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Vast reinsurance business growth potential in Asia
Fitch believes there is significant room for the reinsurance market in Asia to grow given relatively low insurance penetration in Asian markets. Growth momentum is expected to be boosted by increasing risk awareness and continued demand for reinsurance protection by the direct insurance companies in the region, especially in the wake of multiple natural catastrophes that have occurred in recent years.
Asian economies constitute a significant component of the global economy (33.0% of global GDP), along with 59.2% of the world’s total population1 in 2012. However, the total insurance penetration rate in Asia was 5.73% in 2012, compared with 8.03% in the US and 11.27% in the UK.
In particular, three of the most populated emerging markets in Asia: China, India, and Indonesia, had relatively low penetration rates (from 1.77%-3.96%). These markets, with rising household income and rapid industrialisation, contain 68.6% of Asia’s population.
Reinsurance coverage in Asia remains small compared with global reinsurance coverage. Asia and Australia are estimated to contribute about 10%-15% of global reinsurance premiums, according to industry projections and the International Association of Insurance Supervisors.
New capacity added to Asian reinsurance market
Fitch envisages a trend of new Asia-based reinsurers being set up to tap the extensive reinsurance business potential in the region. The latest entrant is Peak Reinsurance (Peak Re), which was set up in January 2013 in Hong Kong. Peak Re was initially capitalised at US$ 550 million; it focuses on underwriting property and casualty reinsurance business across Asia, particularly the emerging Chinese market.
Catastrophes less intensive in 2012-2013 compared with 2011
The frequency and severity of natural catastrophes globally has increased. Asia has been one of the worst-hit regions, although there were fewer occurrences since 2011. Regional countries are exposed to catastrophes to different extents.
Australia, Japan, and China are markets with high catastrophic exposure, while Singapore and Malaysia are relatively catastrophe free. Thailand is no longer viewed by the industry as a completely catastrophe-free market, after prolonged floods in H211 – the worst in 70 years.
Natural catastrophes to have hit the region in 2012 and so far in 2013 include floods in China (May 2012), Sichuan earthquake in China (April 2012), floods in Jakarta, Indonesia (January 2013), Lushan earthquake in China (April 2013) and ex-tropical cyclone Oswald in Australia (January 2013).
The April 2013 earthquake in China caused 193 deaths and more than 12,000 injuries. Industry estimates put economic losses in excess of US$ 27 billion, but Fitch expects the insured losses to be manageable given the low insurance coverage in quake-affected areas.
About 895 claims were reported, according to the China Insurance Regulatory Commission, with the aggregate claim payment to reach about CNY 142 million (US$ 23 million) as at April 2013. Ex-tropical cyclone Oswald in Australia in January 2013 cost insurers AU$ 1.2 billion (US$ 1 billion). There are unlikely to be any more catastrophe events in Australia until December 2013, as the number of such events is historically low during May-November.
The floods in Jakarta in January 2013 affected 74 urban wards in 31 sub-districts across Jakarta’s five municipalities, inundating more than 100,000 houses, along with some of the capital’s main roads. Industry estimates put economic losses at IDR 32 trillion (US$ 3.3 billion), while insured losses are likely to top IDR 3 trillion.
Fitch attributes the significant difference between insured and economic losses to the large proportion of the affected areas not being covered by insurance because flood risks are not automatically included in many motor and property insurance policies in Indonesia.
Expectation of premium rate flattening in latest renewals
Fitch believes that the rising occurrence of natural catastrophes will heighten the awareness of the importance of (re)insurance protection and risk management. This will prompt direct insurers to adopt appropriate risk transfer and capital preservation strategies, and reinsurers to press for higher premium rates that better reflect their claims experience. This will propel the growth of direct insurance and reinsurance businesses, supported by the increasing affluence and generally stable economic conditions in Asian markets.
The agency expects premium pricing rates in the region to remain largely flat or soften slightly in 2013 given less frequent and less severe natural catastrophes. For instance, in Japan, the premium rates of the earthquake and wind/flood policies during renewals in April 2013 were generally flat, reflecting the relatively benign catastrophe environment in 2012 compared with 2011.
In Australia, main property catastrophe policies were renewed in early July 2013. The full impact of the premium price negotiations remains unknown, but Fitch expects mostly flat to modestly lower rates for catastrophe-free areas in the country, and flat to slightly higher rates for catastrophe-affected areas.
