As we enter a New Year for the insurance markets in Asia Pacific, what are likely to be the big challenges in the next 12 months, pandemic aside?
It looks like there will be two quite separate issues that will have a substantial impact on all facets of the insurance, reinsurance and risk management sectors.
The first of these, hardly surprisingly, is inflation.
Some guesstimates have it that the region will see inflation creep up to 5% for the year – while others predict that a figure of 25% is conceivable. Either scenario could have profound implications for the industry as the year unfolds.
Clearly, as inflation creeps up, interest rates will have to follow and this could involve a juggling act for the asset management side of insurance businesses, which have been hamstrung by ‘lower-for-longer’ for quite some time. Many will have substantial amounts invested in long-term fixed income instruments with low yields.
I remember leading economists speculating why inflation had not run rampant after quantitative easing kicked in at the onset of the global financial crisis. (The simple answer was asset bubbles).
But as central banks pump in trillions of dollars to shore up their economies after the pandemic-induced demand slowdown - and supply chains creak under the weight of distorted manufacturing patterns - we see the classic pattern of too much money chasing too few goods.
Health inflation – and health insurance inflation – were already running riot prior to the pandemic so the future is looking decidedly unpredictable on that front. But the inflation we are talking about will have profound implications for all facets of insurance – from wages to rents, from power costs to compliance and everything in between.
The hardest blow from excess inflation will probably be to P&C insurers – particularly on their liabilities in the form of loss reserves – but also on their pricing.
In almost every case, the message is that high inflation is not good news for insurers.
The second, quite separate, issue is the ‘reset’ that is taking place in China and the effect that this may have on global and regional insurers with exposure to the domestic Chinese market.
Data on the inroads that the global banking sector has made in mainland China suggest that success, if it comes for these banks, will be in the long run. Possibly the very long run.
JP Morgan, for instance, lost $40m in China in the last two years according to data from the Chinese regulator. Making losses in China is something the bank has in common with some other leading investment houses.
This is not to say that insurers and reinsurers will not be able to make money in China – simply that both the investment landscape and the financial landscape are in a transition phase at present, which could make it hard to plan and forecast.
It is undoubtedly a growth market, but it is not like any other market that leading players will have encountered before and that would suggest that caution could be the watchword that governs insurance activity there for some time to come.
Asia Insurance Review