As 2014 begins, here is our pick of the issues that have been significantly discussed and that we feel will continue to make waves in the year ahead.
By Dawn Sit
1. Nat CAT protection gap in Asia
Super Typhoon Haiyan, one of the strongest tropical cyclones ever recorded, would likely cause total economic losses – including damage and reconstruction costs – amounting to about PHP250 billion (US$5.8 billion), whilst insured losses were expected to reach hundreds of millions, according to the November 2013 Global Catastrophe Recap report recently issued by Aon Benfield.
Over in India, economic losses for the Uttarakhand floods in June 2013 were estimated at INR50 billion (US$829 million) and the general insurance industry saw claims totalling approximately INR15 billion. In China, the April 2013 Lushan earthquake caused direct economic losses of more than CNY10 billion (US$1.67 billion) but claim payments amounted to just around CNY10 million.
According to Swiss Re’s sigma records, the total economic loss from catastrophes in Asia in 2012 amounted to US$30.5 billion, equivalent to 16.4% of total global economic losses that year. However, only 11% of the region’s losses were insured. Evidently, Asia is highly underinsured – and this needs to be changed.
Need for increased awareness still
The insurance industry as a whole has not been able to communicate to society at large the important role it plays in managing the risks that individuals and societies face in their day-to-day lives. The value of insurance, especially in the aftermath of catastrophic events, needs to be communicated to people, said Mr Anoop Khanna, Chief Manager (CMD’s Secretariat, Corp Communications & ERM), GIC Re.
Quoting Lloyd’s Global Underinsurance report, he said a 1% rise in insurance penetration translates into 13% reduction in uninsured losses; 22% reduction in taxpayers’ contribution following disaster and a 2% rise in GDP in investment funds. Hence any increase in insurance penetration would benefit all stakeholders.
Work in progress
Mr Clarence Wong, Chief Economist, Asia, Swiss Re, said a lot of effort have been expended to help assess and close the protection gap. “Whilst assessing natural disaster risk quantitatively and in a forward-looking manner is still a relatively young science and comes with some uncertainties, the industry is increasingly leveraging on quality historical data, and the use of sophisticated models to improve accuracy,” he said.
2. Regulatory developments around Asia and the world
2013 saw various significant regulatory developments: the implementation of Solvency II had been postponed to 2016; ComFrame field testing is slated to begin in March 2014; IAIS’ plan to develop a global insurance capital standard (ICS) independent of any regional or other sector initiative by 2016; as well as the announcement of the nine globally systemically important insurers (G-SIIs). A separate list of systemically important reinsurers will be announced by FSB in Jul 2014.
As IAIS members, Asian insurance regulators continue with their implementation of the insurance core principles (ICPs) which impact not only capital standards, ERM and the treatment of customers, but also other areas that include corporate governance and investment management among others.
For example, the Monetary Authority of Singapore (MAS) implemented its reviewed risk-based capital (“RBC 2”) requirements by end 2013, with at least a two-year parallel run with its current framework.
The review aimed to improve the comprehensiveness of risk coverage and risk sensitivity of its current RBC framework, give more definition to MAS’ supervisory approach to solvency intervention levels, and to enhance risk management practices. Proposed changes included a calibration of the RBC regime to a 99.5% level of adequacy over a one-year time period and the inclusion of credit spread risk charge.
For China, the regulators there had issued a framework for a second-generation solvency regime in its initial attempt towards insurance supervision reforms in May 2013. The basis of the new regulatory system is the management of insurers’ solvency. The framework’s core solvency regulation pillars – qualitative and quantitative capital requirements, and market discipline mechanisms – require insurers to ensure their capital adequacy commensurate with their risk profiles; that risk is properly analysed and managed; and there is sufficient information disclosure to facilitate decision-making.
Potential uniformity in regulatory practices?
As Asia’s regulators become more connected and look to their regional and international counterparts when developing IAIS requirements, emerging regulatory standards could begin to become more uniform. That could translate to insurers – particularly those with operations in different countries – spending significantly less time complying with a range of disparate regimes and instead report and operate on a similar basis in multiple jurisdictions, said Mr Martin Noble, Senior Manager, Actuarial Services, KPMG.
