Page 61 - Digital Edition SIRC Supplement
P. 61
RISK MANAGEMENT FOCUS
Local Markets expertise across Asia. Some of this is legacy due to widespread
With the advent of risk-based capital legislation/proposals, a tariff usage, particularly for motor. As countries seek to
number of regulators took steps to restrict overseas reinsurers’ deregulate in the coming few years (e.g. Malaysia and
access to the local markets. Countries affected include India, Thailand), it is likely that ensuing volatility in the direct market
Indonesia (during 2014); China (from 2016). Measures to will be passed on to (and absorbed by) reinsurers supporting
develop a vibrant national (re)insurance market were already the affected lines. However, a lack of expertise creates
in place for Korea and Malaysia. The approach used to limit opportunities to provide direct support to cedents thereby
access has either been direct – for example, insisting that local fostering stronger links.
companies cede to local reinsurers; or indirect, for example by Overcapacity
applying heavy capital charges on local insurers if they opt to Overcapacity has been observed in a number of areas and
cede to overseas players with the aim of bringing capital and presents a double-edged sword. Since the start of 2015, a
talent into local markets. number of Chinese companies have established or announced
Enterprise Risk Management – Achieving a best of plans to establish reinsurance operations, including People’s
breed Insurance Company of China, Qianhai Reinsurance Company
Enterprise Risk Management (ERM) has become increasingly and Asia-Pacific Reinsurance. This will intensify competition
important, but what does it mean for reinsurers? An important for Chinese businesses and put further downward pressure
consideration for reinsurance companies is to have an ERM on rates, which have shown 10-15% declines during 2015
that provides a holistic approach that effectively manages renewals. This intensification comes at the same time as
all possible risks. These risks can be broadly categorised as increased protectionism (noted above) and against a backdrop
affecting either the liability side and/or the asset side of the of increasing competition in the broker space, with Tigerrisk
balance sheet. Partners and others driving hard deals.
A good ERM approach involves establishing processes and One potential silver lining for established players is that
controls to set strategy and monitor the position simultaneously strong demand paves the way for the development of alternative
from a “bottom-up” (e.g. risk acceptance processes) and “top- capital structures. These structures can reduce pressure on
down” (exposure and accumulation management) perspective. established players by removing direct competition and the
In addition, the processes developed generally work best if potential volatility from inexperienced entrants.
incorporated into a regular or iterative monitoring cycle with Lack of talent
feedback mechanisms to correct imbalances that develop over The general observation is that successful reinsurance
time. companies tend to have deeply-experienced individuals at the
helm. The increase in the number of reinsurance companies
Our Deloitte team has supported a number of reinsurance being established has generated a strong demand for talent.
clients across the region and has helped develop systems so Over the medium-term, companies may look overseas for
our clients can manage the unique risks they face as reinsurers. talent. In the long term, training needs to move up the agenda
The following chart indicates a number of key risk categories in order for talent to be equipped with good local knowledge
(left side) and some of the different elements of the monitoring of the industry.
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: Asia. This is partly due to limited or poor resolution data from
cedents (barring developed markets like Japan) but also because
Source: Lloyd’s
some of the CAT modelling companies have coverage
gaps by region (e.g. Middle East) or by peril (Flood).
Key challenges in Asia Flood damage is a significant cause of concern for
Establishing clear ERM processes is a good step to managing much of Southeast Asia and it is good to see that
the risks faced by the firm and it should be taken into some of these gaps are being filled by the reinsurance
consideration with issues that affect Asia in particular – such broking companies.
as the fast-changing environment, which can lead to a historic Cycle management
view of risk that is not necessarily representative of today’s The insurance and reinsurance cycle are intrinsically
risk. Here are five relevant issues that impact Asia: linked. For US and European businesses, the typical
Lack of technical pricing cycle length is 7-8 years. In Asia, estimates put
Cedents exhibit a slightly lower level of technical pricing 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.
Back to Contents SIRC Supplement • November 2015 • www.asiainsurancereview.com 59