Reinsurance companies in South and Southeast Asia (S/SEA) posted an improved combined ratio in 2021, although underwriting performance remains pressured with a continued reliance on investments to achieve bottom-line profitability, AM Best notes.
The new Best’s Market Segment Report, “Meeting Cost of Capital Elusive for South and Southeast Asian Reinsurers Despite Improved Underwriting Performance”, says that S/SEA reinsurers recorded an overall combined ratio of 108% in 2021, a five-percentage-point improvement from the high in 2019.
Despite the improvement in technical performance, AM Best notes that the overall return on equity declined to 3.4% in 2021 due to low investment yields amid a prolonged low interest-rate environment in most S/SEA markets.
“Although investment returns are expected to increase over the near term alongside a recovery in interest rates, rising inflation in the region is likely to pose challenges in meeting the cost of capital prospectively,” said Kanika Thukral, senior financial analyst, AM Best.
The global credit rating agency still expects the segment to see stable growth, supported by the expansion of primary insurance markets with economic recovery and increased insurance penetration.
Along with local and regional reinsurers, international reinsurance players have supported the development of S/SEA reinsurance markets as they consider the region to be instrumental to their growth and portfolio diversification strategies. In particular, international reinsurers remain crucial in supporting large property, engineering, and marine risks.
The report notes that reinsurers in the region approached 2022 renewals with a focus on achieving technical profitability, due to the expectations of a challenging investment landscape and an inflationary environment. A retrocession price hardening trend continued for loss-hit accounts; however, S/SEA reinsurers have not significantly amended their retrocession strategies and continue to rely on traditional forms of retrocession, despite increasing costs. Instead, market players have sought to focus on prudent exposure management while maintaining or moderately increasing retention levels in view of these retrocession conditions.
“Even with rate improvements in the past two renewal seasons, the pricing increases may not be enough to see significant improvement in technical profitability given expected increases in loss costs should higher inflation persist,” said Michael Dunckley, director, analytics, at AM Best. “Reinsurers will need a prudent investment and retrocession strategy, along with continued underwriting discipline.”