Various regulatory initiatives in Asian markets could lead to greater demand for local reinsurance capacity as direct insurers rethink risk management strategies and appetite, according to a report published by Fitch Ratings.

“Asian regulators have implemented—or are in the process of implementing—a range of measures which would alter the operating and business climate in the region,” said the report titled “Asian Reinsurance Markets—Regulatory Reforms to Boost Asian Reinsurance Competitive Dynamics.”

For example, Fitch said, many Asian governments are taking protectionist measures to make sure that reinsurance premiums are retained within the local market.

As a result of China’s new risk-based capital framework—the China Risk-Oriented Solvency System (C-ROSS)—Fitch affirmed that there likely will be greater placement of reinsurance within the local market, rather than with overseas reinsurers.

“This is attributable mainly to the difference in capital charges imposed on reinsurance receivables from locally incorporated reinsurers versus that for overseas reinsurers,” Fitch said.

Several new local reinsurers have formed in China in 2015-2016, which should intensify market competition, the report said.

Indonesia, Vietnam & India

Similar protectionist measures have been adopted in Indonesia, which Fitch thinks will benefit the local Indonesian re/insurance industry, which will have to raise their level of sophistication in capital management, reserving and catastrophe modeling. They traditionally have been “heavily reliant on international reinsurers for their reinsurance arrangements.”

“In December 2014, the Indonesia regulator required domestic insurers to reinsure all of their motor, health, surety, credit, life and cargo business with local reinsurers,” Fitch explained, noting that for the remaining classes, 25 percent of the business must be placed with local reinsurance companies.

Prior to this rule change, Indonesian insurers had been required to cede only 10 percent of their risk to domestic reinsurers.

“Vietnam is following in the footsteps of Indonesia to retain reinsurance premiums with the local market,” Fitch said, noting that the Ministry of Finance recently announced it plans to control the extent of reinsurance premiums underwritten by foreign reinsurers outside the country.

Only about two-thirds of the country’s reinsurance premiums were retained in the country, Fitch said, citing statistics from the Association of Vietnam Insurance.

“The Indian market, by contrast, has opened up cautiously to allow overseas reinsurers to set up branch operations,” the Fitch report continued. “These foreign firms are required to retain a specified minimum amount of reinsurance business within the country, while the Indian direct insurers would need to give priority to a local reinsurer to accept their reinsurance business.”

Other Asian Business Opportunities

While the gap between insured losses and total economic losses from natural catastrophe improved in 2015, Fitch believes it is still far too wide. Total insured losses in Asia were 19 percent of the region’s total economic losses in 2015, up from 10 percent in 2014, Fitch explained.

“Many Asian markets have low insurance penetration, which Fitch believes will provide solid business growth potential, including the relatively untapped Indonesian, Chinese and Indian markets.”

M&A Trends

Fitch predicted that the operating landscape of reinsurance in Asian markets will be shaped by a combination of three factors: new operations established by foreign reinsurers in Asia, startups by Asian insurers and ongoing M&A activity.

“Fitch believes there is solid business potential for the Asian reinsurance market to flourish,” which will lead to a wave of M&A as well as new reinsurance startups.

The ratings agency pointed to the fact that Asian economies constituted about 34 percent of global GDP and 59 percent of the world’s population in 2015. (The Fitch report quoted statistics from Swiss Re’s sigma no. 3/2016).

However, the total reinsurance penetration rate in Asia was “a meager 5.3 percent in 2015 (5.2 percent in 2014) compared with 7.3 percent in the U.S. (7.3 percent in 2014) and 10.0 percent in the U.K. (10.6 percent in 2014),” the Fitch report noted.

Further, three of the most densely populated markets in Asia—China, India and Indonesia—have low penetration rates of between 1.7 percent and 3.6 percent, the report added.

“These markets—characterized by rising affluence, a growing number of middle-income earners and rapid industrialization—collectively represent [more than] 65 percent of Asia’s population and 40 percent of global population.”

Source: Fitch