MSH International entered the Chinese insurance market in 2001, setting up a Third Party Administrator service that allowed the parent company to establish MSH China. Based off their success in Europe, MSH began to offer new health and life insurance product options in the region. Read more
The insurance industry seems to be going through a lull. Things are quiet, with few major news events, no major catastrophes rocking the industry and a general sense of calm. How much of this is merely the swimming duck effect, with the appearance of calm on the surface, but energetic kicking happening under the water remains to be seen – but there is certainly a lot going on behind closed doors.
In Europe, the insurance industry is still working hard to effect amendments to Solvency II. As far as it is concerned, the proposed legislation is still far from the final draft, even after almost 10 years of planning and negotiating. Solvency II is going to force the industry to implement measures that will simply become an extra burden, with proposed capital requirements completely out of proportion to actual risks. One example often cited by opponents of the current version of the legislation, is that of Hurricane Katrina in 2005, which caused widespread damage resulting in US$40 billion of claims. While this was the most expensive mega-catastrophe in recent years, the insurance industry was able to absorb this hit and recover rather quickly.
Indeed, according to a recent report published by the Universities of Leeds and Edinburgh, the expected financial losses linked to natural catastrophes such as hurricanes and earthquakes are not of the magnitude to “justify substantially high capital holdings against catastrophe underwriting risk.” The report focused on U.S. insurers, but the findings apply to all those potentially affected by the regulations.
While negotiators and lobbyists in Europe and North America are working feverishly to keep the insurance industry as legally unfettered as possible, the sales and marketing departments also have their work cut out for them.
The current economic climate is putting a lot of pressure on insurance premiums, with many Europeans currently underinsured when it comes to life cover. One of the main reasons for underinsurance is that the products are seen to be expensive, and customers are looking much more closely at what they are spending their hard earned pennies on. This trend can safely be extrapolated to other types of insurance, as the economy is affecting individuals as well as businesses and organisations of all types and sizes. In the life cover market alone, Swiss Re calculated that the protection gap amounts to EUR10,000 billion across the 14 EU countries. This gap is basically the difference between projected amounts of money needed by dependents in the event of a person’s untimely death, and the financial provisions put in place to cover such an event.
In light of this, there is much work to be done to develop innovative products that offer clients an attractive deal. With such a stagnant economy, sales teams are going to have to work not only harder, but much more intelligently to improve their figures. There is certainly untapped potential in the European market, but without new products and bold strategies, only a small percentage of this potential will be realized. Insurers in the USA and EU are facing a lot of legislative uncertainty, especially so in America, as the government rolls out a raft of healthcare and health insurance changes, along with new taxes and regulation for insurers and re-insurers on the horizon. There is certainly a long uphill struggle ahead, but opportunity is often found in the midst of adversity. Although the demand for insurance will not be going away anytime soon, the nature of the business is changing somewhat, and insurers will need to adapt to stay in the game.
Emerging markets offer a whole lot of new opportunity, albeit with some risk and a lot of uncertainty. As the global shift eastward continues, money is flooding into Eastern Europe and Asia, which means access to a whole new set of customers, along with new cultures and completely different environments. Traditional insurance is doing very well in the developing world, and insurers are using strategies such as bancassurance very successfully to help them penetrate these new markets. However, because of the flexible and entrepreneurial nature of emerging markets, where many things are still in flux, traditional insurance companies are also having to face new challenges on a regular basis. Developing countries are not afraid to try something new, and have the luxury of being able to draw on the experience of more developed countries and businesses. For instance, there is a lot of interest being shown into using captive insurance as a solution to risk management and financing, especially based on the experience of large companies like BP in dealing with large scale disasters like the Deepwater Horizon spill in 2010.
Another area where there is a lot of upheaval and change in developing countries is in the area of healthcare. In 2011, the WHO’s 193 Member States committed themselves to reforming their health financing systems to move towards universal health coverage. The goal of universal health coverage is that all people can use the health services they need without being exposed to the financial hardship often associated with paying for them.
