2022 is shaping up to be another profitable year thanks to benign natural catastrophe activity in the region in the first half of the year for Asia Pacific domiciled reinsurers
The accumulation of natural catastrophe risks in Asia-Pacific reinsurers’ home markets remains a significant risk, but AM Best notes that reinsurers in the region have put in years of effort to diversify growth, and now are reaping the benefits from business profiles that are more balanced between domestic and overseas contributions, as well as life and non-life business
HONG KONG:
Major Asia-Pacific reinsurers sustained the ability to deliver stable operating and return on equity ratios in 2021, with average annual net premium growth of nearly 10 per cent in the most recent five-year period, according to a new AM Best report.
The new Best’s Market Segment Report, “Asia-Pacific’s Major Reinsurers Deliver Stable Performances Amid Growing Competition and Uncertainty,” is part of AM Best’s month-long look at the global reinsurance industry ahead of Rendez-Vous de Septembre in Monte Carlo.
Based the operating performance of a group of selected Asia-Pacific domiciled reinsurers that rank among the top 50 largest reinsurance groups globally, as calculated by AM Best, 2022 is shaping up to be another profitable year thanks to benign natural catastrophe activity in the region in the first half of the year.
Pricing momentum in most Asia-Pacific markets is also expected to firmly support premium rate increases for the 2023 renewal seasons, given the recent years of underperformance and retrocession capacity reduction in the global reinsurance market.
The Asia-Pacific composite’s five-year average return on equity (2017-2021) is 5.8%. While the loss ratio shows an increasing trend, it is offset by a decreasing expense ratio, resulting in a stable combined ratio that has hovered around the break-even point. According to the report, investment returns have remained stable as well.
“Most reinsurers in the composite have benefitted from strong economic growth in their home markets, from providing capacity to cedants for capital relief via proportional treaties with loss absorbing features, which has led to stable combined ratios,” said Christie Lee, senior director, AM Best.
However, many major regional reinsurers’ investment portfolios lack geographic diversification, and investment returns are highly correlated with the home market’s capital market volatility.
The accumulation of natural catastrophe risks in Asia-Pacific reinsurers’ home markets remains a significant risk, but AM Best notes that reinsurers in the region have put in years of effort to diversify growth, and now are reaping the benefits from business profiles that are more balanced between domestic and overseas contributions, as well as life and non-life business.
“Diversification enhances returns stability, cost of capital and pricing competitiveness,” said Lee.
AM Best is of the view that capacity in the insurance-linked securities (ILS) market can also support regional reinsurers in capturing rate hardening opportunities.
The governments of Singapore and Hong Kong are keen to leverage their positions as financial powerhouses to develop their respective alternative capital markets for the issuance of ILS.
From an investor perspective, catastrophe bonds that cover Asia-based risks present an attractive alternative for institutional investors looking to diversify their existing portfolios, as current ILS issuances are focused largely on U.S. and European risks.
However, investors will need to gain a better understanding of Asian risks and pricing, as well as the interpretation of catastrophe modelling results.