Competition for reinsurance business in Asia is expected to grow more intense, as the pain being inflicted on the industry in the US forces greater diversification in search of more profitable opportunities.
The contributing factors that have led to 2016 being the worst performing year for the reinsurance business in Asia (excluding 2011 when the Tsunami and Thai floods resulted in significant catastrophe losses) are lower rates, broader terms, poor investment returns and constant pressure from alternative capital.
According to AM Best, competition still remains high. At the end of 2016, the dedicated reinsurance capacity was estimated at US$420bn with US$75bn of that coming from third-party providers such as insurance-linked securities (ILS), which continue to drive investment due to the sector’s lack of correlation with other traditional asset classes.
This interest from alternative capital comes despite poor fundamentals. Across the entire reinsurance sector, return on equity (RoE) is declining five percentage points below the 8 percent figure in 2013, with Bermuda companies hurting the most at an RoE of just 6.8 percent in 2016.
The worrying issue for reinsurers is that these results occurred in a benign year, leading AM Best to worry about the industry’s resilience. Already this year two major hurricanes have struck with the overall losses not yet understood.
The situation may be worse than it first appears, as the competitive pressure faced by reinsurers is not only reflected in pricing — it has also been absorbed by more generous terms and conditions, which is less visible at the moment but may become all-too apparent in the event of a significant catastrophe year.
AM Best have voiced their concerns, even if the industry escapes 2017 relatively unscathed, saying “If the reinsurance market is booking the accident year combined ratio at a loss in a relatively benign catastrophe year, and that in and of itself is not the impetus for change, the next logical question is: What will it take to turn the market?”
AM Best expects that mergers and acquisitions will continue to reshape the industry, not least because capital remains abundant, debt is cheap and organic growth is difficult to come by.
Reinsurers that aren’t looking for a deal may seek to build income streams by working with alternative capital to identify opportunities in a market that is becoming increasingly challenging even for ILS.
The outcome of Brexit in the UK and Trump’s tax reform plans in the US are adding to the market uncertainty. AM Best sees opportunities to grow the reinsurance industry via cyber insurance and mortgage reinsurance, however there are significant risks there too and not many benefits.
AM Best said: “The market headwinds at this point present significant longer-term challenges that industry players need to work through,”
“We’ve said that the companies that are not proactive will not determine their own destiny.”
The strongest players tend to be those with the broadest books and the largest geographic footprint, which could mean an increasing focus on Asia going forward.