The reinsurance market in China has been hardening, but leading terms remain competitive, according to analysts. COVID-19 has also had minimal impact on reinsurers; while insurance premium growth has slowed slightly, the demand for reinsurance has increased, especially in property. The introduction of international reinsurers into the market has also boded well for the growth of the industry and market, with many experts and industry leaders viewing the developments positively.
Apart from COVID-19-related industry loss, the recent years with severe catastrophe losses in different regions have significantly impacted the retrocession markets and ILS funds. As a result, a large amount of ILS collateral was trapped, which dented retro capacity, causing the retro price to be significantly higher last year. The retro cost directly affected reinsurers’ operations and so they are looking for higher margins from their underwriting to compensate the cost.
But for the China market this year, in what seems like a relatively clean and profitable year, property and engineering treaties will create difficulties for Chinese cedants to accommodate the rate increase. “The expectation gap between cedants and reinsurers will lead to more rounds of negotiation during the upcoming renewal. Thus, cedants are encouraged to get to market early, in case they must look for backup options,” said Aon-COFCO CEO Qin Lu.
Agriculture and motor lines were also hit by the severe floods in China. The loss performance of agriculture treaties, particularly proportional ones, will bring pressure for the coming renewals. The flood loss to the motor book offset, to some extent, the better-than-normal performance in the first half year due to COVID-19 lockdowns, he said.
Property insurance pricing will continue to see growth, with the largest increase observed in recent quarters and increasing demand for insurance driven by the domestic stimulus package, although that increase varied in all markets across the region.
“Large, complex and multinational programmes will witness a large impact on pricing, deductibles, and limits given limited capacity in the region. CAT-exposed business in the region will see rapid and robust increases and a continued reliance on international markets for support,” said Swiss Re managing director John Chen.
In addition, ratings agencies are expecting more sovereign rating downgrades in the coming months. China cedants may be more selective in terms of market security, which may further affect the supply of capacity.
Pandemic impact minimal
So far, reinsurance claims from COVID-19 in China are minimal, even though some insurers launched tailor-made products. For example, Aon’s China JV, Aon-COFCO, together with an insurer, developed a product for employee communicable diseases. However, the broker has not seen material losses on the reinsurance side, said Mr Qin.
“The business interruption (BI) coverage is not prevalent for Chinese corporates, particularly for SMEs, thus the (re)insurance loss in this area is very limited. However, COVID-19 did greatly arouse the market’s interest for BI coverage,” he said. “Market practitioners can learn from the international experience, such as Financial Conduct Authority’s test case for BI in UK, to promote and develop the coverage based on the needs of China corporates.”
As the size of COVID-19 related industry loss may not be completely known for years to come, reinsurance markets would still tend to be conservative in terms of coverage. “We expect to see persistent requests for certain clauses and exclusions from reinsurers,” he said.
Recovery for the insurance market and overall economy will also be swift. Mr Chen believes that emerging economies, led by China, will underpin the insurance market comeback from COVID-19, judging by the resilience already shown by the industry.
The pandemic has also changed consumer behaviour and preferences – a rapid shift towards digital solutions. “To develop and implement digital solutions that meet evolving customer needs is clearly an opportunity,” he said.
“While adjusting to the impact of COVID-19, we are focusing more on seizing the opportunities in China’s insurance market from three ‘new’ trends: New infrastructure, new economy and new consumption. The new dynamics generated by these trends will accelerate the digitalisation of the insurance industry and build a new insurance ecosystem. At the same time, they will also bring new ideas for the further development of innovative products and solutions for different sectors.”
Continuous regulatory developments
Regulations evolve rapidly in China, presenting opportunities and challenges to reinsurers.
The ‘Three-Year Action Plan to Promote High-quality Growth of the P&C Industry’ introduced by the China Banking and Insurance Regulatory Commission (CBIRC) in August called for accelerating development of the reinsurance market.
It advocated increasing reinsurance entities, encourages eligible primary insurers to set up dedicated reinsurance-writing functions and supports foreign reinsurers to increase onshore investment. In the last 12 months, Korean Re opened business and XL Re obtained a license. Multiple onshore reinsurers obtained regulatory approval to increase capital substantially. Offshore reinsurers also benefit from the regulatory evolution, as the reinsurance credit-risk factors applied in solvency calculation would be relaxed under C-ROSS Phase II.
All these would make the reinsurance market more dynamic and robust, said Mr Qin. “C-ROSS Phase II may also impact the demand for reinsurance due to the structural change of premium risk and reserve risk factors, the direction depending on specific insurer’s portfolio composition and scale.”
Impact of C-ROSS Phase II
Phase II also applies to a wider scope and is clearer in asset categorisation and more scientific in risk evaluation, said Mr Chen. “It is expected to enhance the sustainability of China’s insurance industry in the long term. C-ROSS also drives up the demand for reinsurance due to higher capital requirements on specialty lines and catastrophe exposures. Increased demand should further support the current trend of rate hardening. The opportunity exists within this new phase, as it also drives up the demand for reinsurance due to higher capital requirements on specialty lines and catastrophe exposures. Increased demand should further support the current trend of rate hardening.”
Implementing market-oriented and risk-based solvency requirements, C-ROSS will hopefully further enhance the foundation of the Chinese insurance market and encourage more foreign (re)insurers to contribute to the development of insurance industry, he said.
In August, CBIRC officially approved the establishment of state-owned reinsurance company China Agriculture Re. It will provide additional reinsurance capacity in the China market, which could shake up how cedants arrange their reinsurance in the coming renewal. Meanwhile, it will impact the international market capacity for China in 2021, after significant improvement in reinsurance terms and various natural weather events in 2020.
At the same time, the motor insurance reform continues, and the new phase is putting pressure on ticket size and profitability at the policy level – at least in short term. This could prove challenging for reinsurers writing whole account business, which is dominated by motor business. The potential deteriorating performance of whole account business might weigh on reinsurers who cross-subsidise other treaties of the same cedant. “Thus, the capacity to support these treaties might become inadequate, although it is still too early to gauge the full impact,” said Mr Qin. A
For communicable disease exclusion clauses, China cedants will negotiate continuously with reinsurers to refine the wordings and better fit their business needs.
Due to auto insurance reform, the top P&C insurers are expected to have more competitive advantages given their branding, operational efficiency and data analytics capabilities. The small-medium P&C insurers tend to focus more on the non-motor lines, particularly short-term health, agriculture and liability products, with the backdrop of COVID-19 and government’s push on compulsory liability insurance. This will create a great demand on reinsurance protection for these risks.