Fitch Notes Reinsurers More Risk-Focused For More Asian Catastrophes

August 23, 2012

Fitch Ratings has issued a statement which points out that 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.”

As a result Fitch said it “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 1Q11, Thai floods in 2H11, as well as the recent floods and typhoons in China in July to August this year.”

Countries in the Asia Pacific region are exposed to different types of catastrophes. Fitch notes that “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 the recent floods.”

As examples Fitch cited the costly Christchurch earthquakes in New Zealand, which produced insured losses, estimated by EQECAT, estimated at $15 to $23 billion, and the strong La Nina weather systems in Australia, which have caused “wetter and more severe weather to the country. Since 1967, loss events exceeding A$10 million [US$10.521 million] have averaged A$1.2 billion [US$1.262 billion] per annum to end-2011. However in the five years to end-2011 the annual average had risen to A$2.5 billion [US$2.63 billion].

In comparison Fitch pointed out that “Japanese insurers and cooperatives registered incurred losses of above JPY3 trillion ($37.5 billion) from the Japanese earthquake in 2011,” which represented 18 percent of the total economic losses of JPY16.9 trillion [$215 billion], as “estimated by the Cabinet Office.

“Additionally, Japanese insurers operating in Thailand were severely affected by the Thai floods given their high exposure to industrial all risk and business disruption coverage for Japanese manufacturers in the affected industrial estates. Their gross insured losses were estimated to be JPY 930 billion ($11.83 billion] as of mid February 2012.”

In China the statistics from the Ministry of Civil Affairs show that “weather related events in July 2012, mainly typhoons and flooding, caused more than 400 deaths and resulted in economic losses of above CNY85.5 billion ($13.5 billion). The insured losses from the heavy rainfall in Beijing in July 2012 amounted to CNY1.0 billion ($158 million), while Typhoon Haikui, which hit several coastal cities near Zhejiang in early August 2012, incurred losses of over CNY1.46 billion ($231 million) for the insurance industry.”

The frequency and severity of the catastrophe losses in Asia have resulted in reinsurers taking a “hard look at their existing underwriting practices with a view to tightening them,” said Fitch. The rating agency also observed 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 program, 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.”

In addition Fitch noted that the 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 percent of total loss. Business renewals are also more carefully screened to weed out unprofitable accounts.”

Fitch also indicated 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 utilized, 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 said it “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 capitalized on the increasing rates to underwrite more and higher quality business from the Asian markets. In Japan, the rates of earthquake programs are reported to have increased by 30 percent – 50 percent, while the wind and flood coverage were renewed with a 15 percent 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 program. Zenkyoren, the biggest Japanese cooperative, issued a three-year $300 billion catastrophe bond covering earthquakes in February 2012.”

Fitch also said it believes the “growth momentum of Asian reinsurance markets will continue to be strong, with increasing risk awareness and continued market demand by the cedants. For example, China’s non-life market was reported to have grown by 15 percent for the first six months of 2012. There is also a stronger emphasis on the credit quality of the reinsurers, given the “flight to quality” phenomenon of the direct cedants.

“As regulators in the region step up their efforts to monitor the adequacy of the capital resources, direct cedants will continue to utilize reinsurance to transfer their underwriting risk and reduce the strain on their capital requirements. The Australian Prudential Regulation Authority operates a risk based capital regime that has recognized the use of reinsurance to reduce the overall capital charge levied on the catastrophe exposure of the direct insurers.

“On a broader level, Fitch notes that reinsurers in Asia will continue to face the challenge of limited data availability to more accurately model and manage their catastrophe risks, while they grapple with the aftermath of catastrophes. Compilation of more comprehensive statistics should improve as the markets evolve over time.

Source: Fitch Ratings

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