Debt as a capital source has become more popular among many Asian reinsurers which are predominantly equity-funded, says Fitch Ratings.
The issuance market is still in its infancy, but Fitch expects it to gain traction in the near to medium term, due to the low interest rates and sustained demand from yield-seeking investors.
The larger players are leading the way, says Fitch. For instance, China Re executed two issuances of US$800 million and US$700 million in March and June 2017, respectively, backed by strong investor demand. Proceeds will be used for overseas acquisitions as the company moves to capture opportunities beyond the domestic market and diversify its business. Korean Re issued a US$200 million hybrid in October 2014 and has also expressed an intention to increase usage of non-equity capital – including catastrophe bonds – to optimise its capital structure as it seeks to establish itself as a global player.
In its report on Asia's reinsurance market, Fitch says that steady economic expansion and insurance market growth will remain the fundamental reinsurance driver in Asia-Pacific. Knowledge transfer and human capital build-up will sustain the sector’s development momentum and spur reinsurance premium growth as globally established reinsurers continue to scale up in the region. Foreign counterparts recognise Asia’s business potential and have increased their focus and commitment to the region. Swiss Re is setting up its general reinsurance business regional headquarters in Singapore in 2018 after opening an office in Kuala Lumpur, Malaysia, in March. Similarly, Munich Re kickstarted a restructuring of its Asian operation in September 2016 to strengthen its presence in key hubs, including Tokyo, Beijing and Singapore, with an eye on potential expansion to India. In addition, Lloyd’s of London’s Indian reinsurance branch commenced operations in April 2017 to tap into accelerating onshore market growth opportunities.
Reinsurance demand will be supported by higher government infrastructure spending and the emergence of cyber insurance offering.
Fitch expects China’s large-scale Asian infrastructure projects, including those pertaining to the “One Belt, One Road initiative”, to be a source of reinsurance demand. In addition, Indonesia plans to increase its budgeted infrastructure spending by 22% yoy in 2017, to more than IDR350 trillion ($26 billion). Similarly, Thailand has increased infrastructure spending to up to THB896 billion ($25 billion) for the year. Direct insurers are unlikely to have the capacity to underwrite such exposures alone and reinsurers will have opportunities to step in and address this gap.
At the same time, Asia is the world’s most vulnerable region to cyber threats, yet its share of cyber insurance premiums is less than 6% of the global total. Asian insurers have small cyber insurance books of business. Fitch expects the segment’s reinsurance arrangements to gain importance as it expands and insurers tap on reinsurers for capacity and diversification, to glean underwriting expertise and plug coverage gaps – especially from global players with experience and insight from European and US markets.
Another area of interest to reinsurers is that catastrophe losses remain a key concern in Asia due the increased loss amounts and frequency of weather-related events.