In the developing world, where a large majority of people live on a subsistence basis, very few can ever afford any kind of healthcare, yet these are precisely the people who need assistance and public provision of healthcare services.
Developing nations face this problem almost universally, and much work is being done to study possible ways to finance universal healthcare and to develop models that provide a better bang for their buck.
Currently, public healthcare is provided based on variations of two basic strategies.
In the first type, a country provides universal healthcare based on a single risk pool, of which all eligible people are members, and funds its system through general taxes. Usually, in this kind of system, healthcare is provided by publicly owned facilities. The NHS in the UK is a good example of this strategy.
In the second type of system, a government provides healthcare to its nationals via mostly private providers, and funds the system through payroll taxes. The government essentially pays for private healthcare on behalf of its citizens. There are usually a few different risk pools, which means that different classes of citizens pay differently and possibly also receive different treatment. The German system works according to these principles.
At the moment, a majority of developing countries have public health systems that use multiple risk pools, but the current trend is definitely towards broader and larger risk pools. Many feel that consolidating pools mean lower administrative costs and less fragmented and possibly unequal treatment. The general consensus is that bringing everyone into one pool can make healthcare more equitable because everyone is entitled to the same set of benefits.
The role of the private healthcare industry varies, but in a majority of developing nations, private services are incorporated into their systems, with the state buying private care for their citizens when the public services cannot provide the necessary treatment.
This would be the best system from the perspective of the patient, as excluding the private sector from a universal healthcare system generally produces double standards, where the poor go to publicly funded facilities and receive basic care, while the rich can afford the very best treatment in private hospitals and clinics.
Developing nations have a their work cut out for them, but at the same time they have a huge advantage with “greenfield” development opportunities – unhindered by archaic and inefficient systems, and generally, a public healthcare system which can only really improve.
Of course, the biggest concern when talking about health services anywhere in the world revolves around finances. Many countries remain uncertain as to how to finance universal health coverage. Medical services have an amazing capacity to consume budgets, and universal coverage seems to be simply unaffordable to many.
Pre-paid schemes such as health insurance, provide one solution to this problem. The WHO hold the view that health insurance and other prepaid health financing mechanisms, are a key route to universal coverage. Every year, out-of-pocket payments force millions of people into poverty. Larger risk pools, combined with a larger percentage of the population contributing to a healthcare fund, would make it affordable for most developing countries to extend a basic standard of care to all their citizens, and even provide subsidies for more advanced services at private facilities on a more limited basis. Increasing taxes or funneling revenue from national resources like oil or minerals for the specific purpose of providing improved healthcare is not a hard sell, as long as citizens eventually feel they get what they pay for. Not all countries will be able to start with a full range of medical services, but getting the ball rolling through pilot programs and incremental extension of public healthcare will mean that they can grow their systems in a controlled fashion, experimenting with new solutions and strategies as they go. Assuming that health ministers can keep their departments on course and free from the ubiquitous bureaucracy, the goals of universal health coverage might just be within their reach.
Low interest rates “an enormous stress”
The current European economic climate, created by efforts to try to stimulate economic growth and rescue an ailing banking sector, is placing the insurance industry under “enormous stress”. This according to Nikolaus von Bomhard, Chief Executive of Munich Re, one of the world’s largest investors with a portfolio of more than €200 billion (US$245 bn).
While the low interest rates in Europe are a boon for consumers and those looking for cheap credit, large investors are feeling the pinch as their ability to make money on large capital investments is being severely hampered.
The value of money over time is especially critical to insurers, since they receive most of their money up front, in the form of policy payments, and then are liable for servicing those policies later. In an environment where the interest rates are extremely low, it is very hard to remain profitable when many annuity and life insurance products guarantee returns significantly higher than the current interest rate.
The interest rate on 10 year German bonds is currently around the 1.24% mark, well below the 1.6% classified as “extreme” and “unsustainable” by Joerg Schneider, CFO at Munich Re, during an interview in May. The rate hit a record low of just 1.21% in June 2012.
von Bomhard also expressed his view that banks should be allowed to go bust and creditors be made to carry a share of the losses. This might be unavoidable, should economist Nouriel Roubini’s recent prediction prove true and the European debt crisis spirals out of control.
