Q: Can Asia lead the way in reinsurance in the near future?
> Asia’s growing presence in the global economy and the reinsurance space begs the question whether the region can soon lead the reinsurance world, overtaking the dominance of traditional hubs like London. And can Asian reinsurers themselves take on a more prominent role globally?
Thomas: I think there has been a real migration of business that used to go to London but is now going to Singapore, and business that would have left Singapore in the past is now being retained here. So I think that Singapore’s standing as a globally-recognised reinsurance hub and platform is increasing fast and its importance is certainly growing.
Shankar: From a Lloyd’s perspective, the Singapore market has high quality underwriting expertise across many classes of business and our large capacity as a result of the subscription mechanism means we are able to take on risk globally and offer a competitive solution in the global reinsurance market.
Sharon: When we deal with the question, we have to separate technical expertise and capital. And you can’t look at capacity for the Asian market in isolation from the global market because of the diversification of reinsurance – it’s a global marketplace and the fungibility of capacity works in reinsurance.
Malcolm: Firstly we need to distinguish between leadership in technical expertise and scale of available capital. We then need to consider the time frame when addressing this question. At some point of time, it is inevitable that China by its sheer scale will be a dominant player in the reinsurance market – just by sheer capacity offered, volume of business and available capital.
Marc: Asia has already grown increasingly important reinsurance hubs such as Singapore and Hong Kong. Substantial capacity is being offered in addition to Bermuda, London and the traditional locations based in Continental Europe. Whilst we probably can’t call Asia a leader in reinsurance yet, it’s only a matter of time given the huge demand from this region going forward.
Malcolm: People today are more mobile so the ability to attract expertise has been made easier and also in Asia, education happens quite quickly. Yes there will be a lack of experience and that can only be addressed with time.
John: Given another 25 to 30 years, I think Asia will realise its global ambitions. As we globalise, business operations will be conducted from the most efficient cities. If Singapore continues on the same path of economic development, generally and for the financial services industry, it can become the main reinsurance centre for the world.
Linus: But I must say the state of the Asian market is still quite different compared to the West in terms of transparency. We’re getting there in terms of data quality, but with the Tianjin incident for instance, we can see that we’re still quite far away in terms of transparency.
James: I think there’s a big difference between Asia being sustainable through international companies leveraging their global capital - whether intellectual or financial – and companies domiciled in Asia with predominantly Asian capital taking a place on the global market. I think that’s a more interesting question.
If you look back at history, reinsurers with a big domestic market took some period of time to diversify and this often included M&As. When you compare that to the aspirations of some of the Asian-based reinsurers, a number have very big domestic markets too but they also have the ability to globalise very quickly.
Sharon: It’s interesting because they have not yet fully utilised their domestic market and what’s needed there. But understanding that in reinsurance now you have a need to diversify growth, then you will need to have some global ambition. So they’d have a timeline set – it’s just whether that timeline is too ambitious or not ambitious enough.
James: So it’s about organic versus inorganic growth and again looking at the example of how some of the major reinsurers evolved, there were periods of M&A activity – one example being Munich Re’s acquisition of American Re. And it’s not beyond our imagination that some of the Asian based reinsurers choose to go out and buy big.
Q: Can reinsurance in its current form continue to exist?
> On the theme of looking ahead, Mr Malcolm Steingold, CEO Aon Benfield, Asia Pacific, asked a provocative yet valid question as to whether the reinsurance business as we know it today could be irrelevant in the future.
With the big groups no longer operating as a pure reinsurance entity, plus the fact that reinsurers have to some extent been cannibalising from the same pie in recent years, will the industry cease to exist in time to come?
Till : Despite all challenges you would invent reinsurance as a business model if it weren’t already there. More than ever it is today about diversification and servicing capabilities. Against this backdrop, the current wave of M&A of smaller players is not surprising.
John: I support your point that the form may change but I don’t think the activity will disappear because everybody will still have to transfer or diversify risk when it is too concentrated.
Thomas: Some buy reinsurance because they want technical expertise while others don’t like the volatility in their earnings so they’re laying off their tail risk. There’s basically enough motivation to buy reinsurance but there is no doubt that reinsurance is undergoing some changes because of the influx of capital in particular.
It’s not that we’re in a prolonged soft market, this is going to be the market.
