S&P Publishes Encouraging Report on Asia-Pacific Reinsurance Market

Standard & Poor’s Ratings Services has published a report on the Asia-Pacific nonlife reinsurance market, which indicates that it “is experiencing a period of profitability following a decade of weak results due to underpriced excess capacity.”

“Over the past two years, premium levels have grown across all Asian markets due to pricing discipline,” stated S&P credit analyst Ian Thompson. “Although some markets are softening slightly after two years of rate increases, the broad trend of a sustained, hardening market is expected to continue during the 2004 renewal season, providing much-needed respite for a region that has suffered significant setbacks over the past few years.”

S&P noted, “in some cases capacity has been rationed,” but said that nonetheless the region “remains attractive to global players, citing the area’s “geographical remoteness and relative lack of correlation with the rest of the world,” as giving companies an opportunity “to add diversity to global reinsurers’ risk portfolios.”

In contrast to international reinsurers, however, S&P said the outlook for domestic national reinsurers, remains challenging, “characterized by geographical risk concentrations and diminishing local market requirements.” It also noted that “relative to global players, domestic reinsurers have less capital, as well as less financial and technical resources.”

The report noted a hardening of rates in Australia and New Zealand. Thomson indicated that “higher underwriting standards, higher retentions by direct insurers, and an increased focus on providing efficient returns on equity look set to improve profitability in the absence of any major catastrophe.”

The same situation appears to be taking hold in Japan, where he noted that “increased premiums stemming from rate hikes in the global reinsurance market and low catastrophic loss incidence have improved profitability.” He indicated, however, that while “the market is expected to remain profitable over the short term. Nevertheless, the consolidation of some major domestic players in the direct nonlife market is expected to result in a slight decline in premiums due to greater retentions and price competition.”

S&P said “Singapore, Hong Kong, and Taiwan have all experienced double-digit reinsurance premium growth over the past two years, with most domestic reinsurers in these and several other Southeast Asian economies reporting a combined ratio–a key indicator of profitability–below the 100% break-even level. Thomson pointed to the 28.4 percent increase in reinsurance premium growth in Hong Kong, indicating that the growth was “largely due to rate increases in the underlying insurance market rather than new business.”

As far as Mainland China is concerned S&P said the “nonlife market remains very soft, and has not been significantly buoyed by the hardening of reinsurance rates. With foreign competition now licensed in the reinsurance market, there is a growing challenge for the state-owned reinsurer, China Reinsurance Corp., currently the sole operating professional reinsurer in the market. Nevertheless, through the sheer scale of the market, the growth potential remains favorable.”

The report concluded, “despite the generally positive growth environment, however, some challenges remain across the region. The Australian regulator now requires direct insurers to hold capital based on the level of risk they undertake, with insurers needing to hold more capital when ceding to lower rated reinsurers than if they ceded to higher rated carriers.”

“Insurers are expected to move toward higher rated reinsurers as they seek to reduce their capital requirements. However, with a limited number of highly rated domestic reinsurers, concentration risk becomes an issue, and it is likely that an increasing amount of reinsurance will be sought outside of the region,” Thompson stated.