3. Accumulation risks and CAT modelling demands
In the last two decades, rapid industrialisation across Asia’s emerging markets has resulted in a growing phenomenon of cluster risks, featuring massive infrastructure building, booming economies and a prolific growth of urban centres. Add globalisation and interconnectivity to the mix, and there would be an exacerbation of business interruption (BI), contingent business interruption (CBI), and supply chain risk components.
According to Swiss Re’s report “Flood Hotspot: Focus China”, it was noted that more than half of the manufacturing centres in China are exposed to flood risk, with Shanghai and the Pearl River area being the most exposed.
In Taiwan, over 50% of earthquake risk is concentrated in the northwest region of the island (Greater Taipei, Taoyuan and Hsinchu), where it is home to some of the largest semiconductor manufacturing companies. And there are other high-value risk concentrations in southern Taiwan too, where the petrochemical, shipbuilding and heavy industries are concentrated; Taoyuan county, with the electronics, paints and car assembly plants; as well as Tainan, which focusses on hi-tech electronics, amongst others.
Comprehensive CAT modelling is crucial
“Rapid urbanisation in Asia, especially in ‘megacities’ around coastal areas, has resulted in major concentration in exposure to man-made and Nat CAT risks. Yet, existing catastrophe models are not robust enough to adequately account for potential losses,” said Mr Alain Flandrin, CEO Asia Pacific, Partner Re.
Dr Tobias Farny, CEO – Asia, responsible for Greater China, Southeast Asia and Korea, Munich Re said continued transparency is needed to avoid blind spots of exposure on top of huge Nat CAT exposures.
The industry needs to pursue a blend of internal and external solutions to ensure two key factors: the ability to identify, quantify and estimate the chances of an event occurring and the extent of losses likely; and the ability to set adequate risk premiums, said Mr Amer Ahmed, CEO, Allianz Re.
4. M&A deals flourishing in Asia
In the last few years, the insurance industry has risen to become one of the hottest sectors for M&A activity, with transactions amounting to a record US$30.5 billion in 2012, according to S&P Capital IQ data. And Asia – particularly China and ASEAN nations – is undoubtedly where the majority of players have their eye on.
Among target markets, Indonesia has particularly caught the eye of a number of foreign investors, such as Japanese insurers who have been looking for expansion and growth opportunities in emerging markets.
However, Mr Dennis Leung, MD, Transaction Advisory Services, Ernst & Young noted that the number of insurance M&A opportunities may drop as licences have been snapped up in most countries in the region.
Still watching the M&A space
Notwithstanding, industry experts expect a continuation of the themes that had driven M&A activity over the past couple of years such as RBC requirements forcing consolidation amongst mid-sized players, access to bancassurance distribution channels and a need for scale in the general insurance market amongst others.
“The M&A trend had started in earnest after the global financial crisis, but has remained a defining characteristic of Asia’s P&C market in 2013,” said Mr Clarence Wong of Swiss Re.
And while multinational insurers continue to seek acquisition opportunities in Asia to strengthen their foothold in the emerging markets, Mr Leung also noted that Asian investors will start to make more acquisitions to slowly expand their regional presence.
5. Talent crunch
The hunt for good talent in the insurance industry is a perennial topic that has featured on many insurers’ list of top concerns. CEOs of Asian insurance companies have recognised this talent gap in both quality and quantity is becoming critical and is causing a bottleneck for growth as the industry’s crème de la crème seek careers in other fields outside of insurance.
According to a talent study “Jumping the Curve” conducted by Mazars, most CEOs had rated talent quality in Asia as “slight unsatisfactory” in comparison with human capital in US, Western Europe or Japan. This was mainly because Asians tend to lack some of the critical leadership qualities needed to take top jobs in the professions, and as such, many tend to get stuck in the pipeline of succession at middle management or individual expert level.
In addition to the quality gap, the other challenge that insurers face is talent retention – the talent in the company does not stay. The study revealed industry leaders admit that quantity often trumped quality as retention gave way to the higher priority of growth. Mr Alan Wilson, Regional CEO, MSIG Holdings (Asia) said: “The demand is there but the problem is the supply. If we have a vacancy, the question is often not ‘who should we select’ but rather ‘who can we find?’”
