The P&C market in Asia has had a mixed first half of the year. While things have been fairly benign on the natural catastrophe front, reinsurers continue to contend with overcapacity and the effect of recent regulatory changes, while slowing economic growth and pricing pressures pose challenges for many in the primary market.
“Many of the smaller markets are on the brink of market consolidation, while regulatory convergence is exerting some capital pressure and thus profit pressure,” said Mr Moungmo Lee, General Manager, Analytics, A.M. Best.
On the reinsurance front, protectionist tendencies in large-scale markets like China and Indonesia have meant that foreign reinsurers have had to adjust their strategies and operating platforms.
“The finalisation of the latest Insurance Law regulations in Indonesia during the fourth quarter of 2014 will mean that the level of cession possible to global reinsurance providers will fall. Currently, it is also unclear if fronting arrangements can offset some of this, particularly given the lack of local expertise,” said Mr Raj Juta, Insurance Sector Leader, Deloitte Southeast Asia.
“A similar issue also arises in China. In that case, the (reinsurance) credit risk charges levied on direct writers under C-ROSS regulations are also generating a negative signal for global reinsurers,” he added.
Overcapacity
At the same time, reinsurers have also had to cope with excess capacity in the market against the backdrop of fairly muted demand.
“Supply of capacity still outweighs demand, allowing buyers to drive both pricing and in some cases terms and conditions,” said Mr James Vickers, Chairman of Willis Re International.
And unlike other soft markets, not many buyers have translated savings in premiums into additional purchases.
“Soft” renewals
Furthermore, a benign CAT loss experience last year – the level of insured losses in 2014 were below the average for the previous 10 years – contributed to a downward pressure on rates.
“In general, reinsurance pricing remains soft in Asia, partly due to less costly catastrophes across the region in the recent year. Renewals continued to be characterised by lower rates, abundant capacity, increasing market competition, and customised services and product offerings with broadening of terms and conditions to improve insurers’ protections for around the same or lower costs,” said Ms Stella Ng, Assistant Vice-President – Analyst at Moody’s.
Mr Juta added: “Renewals have generally showed single or double-digit (<=25%) reductions in most lines. The exception is for loss-affected treaties where some increases have been pushed through.”
Any good news?
On a more positive note, Asia has not seen many capital market players coming in to further flood market capacity – a trend which has become more pronounced in North America and Europe.
Also, there are signs the Asia-Pacific market may be bottoming out with reinsurers prepared to withdraw capacity in certain jurisdictions.
“Asia may have potentially reached the bottom of risk pricing,” said Mr Jeremy Fox, Chief Operating Officer, Aon Benfield (Asia Pacific).
“In Australia and New Zealand, there was a slowing down of the softening of rates with reinsurers starting to push back by June. Also in June, China saw some capacity being withdrawn owing to pricing levels”.
He also added that risk losses in Korea, Thailand and Vietnam are starting to put upward pressure on pricing of risk excesses in Asia.
Direct market
Moving from supply side issues, the demand side has also been anaemic as headwinds in the global economy continue to pose considerable risk to Asia’s globally integrated economies.
“Previously, pressure was mainly from the oversupply of capacity in Asia. Additional pressure is stemming from the demand side in the form of a slowing economy and profit pressure from cedants,” said Mr Lee.
Ms Woo Shea Leen, Insurance Partner, PwC Singapore, added: “Competition is stiff and rates for especially some of the lines like motor and workmen compensation continue to be fairly low. Insurers are trying to differentiate themselves through better customer service and/or offer more attractive rates or schemes to their intermediaries.”
Pockets of hardening
Overall, softening was evident in all lines of business in all classes and territories, said Mr Vickers.
Ms Ng said there were some increases seen in aviation pricing due to some of the losses seen in 2014. And pricing also seems to have held up quite well in the speciality lines, said Ms Woo.
“Speciality lines would be one of the more attractive areas to be in as it still commands rather good returns.”
A.M. Best’s Moungmo Lee said the current softening could also be explained, given improvements in risk identification and management.
“With better risk identification, risk pricing, diversification, and portfolio management, softening in some lines may be somewhat justified. Also, in much the same way as technological developments (such as GPS) have helped drive a decrease in premiums in marine lines, improved levels of Enterprise Risk Management (ERM) may justify some of the softening taking place.”
Growth drivers
Despite the challenging conditions, there are some bright spots acting as potential growth drivers in certain markets.
In Japan for instance, there has been continued improvement in the industry’s underwriting performance so far this year.
“It is due to the ongoing repricing of auto insurance and price increases on the commercial sector’s exposure to earthquake risk. This has led to a stable growth in the industry’s premiums,” said Ms Ng.
She added that while China’s recent liberalisation of commercial motor premium rates in selected cities may trigger price competition, it would also allow the industry to better respond to changes in market conditions – in a business which has seen rising claims and operating expenses due to higher motor repair costs and commissions.
“It will promote product innovation and diversity, as well as improve risk pricing and underwriting transparency,” she said.
Swiss Re’s recent sigma report also pointed the likelihood of increased infrastructure spending, as new governments in India and Indonesia implement pro-growth structural reforms.
In Thailand, a more stable political environment should help in the recovery of non-life premium growth.