Fortunately, there is some good news to offset the the increased pressure resulting from low interest rates.
Global losses due to natural catastrophes have been moderate for the first six months of the year.
2012 is off to a good start as far as insuring natural disasters are concerned, with a total insured loss valued at around US$12 billion, well below the ten year average of US$19.2 billion. Worldwide, the total loss has also been well below the average of US$26 billion for the first 6 months, which is significantly lower than the ten year average of US$75.6 billion. This is according to a recent publication by Munich Re, a leading global reinsurer.
Deaths due to natural disasters in the first six months of the year are also well below the ten year average of 53000, at 3500.
2011 was marked by massive losses suffered during the disasters in Japan and New Zealand, with the total loss for the first half of 2011 stood at US$300 billion of which US$82 billion was insured.
Almost 85% of worldwide insured losses and 61% of total losses were incurred in the USA, mostly due to an earlier than usual tornado season and out of control wildfires. Since 1980, the USA has had an average of 65% and 40% respectively, but the first half of 2012 has seen near record levels of tornado activity.
The most severe single event was a line of thunderstorms that crossed several states, including Ohio and Tennessee, between the 2nd and 4th of March. More than 170 tornadoes were counted in this period, and the storm left 180,000 homes damaged, with total losses in the region of US$4 billion.
In Europe, natural disasters caused lower losses than usual, with only 10% of insured and 16% of overall global losses incurred on the continent. Winter storm Andrea, which brought heavy snowfall and winds gusting up to 200km/h caused the most damage, incurring US$700 million worth of losses, of which about US$400 million was insured. Earthquakes in the sparsely populated area of Modena in Italy caused damage to many historically important buildings.
Aside from some serious flooding in China in May, causing almost US$2.5 billion in overall losses, the Asia Pacific region has had no significant, major loss events to date.
While the mildness of 2012’s weather so far is certainly welcome news, Torsten Jeworrek, a board member at Munich Re, pointed out that, “It is in line with expectations that extreme and more moderate years will balance each other out in the course of time.”
Some success in efforts to deal with Somali piracy
There has been some significant progress made in the fight against piracy, especially off the Somali coast, with a decline of more than 50% in incidents involving Somali pirates. In the first half of 2012, there were 69 Somali-related piracy events, compared to 163 for the same period in 2011.
According to a recent report by the International Maritime Bureau (IMB), global incidents of piracy fell to 177 reported attacks in the first half of 2012, down from 266 for the same period last year. This improvement is mostly as a result of increased naval activity, including preemptive action, as well as improved security measures put in place by shipping operators and the hiring of private security contractors. “Naval actions play an essential role in frustrating the pirates. There is no alternative to their continued presence,” said IMB director Pottengal Mukundan.
While there is a marked improvement in the situation off the Horn of Africa, there were still 11 vessels and 218 crew being held by Somali pirates, some in unknown locations on the mainland.
The Gulf of Guinea, on the West coast of Africa, has seen an increase in piracy, with 32 incidents reported in the first half of the year, up from 25 in the same period in 2011.
Globally, a total of 20 vessels were hijacked worldwide, with 334 crew members taken hostage. Another 80 vessels were boarded, 25 fired upon and 52 vessels reported attempted attacks. Somali pirates still present the most serious threat and ships should continue to take measures to protect themselves.
Elsewhere in the world, attacks are mainly armed robberies, with almost 20% occurring in Indonesia, however, guns were only reported on one occasion.
The global reinsurance industry looks set to rebound, with rates rising to offset some of the worst quarters ever for catastrophe losses following an unprecedented series of natural disasters in 2011 which included, amongst other events, severe flooding in Thailand last year and record earthquakes in Japan and New Zealand. New research data released this past week by insurance market analyst firm A.M. Best Co. notes that the financial positions of international reinsurance companies have remained largely resilient in the face of these challenges, and that positive market trends in the coming months should enable the industry to recover and prosper in the future.
