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RISK MANAGEMENT FOCUS
Local Markets
With the advent of risk-based capital legislation/proposals, a
number of regulators took steps to restrict overseas reinsurers’
access to the local markets. Countries affected include India,
Indonesia (during 2014); China (from 2016). Measures to
develop a vibrant national (re)insurance market were already
in place for Korea and Malaysia. The approach used to limit
access has either been direct – for example, insisting that local
companies cede to local reinsurers; or indirect, for example by
applying heavy capital charges on local insurers if they opt to
cede to overseas players with the aim of bringing capital and
talent into local markets.
Enterprise Risk Management – Achieving a best of
breed
Enterprise Risk Management (ERM) has become increasingly
important, but what does it mean for reinsurers? An important
consideration for reinsurance companies is to have an ERM
that provides a holistic approach that effectively manages
all possible risks. These risks can be broadly categorised as
affecting either the liability side and/or the asset side of the
balance sheet.
A good ERM approach involves establishing processes and
controls to set strategy and monitor the position simultaneously
from a “bottom-up” (e.g. risk acceptance processes) and “top-
down” (exposure and accumulation management) perspective.
In addition, the processes developed generally work best if
incorporated into a regular or iterative monitoring cycle with
feedback mechanisms to correct imbalances that develop over
time.
Our Deloitte team has supported a number of reinsurance
clients across the region and has helped develop systems so
our clients can manage the unique risks they face as reinsurers.
The following chart indicates a number of key risk categories
(left side) and some of the different elements of the monitoring
systems (right side) that we typically expect to see in respect of Catastrophe modelling
a select risk type (in this case, underwriting risk). Both bottom- The use of catastrophe (CAT) modelling is not utilised often in
up and top-down perspectives are provided for illustration:
Source: Lloyd’s
Key challenges in Asia
Establishing clear ERM processes is a good step to managing
the risks faced by the firm and it should be taken into
consideration with issues that affect Asia in particular – such
as the fast-changing environment, which can lead to a historic
view of risk that is not necessarily representative of today’s
risk. Here are five relevant issues that impact Asia:
Lack of technical pricing
Cedents exhibit a slightly lower level of technical pricing
Back to Contents SIRC Supplement • November 2015 • www.asiainsurancereview.com 59
expertise across Asia. Some of this is legacy due to widespread
tariff usage, particularly for motor. As countries seek to
deregulate in the coming few years (e.g. Malaysia and
Thailand), it is likely that ensuing volatility in the direct market
will be passed on to (and absorbed by) reinsurers supporting
the affected lines. However, a lack of expertise creates
opportunities to provide direct support to cedents thereby
fostering stronger links.
Overcapacity
Overcapacity has been observed in a number of areas and
presents a double-edged sword. Since the start of 2015, a
number of Chinese companies have established or announced
plans to establish reinsurance operations, including People’s
Insurance Company of China, Qianhai Reinsurance Company
and Asia-Pacific Reinsurance. This will intensify competition
for Chinese businesses and put further downward pressure
on rates, which have shown 10-15% declines during 2015
renewals. This intensification comes at the same time as
increased protectionism (noted above) and against a backdrop
of increasing competition in the broker space, with Tigerrisk
Partners and others driving hard deals.
One potential silver lining for established players is that
strong demand paves the way for the development of alternative
capital structures. These structures can reduce pressure on
established players by removing direct competition and the
potential volatility from inexperienced entrants.
Lack of talent
The general observation is that successful reinsurance
companies tend to have deeply-experienced individuals at the
helm. The increase in the number of reinsurance companies
being established has generated a strong demand for talent.
Over the medium-term, companies may look overseas for
talent. In the long term, training needs to move up the agenda
in order for talent to be equipped with good local knowledge
of the industry.
Asia. This is partly due to limited or poor resolution data from
cedents (barring developed markets like Japan) but also because
some of the CAT modelling companies have coverage
gaps by region (e.g. Middle East) or by peril (Flood).
Flood damage is a significant cause of concern for
much of Southeast Asia and it is good to see that
some of these gaps are being filled by the reinsurance
broking companies.
Cycle management
The insurance and reinsurance cycle are intrinsically
linked. For US and European businesses, the typical
cycle length is 7-8 years. In Asia, estimates put
periodicity closer to 10-15 years. While Tianjin
may cause some hardening in China, we generally
expect the cycle to persist and therefore anticipate
that firms will seek to cleanse their book.
Staying in the competition
Asia has weathered a number of large CAT events
in recent years, but the reinsurance industry has performed
admirably. Looking ahead, the role of risk management has
come under the spotlight particularly given the widespread
regulatory thrust for risk-based capital regimes. Firms that
wish to succeed in this more competitive and regulated
environment should start building their strategies and
frameworks now.
Mr Raj Juta is Partner – Insurance Sector Lead at Deloitte Southeast
Asia. Mr David Menezes is Director – P&C Actuarial at Deloitte Hong
Kong. The views expressed are the authors’ own.