Debt as a capital source has become more popular among many Asian reinsurers which are predominantly equity-funded, says Fitch Ratings.
The issuance market is still in the early stages, however Fitch expects it to gain traction in the near to medium term, due to the low interest rates and sustained demand from yield-seeking investors.
The larger players are leading the way, says Fitch. For example, China Re executed two issuances of US$800mn and US$700mn in March and June this year, respectively, backed by strong investor demand. Proceeds will be used for overseas acquisitions as the company moves to diversify its business and capture opportunities beyond the domestic market. In October 2014, Korean Re issued a US$200mn hybrid and has expressed an intention to increase usage of non-equity capital – including catastrophe bonds in order to optimise its capital structure as it seeks to establish itself as a global player.
In its report on Asia's reinsurance market, Fitch says that steady economic expansion and insurance market growth will remain the fundamental reinsurance driver in Asia-Pacific. Knowledge transfer and human capital build-up will sustain the sector’s development momentum and spur reinsurance premium growth as globally established reinsurers continue to scale up in the region. Foreign counterparts recognise Asia’s business potential and have increased their focus and commitment to the region. After opening an office in Kuala Lumpur, Malaysia, in March, Swiss Re is setting up its general reinsurance business regional headquarters in Singapore in 2018. In September 2016, Munich Re began a restructure of its Asian operation to strengthen its presence in key hubs, including Tokyo, Beijing and Singapore, with the potential of expanding to India. In April 2017, Lloyd’s of London’s Indian reinsurance branch commenced operations to tap into excelling onshore market growth opportunities.
Higher government infrastructure spending and the emergence of cyber insurance offering will support the reinsurance demand.
Fitch expects China’s large-scale Asian infrastructure projects to be a source of reinsurance demand. Indonesia plans to increase its budgeted infrastructure spending by 22 percent YOY in 2017, to more than IDR350trn ($26bn). Comparably, Thailand has increased infrastructure spending to up to THB896bn ($25bn) for the year. Direct insurers are unlikely to have the capacity to underwrite such exposures alone and reinsurers will have opportunities to step in and cover this gap.
At the same time, Asia is identified as the world’s most vulnerable region to cyber threats, yet its share of cyber insurance premiums is less than 6 percent of the global total. Asian insurers have small cyber insurance books of business. Fitch expects the segment’s reinsurance arrangements to gain importance as it expands and insurers tap on reinsurers for capacity and diversification, to glean underwriting expertise and plug coverage gaps – especially from global players with experience and insight from European and US markets.
Another area of interest to reinsurers is that catastrophe losses remain a key concern in Asia from the increased loss amounts and frequency of weather-related events.