to consider the increase in internationalisation of a market’s local players. It needs to ensure a level playing field between the market participants. 
 
Regulators should also sufficiently assess the cumulative and cross-sectoral implications of regulations, said Mr Wong.
 
And with the formation of the ASEAN Economic Community in 2015, Mr Hashim Harun, President & CEO of Malaysian Re, believes it will be good to put in place a regional regulatory framework to standardise the industry landscape in the ASEAN region. This, he said, will boost cross-border participation.
 
Have some flexibility
There should be some degree of flexibility towards building a well- but not over-regulated insurance and reinsurance market to give the conventional reinsurance market time to develop and expand profitably, said Mr Bengt Johnsen, CEO, UIB Asia Reinsurance Brokers. 
 
“Asia is an exciting marketplace with plenty of room to grow and develop. We just have to ensure we do not force or adopt regulation from very mature countries that is actually ‘tailored’ to their own market experience,” he said.
 
 Regulators, he added, should be sensitive to the fact that many insurance markets in the region are still very young and need time to develop before a decision is made on what regulation is “right” for individual countries.
 
Improve financial transparency
Mr Mark Shumway, Guy Carpenter’s Managing Director, Global Business Intelligence – Singapore, encourages regulators to institute rules that improve financial transparency, promote more robust and not one-size-fits-all risk management practices, and protect insurance and reinsurance buyers. 
 
Such rules may include tighter regulations on intermediaries, he said. “Many agencies and brokers in the region operate with very little capital and almost no oversight. This is potentially problematic to the health of the industry.”
 
Ensure adequate pricing
Regulations should put emphasis on ensuring adequate pricing and curbing excessive price competition among primary insurers, said Mr Mohammad Rais Abu Noh, President/CEO of Labuan Re.
 
Ensuring sufficient CAT protection of primary insurers’ property portfolio in CAT-exposed markets through regulations should also be considered, he said.
 
Invest in training, boost professionalism
Regulators and other market participants also need to put in more resources to the markets and invest more in training and making insurance and reinsurance a valued subject at major tertiary educational institutions, said Dr Farny. 
 
Mr Marc Haushofer, CEO Asia Pacific & EVP of Validus Re, said he is grateful for any regulatory activity that adds to the professionalism of the industry. “Whilst some may feel that we are getting overregulated in certain instances, I’m happy if through financial supervision we sort the wheat from the chaff.”
 

 

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