Most reinsurers in Asia enjoy strong domestic market growth and considerable pricing power, but they need to adapt to maintain their dominance.
More complex pricing challenges, the hard-to-predict effects of urbanisation and climate change, and the need for risk diversification could all erode home-court advantages for Asian reinsurers, according to S&P Global Ratings.
The past three years have brought declining returns and market share for regional reinsurers, the ratings agency has found in a financial review of the sector.
Across the 18 reinsurers studied, the average combined ratio rose to more than 102% in 2018 from 97% in 2016, while net income fell by a quarter in 2018 alone. S&P also says that return on equity slumped from almost 6% in 2016 to less than 2% last year. But, to be fair, this average is hugely affected by a -23.9% RoE for Thai Re. Absent that number, average RoE was a more respectable 3.7% — though this is still far below the industry’s average cost of capital.
Part of this weak performance is cyclical, as a result of volatile investment markets, higher compliance costs as regulations internationalise and some major natural catastrophes. But S&P sees structural challenges as well, in the form of “mounting competition from all sides, technological disruption to business models, and the globalisation of regional players”.
For example, China Re’s acquisition of Chaucer in late 2018 and Samsung Fire & Marine’s plans to take a strategic stake in Canopius reflect a growing trend towards global diversification as a means to reduce the concentration of Asian reinsurers’ risk exposures.
Japanese players have been responsible for most of this activity to date, though India’s GIC Re has made an effort to broaden its footprint and claimed in September that it was interested in establishing a subsidiary in Russia, where it already has a branch office, and is exploring the possibility of an office in Brazil to cater to the South American market.
“Ideally, we would want a 50:50 share in our foreign and domestic underwriting,” general manager Devesh Srivastava told Indian media. “Today we are at 70:30, and we want to better it. We are also looking at offices abroad to balance our portfolio and give us balance.”
The Indian reinsurer has also had a seat at Lloyd’s in London through GIC Syndicate 1947 since last April, as well as branch offices in Dubai and Malaysia.
More of Asia’s domestically focused reinsurers need to follow this lead, though managing a globally diversified risk portfolio brings its own challenges.
At the same time, unmodelled risks from rapid urbanisation and the changing climate provide new opportunities, but may also serve to level the playing field with offshore reinsurers as historical data and understanding of the domestic risk landscape becomes less important.
Investments in technology will be needed to counter this offshore competition.
“Asia-Pacific reinsurers need to embrace stronger tech throughout their operations,” said S&P. “This ranges from reaching new customers through e-channels, offering new products to capture the evolving landscape or managing risks more effectively.”
Some examples include the use of drones and satellites to analyse crop coverage and determine valuations to provide appropriate protection levels to farmers, or advance weather-tracking mechanisms that can limit losses by farming clients to protect their herds.
“Such modernisations can help both insurers and reinsurers to grow new markets even as structural growth levels slow for some key economies in the Asia Pacific,” said the report.
However, cost-cutting is the focus of the day for many reinsurance companies and technology upgrades do not come cheap. Investments are not costs, of course, but they can be squeezed out in the search for short-term gains.
Another option is to partner with tech groups by bringing them on as shareholders, as China Re has done through its property-casualty arm China Continent.
Of course, many of the region’s national reinsurers are protected through regulations that will buy them time, but there is ultimately no escaping the need to offer a competitive proposition. As S&P says, they must evolve or dissolve.

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