S&P Global Ratings (S&P) has identified several major trends and risks in the Asia-Pacific reinsurance sector in its report titled "Asia-Pacific Reinsurance Sector Update - Improvements Are Underway".
In the report, Wen Wen Chen, director, and Trupti Kulkarni, associate director, at S&P, list the key trends as follows:
- Rated regional reinsurers to see stable credit trends, given supportive earnings and capitalisation.
- Prospective reinsurance capacity to remain given Asia-Pacific’s still attractive growth story
- Easing premium rates and organic demands to chart the region’s topline growth momentum.
- However, headwinds are accumulating amid rising physical risks and a slower economic outlook.
- Still-costly retrocession cover could push up risk retention, potentially increasing margin volatility. Softer investment returns will require more underwriting discipline as monetary policy easing takes root across the region.
- Higher-than-expected insurance claims and capital market volatility to chip away at capital strength.
The report also comments on the following areas:
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More Disciplined Premium Growth
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- Modest premium growth reflects slower economic growth and moderating rate in certain lines.
- Increased effort in managing in-force book and re-evaluation of expansion plans.
- Greater private-public partnership (such as catastrophe and agriculture insurance) and growing liability-related coverages to provide opportunities.
- Escalating geopolitical tensions could change growth dynamics among countries in the region.
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International operations
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- Moderate growth in international book with a focus on pruning of loss-making accounts.
- Reinsurers are refining risk appetite and stress-testing in response to increasingly volatile economic conditions.
- Meanwhile, S&P expects changes in life reinsurance offerings following a cut-back in capital-consumptive products.
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Complexities Could Chip Away Underwriting Margin
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- Better underwriting profits follow the pruning of loss-making accounts.
- Profits remain thin due to a competitive primary insurance market.
- Economic uncertainties could intensify competition.
- Increasing complexities of more frequent natural catastrophes and urbanisation could dilute underwriting profits.
- Global reinsurers’ profitability reflects sustained underwriting discipline.
- Marginal underwriting profits still thin compared to global reinsurers.
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Shifting Interest Rates Lead To Revisiting Investment Allocation
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- Interest rate cuts (ex-Japan), capital market volatility, and costly forex hedging could demand a reassessment of asset mix. Allocation toward real estate, alternative assets, and equities heightens sensitivity to credit and market risks.
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Capitalisation Offers Some Cushion Against Catastrophes
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- Still costly retrocession could prompt Asia-Pacific reinsurers to retain more natural catastrophe exposures.
- Rise in exposure to natural catastrophes mainly attributed to organic growth; this could add more volatility to balance sheet.
- Increased frequency and severity of extreme weather could weigh on underwriting results and dent capital buffers.
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