Reinsurers give up hope of any price increases

There has been a fundamental change in the reinsurance industry, as the increasing capital of the ILS market – last calculated at $88bn at the end of 2017, compared to the $365bn in the global reinsurance industry – has become a permanent part of the (re)insurance industry.

“It is estimated that investable assets globally total something like $130tn, mostly held in pensions and long-term funds. And of that, $99tn is held in global markets; $68tn in global equities and $15tn in asset-backed securities. At the moment, $88bn is being put to work in the ILS markets,” said Willis Re International chairman James Vickers, during the panel yesterday morning.

Since ILS are completely uncorrelated from all other investable asset classes, all investors should have some exposure in their investment portfolio to ILS, he said. “Such exposure might be in the range of 2-3%. And given the $130tn figure we were just talking about, even a 2% investment into ILS is an enormous figure, something like $2tn.” Given that the total current size of ILS is something in the region of $100bn, the scope for growth is clear.

The ILS market is one of the main drivers of the changing face of the insurance distribution chain, the other being technology. He pointed out the increasing M&A activity in the insurance sector that showed insurers acknowledging the growing ILS trend, such as AXA buying XL Catlin and AIG acquiring Validus – and he forecasts a further convergence between insurers and the ILS market. “All participants are trying for the lowest cost of capital in this low return environment, which does not seem to be changing. Reducing the cost of capital is crucial and raising prices is difficult.”

He pointed out that coming off the Baden-Baden Reinsurance Meeting, reinsurers have “largely given up hoping for any rate increases and are hoping for it to be stable, but in reality, the rates will probably reduce.”

But the challenge to the industry is not capital. “We have the capital. In 2017 we had a $145bn in claims. That was easily shrugged off and absorbed by the global reinsurance and insurance industry. We can manage that sort of thing with no trouble at all. What we need is to sell more of our product,” he said.

Lessons from the neighbours

For that, the panel turned to adviser of General Insurance Association of Korea, Professor Yeon Hur. Korea’s insurance industry rebounded well after the Asian Financial Crisis and managed to increase their insurance penetration by about 3% through a combination of bancassurance, cross-selling from agents and utilising new channels such as home-shopping networks and online direct channels.

Further, insurers were mandated to disclose important details that a consumer had to know, such as business expense ratios, consumer complaints filing ratios, the speed of settlements, which helped build trust with the industry.

For the Indonesian industry, Professor Hur had several suggestions. Firstly, he called for a greater promotion of risk management education to “make everyone aware of the various risks associated with their daily lives and business”, which also had the added benefit of minimising adverse effects and shortening recovery time after a disaster event.

To increase penetration, he suggested, insurers should continue the focus on microinsurance and increasing awareness of the value of insurance amongst the general public. “Instead of providing public subsidies or financial support in case of a disaster event, provide them with a subsidy for the insurance premium so that the mechanism of insurance can monitor or conduct surveillance loss exposures through the pricing mechanism,” he said.

He admitted that Indonesia has a geographical disadvantage, as an archipelago with too many islands to have a central distribution channel such as a home-shopping network. However, the deep mobile penetration within the nation is an advantage that insurers could tap into.


Catastrophe bonds show strong growth in 2018

Catastrophe bond issuance in the 12 months ending 30 June 2018 recorded a strong issuance volume of $9.7bn, according to a report by Aon Securities. This represents a decrease of $1.6bn of activity over the preceding period, which should not be confused with a lackluster performance in the period. Contributing to this strong year were not only repeat sponsors looking to renew maturing bonds, but also new sponsors testing the capital markets for the first time. In addition, the capital markets welcomed new perils from new geographies providing diversification to the broader market.

The catastrophe events at the end of 2017 brought increased attention and concern over ILS-related trapped collateral, ILS manager ability to “reload” at renewals, and the pricing environment. The volume of transactions remained high, while catastrophe bonds continued to both upsize and price at the low end of, if not further below, initial guidance. With both supply and demand remaining strong, total outstanding volume of the market has reached its highest level at $30bn.