Impact update 2011: Thai floods reinsurance coverage
The large scale and severity of prolonged floods in Thailand in 2H11 means it has taken time for the industry to accurately compile loss statistics arising from the event. The flood, which affected 64 of Thailand’s 77 provinces, was estimated by the World Bank to incur economic losses of about THB 1.4 trillion (US$ 45 billion) – THB 640 billion in physical damages and THB 717 billion in lost business opportunities.
The disaster resulted in a GDP contraction of 9% in Q411. The industry expects flood claims to tail off in 2013 as most of the reported claims were paid in 2012. Total claims (excluding business interruption (BI)) for the 2011 floods reached THB 424 billion − of which 79% was paid at 31 December 2012 – according to estimates by the Office of Insurance Commission. Claims arising from BI − currently about THB 35 billion − are still not finalised due to the complexity of claim assessments.
The financial impact on non-life insurers in Thailand was generally limited compared with foreign reinsurers, with the exception of Thai Reinsurance Pcl (TR). Flood risks are typically included in the fire and industry all-risk policies (IAR), of which direct insurers transfer a high proportion of the risk to reinsurers. Foreign reinsurers have a large market share in Thailand, accounting for 75% of non-life reinsurance premiums ceded in 2012. TR incurred net losses of THB 1.7 billion in 2011 and THB 4.3 billion in 2012. The company raised funds of about THB 7 billion through private share and rights offerings in 2012. Its financial performance turned around with an estimated net profit of THB 263 million in Q113.
Tightening of underwriting terms and conditions
Many reinsurers in the region have started to tighten their underwriting conditions to exclude free catastrophe coverage and impose event limits on selected property policies in response to the unexpectedly massive losses arising from the Thai floods. For instance, in Thailand flood insurance coverage, which was previously included in fire and IAR insurance, is now sold separately with sub-limit coverage. Some reinsurers have also trimmed their business volumes in catastrophe-prone Asian markets after conducting portfolio reviews.
Fitch believes it is important for insurers to enhance their risk management practices and increase their catastrophe-modelling sophistication to better prepare for future disasters. Many industry players in markets such as Thailand and Indonesia have also started to look into developing a more comprehensive flood-risk statistical model for better risk assessment during the underwriting process.
Positive evolution of regulatory landscape
The regulatory landscape has undergone considerable changes in recent years, particularly in the wake of higher catastrophe occurrences. Regulators in the region continue to enhance regulations to monitor the adequacy of capital resources in an effort to contain unforeseen volatilities. This means direct insurers will continue to employ reinsurance as a means to transfer their underwriting risk and reduce the strain on the capital requirements.
Fitch is positive on the various regulatory initiatives that have been implemented to boost the overall financial health and transparency of (re)insurance markets. These regulations are likely to propel the demand for technical expertise, risk transfer, and reinsurance capacity by direct insurers to meet the higher regulatory requirements.
For instance, an increasing number of jurisdictions, including Thailand and South Korea, have moved away from a one-size-fits-all solvency margin regime to a risk-based capital (RBC) regulatory framework. India is considering a RBC regime, while in Indonesia reinsurers will be required to meet the minimum regulatory capital requirement of IDR 200 billion by end-2014, from IDR 150 billion in 2012 and IDR 100 billion in 2010.
From 1 January 2013, the Australian Prudential Regulation Authority’s RBC regime requires each insurer to set aside a certain amount of capital to adequately cover its net retention based on a single large 1-in-200-year catastrophic event, or accumulated from a series of smaller loss events. This additional capital component introduced by the regulator highlights the critical need for insurers to set sufficient capital resources to mitigate the financial impact of unexpected catastrophes.
In Thailand, the government set up the National Catastrophe Insurance Fund (NCIF) in 2012 to improve the industry’s financial buffer to better cope with future catastrophes. The fund acts as a reinsurer, offering coverage for damages caused by three natural disasters: floods, earthquakes, and damaging winds, for households, SMEs, and industry sectors. The objective is to provide sufficient reinsurance capacity at the lowest possible premium rate, and provide easy access to catastrophe insurance to households and businesses. NCIF had a sum insured of THB 55 billion as of 7 May 2013.