In AM Best’s special report, available here, the firm observed that the global reinsurance industry managed to end 2011 with around the same amount of capital it started with, even though uncertain economic conditions and frequent and significant loss events struck key markets throughout the year. All in all, natural disasters and other catastrophic events cost the global reinsurance sector about US$50 billion in losses during 2011, although to many reinsurers this exposure amounted to little more than a negative earnings event. This fact, according to the ratings agency, demonstrated both the strength of individual reinsurance companies’ risk-management capacity as well as the overall resilience of the marketplace to withstand and rebound from such devastating events without any further dislocation or squeeze on capacity. Furthermore, the report added that 2011’s severe loss events had no reciprocal effect on the rate renewals occurring in January and April this year, which were described as suitably organized and timed. Global reinsurance companies have been able to negotiate better pricing terms and conditions for property and catastrophe (p&c) cover and the broader market has benefited from this stability. AM Best noted that the continued supply of reinsurance capacity in the aftermath of these catastrophic events has enabled pricing to remain generally flat across most other global insurance lines.
According to AM Best’s report, few reinsurers experienced higher losses than they could tolerate last year due to the valuable lessons the international insurance industry learned from 2005, which still holds the record for costliest year thanks to hurricanes Katrina, Rita and Wilma, and a combination of other catastrophic events, that cost insurance company underwriters about US$125 billion in losses. Private and public sector enterprises have worked hard since then to bolster their reinsurance risk management strategies and implement more prudent capital and enterprise risk management tactics. Best also noted that the global reinsurance sector has traditionally been more proactive than its other insurance business counterparts in adopting and developing new risk modelling systems, as they have avoided dependence on any one risk model and frequently tested for proprietary catastrophe situations. “This has tended to result in a more conservative view of risk,” AM Best noted.
These more conservative management strategies, combined with a renewed regulatory interest on solvency margins, have worked to ensure that those within the reinsurance industry regularly test the impact of catastrophe losses on clients across the world. As a result, reinsurance companies have tended to hold a capital cushion well in excess of these tests in order settle ratings agency concerns following a severe loss event and keep financial flexibility; this has been a boost to the market’s overall resilience. AM Best noted that the positive effects of this excess capital cushion could first be seen in the aftermath of the 2008 global financial crisis. Reinsurers were largely able to withstand this decline in capacity and asset values, and didn’t require any further bailout or consolidation efforts to adjust to new market realities.
AM Best went on to state that, in addition to changing reinsurance management attitudes, the technology involved in determining risk exposure and preparation strategy has continued to evolve as well. The report credited the advances made in catastrophe and economic capital modelling schemes in particular with reducing unnecessary loss exposure and improving the overall pricing environment in tow. These tools, according to AM Best, “significantly helped a reinsurer’s ability to better allocate capital within complex risk portfolios. The models, while not perfect, helped keep both individual and cumulative losses in 2011 within stated risk tolerances for most of the global reinsurers,” Best said.
Going forward, the international reinsurance industry is only expected to improve upon its efficiency as risk management practices further evolve. Recent catastrophic events in the Asia Pacific region have only further highlighted this trend. Historically, international reinsurance companies tended to avoid focusing on countries like Australia, New Zealand and Thailand, classifying them as non peak zones. These zones have not been traditionally prone to significant losses and were not expected to produce them in the future, and as such were often underwritten at lower margins in relation to peak zones elsewhere. Now, after the Bangkok floods, Cyclone Yasni and the Christchurch earthquake, those presumptions have quickly changed, and reinsurance companies have responded by reallocating capacity and demanding higher rates to cover these areas. These moves, combined with increased regulatory pressures on solvency margins appear to have driven up reinsurance demand again, especially in loss-prone areas around the world. Reinsurers naturally seek rate increases when uncertainty is prevalent and with natural disasters now apparently more widespread than ever, their risk portfolio can grow.