While the third and fourth quarters of 2017 saw relatively modest issuance volume, the real driver of the trailing 12-month period was a fairly even combination of the first and second quarters of 2018.

Aiding in the strong first quarter issuance was the largest ever sovereign risk transfer and the second largest issuance in the history of the ILS market at $1.4bn, facilitated by the World Bank on behalf of the Pacific Alliance countries.

The strong first quarter 2018 issuance of $3.6bn was followed by a stronger second quarter, which brought an additional $4bn of catastrophe bonds to market.

While $5.5bn of catastrophe bonds reached maturity since the quarter ending June 2017 through the quarter ending 30 June 2018, the supply once again outpaced the outgoing maturities. In each of the last four quarters, new issuance volume easily replaced the next cycle of maturing catastrophe bonds, with a positive influx of $4.2bn in volume. The 12-month period in review is most noted for the resiliency demonstrated by the investment community as investors reloaded capital bases following the catastrophic events at the tail end of 2017.

Overall, strong 2018 issuance has allowed alternative capital to grow just over $9bn to a total of $98bn for an overall increase of 10.2%. This growth came despite the third and fourth quarter events of 2017. However, the period of growth also came with new structural features, risk profiles, perils, and sponsors.


Growth buoyed by a rising economy

Asia Insurance Review recently spoke to Indonesian General Insurance Association (AAUI) executive director Dody Dalimunthe on the state of play in the country’s non-life sector.

The recent performance of the general insurance industry in Indonesia has been positive. While premium growth slowed in 2016 and 2017 on a y-o-y basis, gross premiums of IDR55.6tn ($3.73bn) in 2017 were up 2.3% from the year before. Data from the Indonesian General Insurance Association (AAUI) showed that as of 1H2018, gross premiums reached IDR33.1tn, double-digit growth of 11.2% compared to 1H2017. The number of general insurers has remained constant at 76 since 2015.

The increase in performance is in large part due to parallel growth of the Indonesian economy, which reached 5.27% in the first half of this year. Economic growth had positively influenced motor vehicle and property sales and boosted consumer purchasing power, all having a run-on effect of significantly increasing general insurance premiums.

Property and motor dominate

Property and motor continue to dominate non-life in Indonesia, accounting for over half (IDR17.58tn) of all gross premiums in 1H2018. Reflecting the population’s demand for new vehicles, motor recorded the largest nominal gross premium growth for conventional lines of business.

Almost all business lines recorded positive growth in this period, except for marine hull, energy and engineering. Aviation and satellite premiums saw a massive growth of 188.1% (IDR366.3bn), in part related to coverage for BRISat—a commercial telecommunication satellite launched recently in 2016.

Non-life gross claims in Indonesia for 1H2018 grew 3.3% compared to the same period last year. In terms of challenges, loss ratios decreased from 41.8% in 1H2017 to 38.8% in 1H 2018, but the sector is still experiencing pressures to profitability due to increases in operating costs, said AAUI executive director Dody Dalimunthe. Nonetheless, he expects the good economic performance and the focus of the Indonesian government in developing infrastructure to provide growth opportunities for the sector, particularly in property and engineering lines, he said.

Non-life gross claims in Indonesia for 1H2018 grew 3.3% compared to the same period last year. In terms of challenges, loss ratios decreased from 41.8% in 1H2017 to 38.8% in 1H 2018
Mr Dody Dalimunthe
Indonesian General Insurance Association (AAUI)

Protection gap

Currently, there still exists a property protection gap, in particular against Nat CAT. With Indonesia being Nat CAT-vulnerable, the recent earthquakes on the island of Lombok in July and August have revealed a significant gap between insured and economic losses. The incidents are expected to increase public awareness of insurance.

“AAUI views that efforts should be made to close the protection gap in the future so that recoveries of natural catastrophe are not fully left to the government. AAUI is actively trying to increase education and insurance literacy in vulnerable areas so that the people in such places would realise how important it is to mitigate catastrophe risk through buying insurance,” said Mr Dalimunthe.