Linus: I think reinsurance will stay but there’s a trend towards companies going into the direct space, you want to go to the source to have a bit more stability. I think cycles are going to be different so if you think of that as a permanent feature, as a major reinsurance player, you may have to look at whether there will arise a situation where reinsurance will only be 10% of what you do in the extreme.
Sharon: A protection gap still exists and if you fill that gap then the capacity currently available won’t be enough, and so that will need to grow as well. So we have to see what needs to be done to close that protection gap because if you are fighting over the same piece of the pie, then yes everyone is going to have an existential crisis.
Malcolm: I wonder if reinsurers have lost their way a little in terms of being innovators in this space. We keep on talking about the stuff around the existing pie but the opportunity for reinsurers really lies in all the uninsured risk at the moment – the biggest one being cyber.
Q: Have reinsurers been innovative enough to close that protection gap?
> In trying to close the protection gap, participants discussed the challenges of innovating in a tough business environment, the ability to serve social needs while being commercially viable, and how best to sell the concept of insurance within communities.
Marc: Asia is very innovative and hence demands tailor-made transactions. Many of these require substantial investments in terms of manpower, expertise and money. All of us are expected to deliver smart and timely solutions in order to justify our individual positions. Cyber is, for instance, an area requiring prominent innovative attention.
On the other hand, we’re still experiencing hugely underinsured markets offering vast opportunities in a more traditional sense. As many of our buyers are also fairly price conscious, we need to establish a sound balance between innovation and competitiveness.
Till: In many instances, the awareness of why insurance can be so valuable is just not there. There are two ways demand is usually triggered: one, there is a major loss in the market and so you feel insecure, second, the government can step in and for instance, set up pools. The industry should look at both aspects and come up with innovative solutions.
John: The net worth of the middle income is not there yet and because it is still emerging, the government still needs to play a big social role. But when the government plays a social role, the individual will say: “Look, this is the government’s problem, not mine.” And if I am expecting the government to pay every time I have a loss, why would I need insurance?
Sharon:But in India, it has worked with agriculture for example, you’ve seen that coverage is possible and that possibility cannot be ignored. We are in an industry ripe for disruption, so if we’re talking about tackling the protection gap in the context of how we normally do business then that’s a worry.
Kenrick: We found in our latest report that cyber risk is at the top of many corporates’ concerns, but there’s a lack of demand for cyber liability insurance by the public. In Indonesia for example, there’s demand for agriculture insurance for palm trees but there’s little supply from the insurers. So it’s this mismatch between supply and demand, and how we can, for example, bring the government in together to bring balance between the two.
John: If you look at the Singapore government’s success on health and medical issues, where every person can be insured even with their existing illnesses even without having to go for a check-up, that tells you that governments very often have greater latitude to do certain things than commercial institutions can ever have.
So we have to take note of this fact, and that it may be beyond insurers’ scope to undertake something which is not commercially viable.
Philippe: At times it is not just the issue of affordability but there’s also a lack of trust as well that people have for insurance. Many people still have the impression that they won’t get their money back when they buy insurance.
Marc: Reinsurers deliver strong support to several hundreds of insurers in Asia. Prominent regional loss events such as the Thai floods, the Tohoku earthquake, SK Hynix or very recently the Tianjin explosions are only a few examples of significant financial aid from our industry.
Whilst we’re all clear about our contractual obligations in this context, it is my belief that we could do more to elevate the positive reputation we deserve for supporting the Asian economies as a whole.
James: The opportunity that we have in Asia, at least in the more developing markets, is that we don’t have to follow the norms of the other mature markets like the US or Europe.
Q: Is alternative capital a friend or foe, and will it catch on in Asia?
> With alternative capital being well entrenched in the global reinsurance space, how will reinsurers compete in the long run and what adjustments are needed?
James: On the point of protection gap and how capital can support risk, the ILS market shows there’s a willingness for capital to support risk when it is properly priced and structured.
Sharon: What’s interesting about all this is the optionality; in Asia, we’ve seen Central Re placing bonds and the large Japanese players have done the same. They’re actually testing the market looking for options, you’ll see that being norm and something discussed as separate from the industry.
Kenrick: It all boils down to market efficiency and cost efficiency. Traditional reinsurers generally require a return on equity over 10%, while investors in some CAT bonds are willing to accept low single-digit return. So in order to keep ourselves relevant, reinsurers need to adopt a very efficient capital structure.
