The reinsurance sector is at a crossroads. Whether you consider that crossroads to be a “flex point” or a “sandwich”, to quote our roundtable participants, one thing is clear – whatever direction the industry takes from
here it needs to start generating returns that justify (and significantly outweigh) the cost of capital.
On the one hand, there has been a long term trend of underpriced risks but, as Asia Capital Re’s Bobby Heerasing points out, the claims trend has also been towards increasing frequency and severity of major loss events and an uplift in attritional losses – alongside low interest rates that have eroded investment returns.
Part of the loss picture appears to be climate-change driven, particularly with regard to the greater incidence of wildfires and the impact of flooding in hitherto flood-free zones.
However, it’s not simply a question of risk modelling challenges. The reinsurance sector could probably do more to assess likely aggregations, and be prepared to walk away from certain risks.
There are other pressures to consider, however. Retro rates are up, so while reinsurers are able to push rates with cedants – who are likewise pushing pricing increases with insureds – the several successive quarters of increases needed to get both insurance and reinsurance pricing back to sustainable levels suggests that a rise in retro prices will continue the squeeze on reinsurance market returns.
The one bright spot for the Asia Pacific market in this wider (re)insurance picture is that its growth has outpaced that of equivalent markets in the US and Europe.
As Hyperion X’s David Flandro puts it: “AsiaPac was once considered a small, rather esoteric, diversifying risk. We are quickly getting to the point where Asia is the most important region in the world, not just for the global economy but also for insurance.”
But, as with mature markets, this maturing one has structural issues to address if its growth potential is to be realised in the most effective manner possible.
Talent is one challenge. Taking Singapore as an example, the market has done a good job of developing its domestic (re)insurance talent and is now expanding that pool to ancillary industries such as claims, legal and loss adjustment.
However, Singapore and the other Asia Pacific hubs still need to work out not only how to retain that talent, but how to develop a more entrepreneurial environment to match that found in key reinsurance centres such as London and Bermuda.
And then of course there’s data and technology; how to leverage the capture and analysis of one and the implementation of the other, to make sure the (re)insurance sector remains relevant and responsive to the needs of insureds.
Whether that entrepreneurial spirit and new technology comes from the outside via independent InsurTechs, or internally via in-house initiatives, it is clear that the (re)insurance industry needs to keep pace with the wider Asia Pacific technology boom if it is not to be disrupted out of existence.
Read on to learn more!
Click here to read the SIRC Roundtable 2019 supplement.