Fly the insurance flag high
“The perception in Asia is that insurance is not particularly glamorous. Insurance in Asia is not seen as a profession, when in fact it can be a much more sustainable career than banking,” said Mr Kent Chaplin, Head of Asia Pacific, MD, Lloyd’s Asia.
Therefore, insurers should cooperate to grow the quantity and quality of talent for the industry as a whole – working with governments, universities and specialist training institutes – to improve the attractiveness of the industry, rather than ‘steal’ good people from their competitors.
The industry also needs to broaden the younger generation’s understanding – especially college-bound high school and business college students – about the contribution the industry makes to society and the economy, as well as the professionalism of its workers, said Professor Jean Kwon, St John’s University, New York.
|The top 3 issues on CEOs’ list
Customer-centric mindset, claims and IT
“Now more than ever, you need a customer-centric mindset as consumers are rightly demanding an efficient and holistic approach to meeting their insurance needs. The right approach to claims is also more critical than ever; we make sure our customers know that we are there to help when they need us most – we call it the ‘moment of truth’. The third is fully embracing technology to enhance customer convenience and producer support.”
Mr Jose Hernandez
President & CEO, AIG Asia Pacific
Insurance demand, unmodelled risks and to be a bridge between insurers and reinsurers
“I think our top three concerns would be to stimulate and understand insurance demand – particularly where CAT exposure is; help obtain a better understanding of unmodelled risks; and to assist in the mutual education and understanding of insurance companies with the reinsurance counterparts.”
Mr Dominic Christian
Executive Chairman, Aon Benfield International
Solutions for clients, regulation and Nat CATs
“Besides concept, we are now discussing concrete risk exposures and solutions that fit the specific needs of our Asian clients. Regulation in Asia puts more emphasis on the implementation of matters and solvency, and we see an increasing dynamic of new business opportunities. We also see an urgent need in Asia to better protect communities from natural catastrophes – there is a lot more to be done when it comes to protecting people’s lives and property.”
Dr Tobias Farny
CEO Asia, responsible for Greater China, Southeast Asia & Korea, Munich Re
Underwriting discipline, local resources and building sustainable relationships
“In an environment where competition for top-line growth prevails, it takes courage and tenacity to grow while maintaining underwriting discipline. Success in Asia requires solid understanding of the Asian culture, as well as legal, regulatory and financial environments – which is why we focus on developing talented local resources to bring us closer to underlying risks and deepening our local expertise. We are not focussed on market share, but rather on building sustainable and mutually beneficial relationships.”
Mr Alain Flandrin
CEO Asia Pacific, Partner Re
New capacity, Nat CATs and reinsurer credit risk
“The threat of new capacity from non-traditional sources was a major talking point in Asia in 2013. The impact of alternative capital to date has been minimal, but we must expect it will find a way to be put to use; the task is to ensure it’s used to enhance effectiveness of coverage for major events. The two largest CAT events in 2013 caused considerable economic loss but minimal (re)insured response relative to the event size, underlining the market failure and the need to bring the power of reinsurance to sustainable development in these under-represented regions. The issue of reinsurer credit risk has shown clients the need to look at factors other than price – the trend now reinforces the importance of the true need to know your counterparty.”
Mr Chris Kershaw
Managing Director, Peak Re
Talent crunch, customers and opportunities in emerging middle-class
“Competition for talent across Asia – insurers always find themselves in need of more highly-skilled individuals to handle compliance with regulatory and reporting requirements, advanced data analytics and predictive models being deployed. How to better reach our customers against the backdrop of booming economies in Asia with changing customer needs and behaviour. Thirdly, there is a definite emergence of the middle class across Asia, creating demand for personal and corporate insurance; this is an opportunity.”
Mr David Fried
CEO, QBE Asia Pacific
Clients, innovation and to build, rebuild and strengthen communities
“Understanding the need of our clients and helping societies to close the Nat CAT protection gap remains the top issue for Swiss Re. Innovation and knowledge transfer are equally important in order to manage the evolving P&C risk landscape of Asia Pacific. Alongside traditional solutions, we have been exploring innovative solutions to help our clients better manage their risk exposure. Third, our 150th anniversary offers us an opportunity to engage different stakeholders to build, rebuild and strengthen communities, and to enable progress, by coming together to find answers to some of the world’s biggest challenges.”
Mr Clarence Wong
Chief Economist, Asia, Swiss Re