The finance ministry is considering a disaster risk insurance and financing scheme that could be included in the state budget in 2019. Until now there is no single legal umbrella covering this issue, and existing pre-disaster financing regulations to date are still sectoral, such as applying to agriculture or fish farming, and state budget allocations for contingency funds have been limited during the last 12 years, amounting to IDR4tn a year at the highest, reported CNN earlier this year.

Digitalisation initiatives

Besides new opportunities in infrastructure, the Indonesian insurance industry is also currently furthering opportunities in digitalisation, which can potentially enhance its reach and quality of service to consumers, said Mr Dalimunthe. The AAUI found in a recent survey that two-thirds of members have engaged in digital marketing through the utilisation of company websites, digital/mobile applications and aggregators and about the same number have adopted an integrated operation system for their business processes. Four out of 10 of its members have partnered with InsurTech companies.

The AAUI also found that general insurers are also using digital platforms to market microinsurance products to cut distribution costs. “Aside from that, AAUI observes an increasing interest among its members on topics such as automated underwriting, artificial intelligence, blockchain technology and big data,” said Mr Dalimunthe.


Reinsurers take the temperature in Monte-Carlo

Doing business in only part of the reason that so many reinsurers gather in Monaco each year. It’s also about feeling the pulse of the market – measuring expectations and crafting a strategy.

By Paul McNamara

The mood at the Rendez-Vous de Septembre in Monte-Carlo this year, in spite of dystopian headlines from earlier in the year, was decidedly upbeat. Reinsurance is in the midst of change – but it is a vibrant change that will lead to more opportunities and a bigger, stronger sector.

Optimism abounds

This year’s Rendez-Vous opened with an optimistic picture of the market painted.

Willis Re global CEO James Kent acknowledged that a “dark picture of the industry” had been painted by some but, he said, there had still been some “robust growth” with revenues still growing in the last year. Willis Re, he said, “was much more bullish” than it had been last year and went on to say that the firm was “pretty positive” about the future.

Willis Re International chairman James Vickers pointed to the year ahead as holding “a much bigger opportunity” particularly in the three areas of privatisation of government risk, the disclosure of climate change for corporates and closing the protection gap. “The reinsurance industry is the gearbox to make this happen,” he said, and it was “on the cusp of making it happen.”

Mr Vickers also said that, “the reinsurance industry is facing some of the most exciting change that it ever has,” and this could only be good for business.

The future’s so bright

Partner Re CEO Emmanuel Clarke made similar points and pointed to “a bright future” for reinsurance. “We believe strongly in the future of reinsurance,” he said. “Scale matters,” he said, “and relevance matters even more in reinsurance.”
He went on to predict that, “the reinsurance market will consolidate into a large handful of big firms and a number of small commoditised players.”

SCOR chairman and CEO Denis Kessler was even more enthusiastic when he said, “you will never see SCOR moan about what an awful world we live in. People are underinsured. It’s fantastic for our industry to say that we have the opportunity to satisfy that demand.”

SCOR Global P&C CEO Victor Peignet echoed this optimism when he said, “the year ahead should be much better. It is totally workable for us,” both in terms of providing capital to clients as well as in offering consultancy services, he said.

Growth expected

Munich Re chairman of the reinsurance committee Dr Torsten Jeworrek pointed to the reinsurer’s forecast of “moderate reinsurance premium growth expected until 2020, with rates roughly in line with primary insurance premium growth.”
“Discipline remains important,” he said, “since the level of competition remains the same.” Cyber, he went on to say, was the unique challenge facing the industry since it remains the only “truly global risk.”

Munich Re chief underwriter Stefan Golling focused on strong growth prospects and said, “We are investing heavily in cyber insurance,” and indicated that his firm would look at most risks, with the exception of “the outage of external networks,” such as utilities or internet services. These, he said, were simply “too big for insurance companies to tackle alone.”

Insurance-linked securities

A lively discussion, facilitated by Munich Re, put ILS under the microscope in the hope of establishing where this relatively new asset class was likely to head next - and what impact that could have on the reinsurance world.

KBW vice president Christopher Campbell gave some context to the growth of ILS when he said, “The large catastrophes of last year leading to price reductions at renewal time didn’t happen. The traditional model for Nat CAT seems to be broken.”


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