Malcolm: The interesting point is how some of the reinsurers compete with hedge funds, pension funds and private equity when this alternative capital is happy to distribute its capital at a lower cost.
Till: Reinsurers can partake in the opportunity, but the other question is whether you can rely on that capacity for the long-term. For us to be a sustainable partner for our clients, we have to make sure that we are not dependent on purely opportunistic capital.
Q: What do you make of the flurry of M&As in the industry?
> At what point can a company claim to have enough scale in today’s market, and will the M&A fever continue?
James: Making a 15% return over the current cycle is extremely difficult and I think as an industry, we’ve struggled to adapt to the environment we’re living in – less leverage and low interest rates.
Mac: The ongoing M&A activities are just another crossroad our industry has to manage. Some seem to believe that size matters, others feel that diversification does the trick.
There is absolutely no question that the current environment requests every industry player to stay alert to potential strategic partnerships. And yet we need to stay mindful of our own strength and whether a new partner is able to add real value.
Thomas: The consolidation we’re seeing within the industry is being driven by a number of factors and the motives for each have been slightly different depending on the strategic imperatives of the companies involved. Some in the market have expressed the view that much of this is to do with the desire to be bigger but I would question whether size is the key differentiator to being successful and relevant. While size may matter to some companies, relevance to me is about demonstrating thought leadership and innovation, showing your clients that you really understand their business and can develop reinsurance solutions that add real value for them. If you can do that really well, that is the key differentiator.
Whether you like it or not, some people are going to be squeezed out in the current environment but it is almost impossible to predict with any certainty how the current spate of M&A activity will play out in the future.
Q: What regulatory improvements would you like to see happen?
> Issues raised revolved around protectionist tendencies, and lobbying for best practices while also dealing with the political realities of the day.
Malcolm: There is a need to distinguish between sound regulatory changes aimed at putting charges on capital which prevents premiums leaving the country, as opposed to circumstances where there is a deliberate attempt by governments to retain premiums onshore for reasons other than improving counterparty risk. And that distinction is important.
If it is done purely for the sake of only retaining premiums onshore then I am afraid that is pretty naïve particularly if this is not accompanied by an assessment of whether the country has the capacity to retain these risks.
Till: One of the less protective market in Asia is Thailand, and that is because they have had severe loss experience. They know what reinsurance is about, the thing is how do you transfer this experience to other territories.
John: I agree with Malcolm and the distinction being made, that if you’re just focusing on retaining premium then I don’t think it’s the right thing to do because you also have exposure. But in my conversations with regulators, I realise too that it’s sometimes hard for them to draw the line – most regulators at the end of the day just want to have certainty that the money is there and, if there is a problem, they don’t have to go outside the country to retrieve the money.
Rene: But historically how often have large global reinsurers not paid claims?
John: History was never a problem, but people always have a problem with the fact that there is always the possibility of a first time. Nobody expected Lehman Brothers to collapse, so they ask you what if there is a first time and who is going to bear the consequences?
Sharon: Working with regulators is also important and you see good examples in Singapore with the MAS and they do consult the industry and have white papers, compared to elsewhere in Asia where regulations suddenly appear overnight and completely change the face of the industry.
And those two differences come from the fact that in one, you have very good relationship with the regulator and there are lots of transfer of knowledge and understanding, and on the other, there isn’t very much discussions around it. So there’s that ability to work with the regulator to ensure you get progressive policies.
Thomas: A strong relationship and dialogue with regulators is so important and by investing in that, it will inevitably pay dividends in the longer-term. As part of that, the role of organisations such as the Singapore Reinsurance Association (SRA) is vital for the industry to be successful and move forward. We are trying to be more vocal as a community to correspond with regulators on regulatory best practices among other things. It’s clearly an on-going process but such an important one for everyone concerned.
Philippe: We see a flurry of regulatory activity in the region; I would like to see regulators benchmark themselves on who has got the best risk-based capital framework because comprehensive, well thought-out risk-based frameworks foster discipline, leave room for innovation, and help us close this protection gap under sustainable risk-adjusted frameworks.
Till: If the objective of national regulators is to keep premiums inside the market, I think the best way to do so is to build up more capital with RBC. If you have a masterplan in place to increase the capital base of the local industry, then it’d be the most effective tool to retain premiums within the market.