'
ProgramBusiness
 
  


  1. News Articles
  2. Related News Articles
  3. Comments
News Article Details

Reinsurers Looking Closely at Capital Requirements As April 1 Renewals Approach

Source: A.M. Best


Posted on 28 Mar 2012

Facebook LinkedIn Twitter Google

Reinsurers are looking closely at capital requirements and their relationship with natural catastrophe exposures as they approach April 1 renewals in Asia, given 2011's record high losses and weak global investment markets.

Reinsurers will resort to two options in strengthening their capital position. First, a few companies will raise capital or issue subordinated debt. Second, some may reduce business capacity or risk exposure. MM Lee, general manager of analytics at A.M. Best Asia-Pacific Ltd., said many companies will prefer the first option by restoring capital as they expect some form of hardening in the market.

"There is no doubt that the April renewal will be a challenging one for the market and that significant rate increases will be called for by the reinsurers," said Robert DeRose, vice president at A.M. Best Co. "It's possible that capacity may be held back if the pricing is not deemed sufficient to provide a return for the perceived element of risk and capital deployed," he added.

Catastrophe coverage will be the focus of discussions for April renewals, Lee said. Due to the impact of catastrophe losses, some Asia-based reinsurers "will have to watch their top line" as solvency is mainly based on premium, and this will add pressure to the high-volume, low-risk business as well.

"The Asian market, while relatively small in comparison to the United States and Europe, is an important source of business to global reinsurers due to its potential for risk diversification and also its future growth potential," said DeRose. The region overall has been profitable over the longer term despite significant losses during the past year.

"There is need for improvement in risk modeling and transparency of data in the region and given the events of the last year, it is more likely now that further advances will be made in this effort," said DeRose.

The spate of 2011 catastrophes "has changed underwriters' views towards non-correlating exposures and distinctions between peak and nonpeak zones," said Malcolm Steingold, chief executive officer of reinsurance broker Aon Benfield. "As a consequence, most underwriters have changed their expectations on the returns required for capital exposed to catastrophes in the region," putting upward pricing pressure on catastrophe coverage in the region.

"This pressure will be balanced by the fact that there is, with some limited expectations, more than adequate capacity for catastrophe reinsurance in the region," Steingold said.

Asia's April reinsurance renewals are centered mainly on Japan, South Korea and India. Some of the bigger programs in the Philippines will also renew at April 1, Steingold said.

Last year's losses have led to "the withdrawal of capacity from Asia by some midsize players, which will also impact the renewal discussion," said Clarence Wong, chief economist of Asia at Swiss Re. The Asia-Pacific region accounted for 70% of the US$100 billion in global insured catastrophe losses last year, noted Geoff Lambrou, managing director and head of placement for broker Marsh Asia.

Disaster-hit regions are seeing rate increases of more than 30% for natural catastrophe and some property risks, especially flood coverage, said Marsh in a report, noting insurance markets "appear to be moving in fragmented directions" in 2012.

Wong said "the impact on reinsurers' appetite and capacity varies." Large international reinsurers "were well-capitalized and able to benefit from global diversification." These reinsurers' risk appetites will not change significantly, and will be largely price driven, said Steingold.

"On the one extreme, there will be a tiny minority of reinsurers who will withdraw their capacity completely," said Steingold. Then there will be "some opportunists who see the current market as an opportunity to increase their position in the territory," he added.

In disaster-hit regions, insurers are putting more focus on the technical underwriting of risks, according to Lambrou. Meanwhile, areas that were not hit by catastrophes last year "still see a strong market" for buyers, he said.

"Underwriters are more focused on quality of underwriting portfolio and the loss experience of a specific program," Steingold agreed.

Amid the Jan. 1 renewals, Steingold noted "unlimited perils cover under pro rata treaties is, for the time being, a thing of the past."

Underwriters are taking a more cautious approach to business interruption and supply chain insurance, according to Marsh. As losses from the 2011 events largely stemmed from knock-on effects to the supply chain, insurers are reducing or eliminating sub-limits for this type of cover.

However, rates reductions for risks such as construction, general liability, professional indemnity and financial institution are still achievable.

"Although reinsurance costs have risen following last year's record losses, they are not being passed on to most insureds," said Alan Cheah, chief executive officer of Marsh Asia. "In addition, capital inflow, continued growth in the construction sector, and a heightened awareness of insurance and risk management have combined to lessen the effects of last year's catastrophes on the broader market."

The trends observed in the January renewal will likely persist into renewal discussions in April, Wong said.

A big issue raised during January renewals was the "cold spots" phenomenon, which refers to exposures that were inadequately modeled and where the severity of losses was unexpected, according to a report by reinsurance intermediary Guy Carpenter & Co. These cold spots involved hits to globalized economic activity in unanticipated ways, including supply chain disruptions caused by the March 11 earthquake and tsunami in Japan and floods in Thailand.

Local and regional insurers remain competitive as the indigenous industry continues to become more sophisticated. In the region, many domestic and international insurers remain well capitalized and are keen to write new business in geographies and classes that were unaffected by natural catastrophes at competitive rates, said Marsh.

The Thai commercial insurance industry will likely face sharply contracted capacity, higher pricing and tighter terms for coverage during the Asian and Japanese reinsurance renewals in April, said A.M. Best Co. in a recent report. In 2012, flood coverage will be separated from industrial all risk policies, which automatically included flood risks for most industrial and large companies.

In 2011, Lambrou noted market capital was at an all time high and this strong condition still remains. Competition among insurers for market share in many other insurance lines remains strong with rates continuing to decline, said Marsh. Economic worries in Europe and the United States have led to a rise of trade credit insurance in Asia, with interest up 30% and 20% in Singapore and Hong Kong respectively.


Comments

Post a Comment
If you are a Storefront / Tradingfloor user, click here to login.
Note: As a guest user, please fill out the form below to post a comment.
Post your comments here.
Name :
Email Address :
Captcha :
Comments :
Character left : 2000