JAKARTA - Reinsurance pricing in Asia remains subdued because of below-trend economic growth, a lack of significant reinsurance claims, and rising domestic capacity. The credit profiles of domestic reinsurers, especially those in emerging Asia, are impeded by a lack of sophisticated risk management compared with global reinsurers.
A lack of significant insured natural catastrophe losses in the past two years will keep pressure on the region’s reinsurance premium rates. In the latest renewal season there has been a general broadening of contract terms and conditions at no additional charge. This, along with low investment yields in a prolonged period of declining interest rates, will continue to challenge the reinsurers’ earnings.
Meanwhile, Asian authorities have stepped up their efforts to develop their domestic reinsurance capacity. In this context, recent regulatory changes in several of the region’s jurisdictions point to increased support for domestic reinsurers, with the adoption of measures such as domestic cession requirements and higher capital charges for foreign reinsurance transactions.
» In Indonesia, the Indonesian Financial Services Authority (Otoritas Jasa Keuangan or OJK) recently finalized domestic cession rules in an effort to improve domestic capacity. Under the new rules, motor, health, personal accident, credit, life and surety lines of business require 100% domestic cession. However, the OJK rules exempt worldwide products – which are designed specifically for multinational companies – as well as new insurance products developed with support from foreign reinsurers.
Against this backdrop, the State-Owned Enterprises Ministry is planning to merge three state-owned reinsurers into a unified national reinsurer that can compete with regional players by 2017. In December 2015, two state-owned reinsurance companies – PT Reasuransi Umum Indonesia (unrated) and PT Reasuransi Indonesia Utama (unrated) – were merged and renamed Indonesia Re (unrated). The next step is to merge Nasional Indonesia Reasuransi (unrated) into Indonesia Re.
» In Vietnam, the Vietnam Insurance Supervisory Authority, which operates under the Ministry of Finance, has issued Decree 73, which prevents foreign insurers from placing reinsurance contracts overseas. One of the key changes under the decree, which came into effect on 1 July 2016, is a new cap that allows foreign insurance companies to reinsure no more than 90% of their total insurance liability. In other words, foreign insurers operating in Vietnam are no longer allowed to transfer all of their premiums to overseas-based affiliates through overseas reinsurance placements. This new requirement would therefore increase demand for domestic reinsurance capacity.
» In China, the implementation of China’s Risk-Oriented Solvency System (C-ROSS) this January will encourage the use of reinsurance. As a risk-based capital regime, C-ROSS allows insurers to improve their solvency positions through risk transfer arrangements, including through reinsurance, and requires insurers to hold capital for catastrophe risk. In particular, C-ROSS provides strong incentives for foreign reinsurers to set up onshore operations and establish themselves as domestic players, since it allows onshore insurers to offer cedants a low capital charge of 0.5%-4.7%, well below the 8.7%-86.7% it sets for offshore reinsurers.
The opening of Taiping Reinsurance (China) Co. Ltd. (unrated) in February 2016 and the recent China Insurance Regulatory Commission (CIRC) approval to establish two domestic reinsurers, Qianhai Re (unrated) and PICC Re (unrated), further demonstrate a policy of developing domestic reinsurance capacity to support direct insurance growth in China. Further, the CIRC published a request for comment in August 2016 to specify the requirements for collateral and credit enhancement arrangements to ensure the quality and soundness of the security provided by offshore reinsurers.
» Japanese (re)insurers, in contrast to their emerging market counterparts, will benefit from the ability to continue competing in the EU common market. The European Commission’s third-country temporary equivalence decision regarding reinsurance, which took effect from January 2016 and is valid for five years, places Japanese (re)insurers on a level playing field with EU (re)insurers in terms of business conducted in the EU. We believe this decision will help Japan-domiciled (re)insurers such as The Toa Reinsurance Company Limited (unrated) maintain their competitiveness in the EU.
Japan’s top three domestic property and casualty insurance holding companies all have overseas subsidiaries with reinsurance functions, which add to their parents’ business diversification and growth. In February 2016, Mitsui Sumitomo Insurance Company Limited (insurance financial strength rating A1 negative), the subsidiary of MS&AD Insurance Group Holdings (unrated), completed its acquisition of Amlin PLC (Baa3(hyb) subordinated debt rating; insurance financial strength rating A2 on its lead insurance operating entities), a global specialty (re)insurer operating in the Lloyd’s market.
These developments will have mixed credit implications for Asia’s reinsurers. On one hand, reinsurers will have more opportunities to enhance their competitiveness and access Asian markets. Domestic reinsurers generally have a greater understanding of the local market and better access to relevant data than offshore reinsurers, and thus are better positioned to optimize their risk selection. At the same time, growth will expose domestic reinsurers to new risks that could challenge their underwriting expertise and risk management as well as sustainability issues that are often associated with policy-induced growth.
by Stella Ng, Assistant Vice President - Analyst, Financial Institutions Group, Moody’s Investors Service Hong Kong Ltd and Soichiro Makimoto, Vice President - Senior Analyst, Financial Institutions Group, Moody’s Japan K.K