Reinsurers More Risk-focused for Next Asian Catastrophe, Says Fitch

 

Fitch Ratings says the spate of Asia-Pacific catastrophes in the past two years have prompted reinsurers to take stock of their existing portfolio and re-evaluate their underwriting approach and risk appetite. The credit ratings agency (CRA) believes that reinsurers in the region are becoming more risk-focused to better brace themselves for the next Asian calamity, after their financial performance had been battered by several loss events to varying degree. This includes the earthquakes in New Zealand and Japan in Q111, Thai floods in H211, as well as the recent floods and typhoons in China in July to August.

Countries in the Asia-Pacific region are exposed to catastrophes to different extent, according to Fitch. Australia, New Zealand, Japan and China are markets highly prone to catastrophes such as earthquakes and floods. On the other end of the spectrum, Singapore and Malaysia are relatively catastrophe-free. Thailand is no longer classified as a catastrophe-free market, given the severity of last year’s floods.

Given the increasing frequency and severity of catastrophes in Asia, reinsurers have taken a hard look at their existing underwriting practices with a view to tightening them. Fitch observes that reinsurers are gradually reducing their participation in proportional reinsurance business, while increasing their non-proportional business. Under the latter, reinsurers would only be affected should the direct cedants or insurance companies’ insured losses exceed a certain predetermined level, as opposed to taking a proportional share of the losses incurred by the cedants.

The level of deductibles, or the amount of losses directly borne by the cedants before it could be claimed under their reinsurance programme, has also increased, although the extent varies from market to market. While the shift in underwriting approach may result in a reduction in top-line premium growth for the reinsurers, Fitch believes this could improve their overall profitability.

Reinsurers are taking a more proactive stance to monitor and evaluate their risk accumulation exposure in the various Asian markets, particularly the catastrophe-prone markets. During recent renewals, many reinsurers began imposing event limits to policies that they underwrote to cap their losses should a catastrophe occur. For instance, in the Thai market reinsurers are likely to limit the level of flood coverage to less than 100% of total loss. Business renewals are also more carefully screened to weed out unprofitable accounts.

Fitch notes that there is increasing market demand by direct cedants to seek two or three reinstatement premiums from the reinsurers, particularly for catastrophe reinsurance coverage. If utilised, this allows the direct cedants to continue to have access to the capacity of reinsurers, should the incurred losses exhaust the initial policy capacity. Reinsurers are granting them selectively, given the potential escalation of losses they would have to bear in the event of catastrophes.

On a more optimistic note, Fitch believes that the catastrophes have also brought about higher business opportunities for reinsurers and capital markets in the region. Reinsurers, especially those who were relatively unscathed from the recent calamities, have capitalised on the increasing rates to underwrite more and higher quality business from the Asian markets. In Japan, the premium rates for earthquake programmes are reported to have increased by 30%-50%, while the wind and flood coverage were renewed with a 15% rate increase in April 2012. In addition, New Zealand property policy renewal prices have doubled.

Some market players are also exploring the option of bond issuances in the capital markets to cover catastrophe exposure rather than solely relying on their reinsurance programme. Zenkyoren, the biggest Japanese co-operative, issued a three-year US$300bn catastrophe bond covering earthquakes in February 2012.

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