Three risks insurers must manage in Asia Pacific

17 November 2016

Managing regulatory risks and shortages in talent and risk modelling tools is vital for international and local insurers.

The downward pressure on (re)insurers’ margins is as much in evidence in Asia-Pacific (APAC) as elsewhere. Yet it has not inhibited growth in the number of players in the market.

This has been driven both by:

a) more foreign-owned reinsurers entering the market or expanding their offering, and

b) by the growth of indigenous reinsurers – particularly in China, South Korea and Indonesia.

These trends will continue, says Stuart Beatty, Chief Executive Officer for JLT Re in the APAC region. “All roads don’t lead to London anymore. There is more and more of a need to have in-country entities able to service their own domestic risks.

“If anything, they will look to expand outside their own countries and start to take market share from the existing international carriers. There is already evidence that the Korean and the Chinese reinsurers are doing this.”

Local risks          

Established international carriers have already positioned themselves to work alongside the changing local markets, says Mike Mitchell, Head of Property Underwriting and P&C facultative Asia at Swiss Re.

Ultimately reinsurance is about risk diversification – there is a limit to how much risk can be retained domestically. Capacity for the larger exposures will continue to be sourced globally.

“Many Asia-Pacific markets are highly fragmented with numerous insurers but, in some cases, local reinsurers offer an efficient way to aggregate exposures from smaller companies into larger risk pools. Here we can partner with them,” says Mitchell.

Against this fluid backdrop, growing business in the region requires the management of many risks, in particular:

  1. Regulation
  2. Talent shortages
  3. Lack of reliable capital and risk models.

Regulation

Insurers in the region have to be very focused on regulation when they make decisions on when, how and where to risk their capital, says Beatty.

“There is no common regulator in APAC – from China in the north to Australia and New Zealand in the south there are over 15 regulators with different approaches to capital and capital adequacy,” Beatty says.

Multiple jurisdictions may be a challenge but they also present an opportunity, says Mitchell.

“We are able to apply our understanding of different prudential and governance frameworks to help provide solutions to our clients' varying needs. A good understanding of regional regulatory environments helps us tailor transactions to find the optimal reinsurance solutions for our clients,” Mitchell says.

Brokers can also add value in this area, says Beatty. “Most insurers expanding into new jurisdictions need advice from brokers about how to use their capital and the most appropriate risk transfer models.”

Talent management

Insurers also need to manage potential talent shortages – the flip side of abundant capacity.

“They all need a CEO, CFO, CRO, CUO and so on, but these all have to come from a limited talent pool,” says Beatty.

“You can only go so far in importing talent from outside the region. You have to invest in developing your own staff and training them in other parts of the world – you then have to hope they don’t get poached.”

Attracting and retaining good people is also a priority at Swiss Re. “Talent management is a key focus for our Asia management team: providing our people with a strong employee value proposition and continuous development is very important,” says Mitchell.

Risk modelling

A lack of some of the technical modelling tools available elsewhere in the world will be another major challenge for insurers in the region, and one which they will need help to overcome, says Mitchell.

“Not many regional insurers use internal capital models, and the use of these is constrained by the underlying data quality and exposure modelling.”

However, as regulators push for better-capitalised, more consolidated insurance markets, there will be more pressure on Asian insurers to source and manage larger capital bases, says Mitchell. “The first step is improving data quality and modelling, then developing risk management frameworks and finally more robust economic capital models.”

Yet it isn’t just the capital models that are deficient. Many of the catastrophe risk models are poorly populated with quality, up-to-date data, especially in the face of the changing risk scenarios such as the growth of mega-cities and the impact of climate change, warns Mitchell.

“Catastrophe models need continuous improvement, starting with better exposure data, better hazard and vulnerability data, and good claims feedback loops. In many Asian countries improvements can be made in all these areas.”

Helping to fill some of these gaps is a key focus for JLT Re, says Beatty. “In a mature market you’ll obviously have manageable levels of capital at risk versus premium potential and a good balance across the portfolio.

“The danger in emerging markets is putting too much capital at risk for too little return. We can help by constantly monitoring risk and exposure.”

Download this Risk Perspective article.

For more information, please contact Stuart Beatty, Asia Pacific CEO on +61 (0)478 304 812 or  email stuart.beatty@jltre.com