AM Best believes that recent events have indeed triggered an increased focus on the value of coverage and this could be the lift the reinsurance industry needs. While demand for reinsurance services had fallen over the past five years, the recent spike in global catastrophe activity has reaffirmed interest among primary insurers and has helped push rates up for reinsurance while pricing in casualty classes remains flat. In conclusion, the report indicates that the confluence of these two factors “will support a low double-digit return on equity in 2012 and continue to support reasonable organic growth in capital, assuming a normal level of global catastrophe losses.”
Ratings agencies have long recognized catastrophic events as a key threat to the solvency of both reinsurers, and property and casualty insurers, due to the often unexpected and severe nature of these losses. Global socio-economic trends over the past decade have pushed property values and concentration risk in catastrophe-prone areas upwards, and insured exposure has escalated rapidly in tow. As more and more people and businesses inhabit risk prone areas, insurance companies must take on more responsibility to provide coverage against a wide array of risks, including newfound risks like terrorism. Natural disasters, however, will always be one of the best reminders to prospective clients to have adequate protection against catastrophic loss. As the worldwide insurance industry’s exposure to catastrophe losses continues to rise, solutions need to be found. Luckily it appears as if the reinsurance trade is on the right track.
A.M Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors.
With the flooding in Thailand beginning to abate after it first started in July, the cost of covering all the P&C (property & casualty) insurance claims and other flood-related claims may come to upwards of US$10 billion for the insurance industry.
With the rains during Thailand’s monsoon season causing flooding across many parts of the country over the last few months, the loss of life and property has been devastating and will continue to have long lasting effects. The World Bank estimated in early December that the total damage from the floods was about US$45 billion.
Read the rest of the Thailand Flooding to Hit Reinsurance Industry article
China’s share of the world insurance market has quadrupled over the past decade, owing to a strong economy, surging demand and evolving industry regulations. A new report published on Monday by Aon Benfield, the global reinsurance intermediary of Aon Corp, acknowledges the opportunities the Chinese market now presents to the international insurance industry as well as the challenges now apparent after years of rapid growth.
The Chinese insurance industry has experienced phenomenal growth over the past decade and still has much to look forward to due to favorable economic conditions and an under-penetrated market. China now represents close to 4 percent of all life and property insurance premiums worldwide at CNY1.45 trillion (US$226 billion), moving up from just a 1 percent share decade ago. Industry analysts in the world’s second largest economy are now targeting a 15 percent compound annual growth rate over the next five years.
Aon’s report, titled ‘The China Property & Casualty Insurance and Reinsurance Market Report,’ is chiefly concerned with the slow development of the Chinese catastrophe insurance and reinsurance sector, which has become particularly glaring given the country’s increased exposure to widespread catastrophic risk. Indeed, given recent events in Thailand and Japan, the potential for supply chain disruptions in China due to natural disasters has become a growing concern for executives at large multinational corporations. According to the report, China’s property and casualty (p&c) insurance market is now growing only at the same rate as GDP, whereas the insurance sector overall is still growing much faster. Over the last ten years, the Chinese p&c market had grown by over 20 percent annually, outpacing the country’s GDP growth in that period and reaching CNY402 billion (US$63.4 billion) by 2010. While this has occurred, Chinese government subsidies have also been working to support the growth of agriculture premiums and have doubled in size since 2005, now amounting to CNY13.6 billion (US$2.15 billion)). Aon observed a similar growth pattern in aggregate reinsurance premiums acquired by China’s p&c insurers, which have seen a 67 percent compound annual growth rate since 2005, now totaling CNY44 billion (US$6.9 billion).
Aon’s findings indicate that insurance will continue to be a necessity in the country. The China Insurance Regulatory Commission (CIRC), the Mainland’s chief industry oversight body, recognizes that the insurance sector will keep on facing structural challenges due to the tremendous scale of the market combined with the recent speed of its development, and is planning considerable action over the next five years to address this. Aon notes that China has been hit by 5 of the top 10 most deadly natural catastrophe events in history, with recent disasters (earthquakes, mudslides, blizzards) affecting more than 70 percent of the country’s total land area and over half the population in some way as well. The CIRC is aware of this persistent catastrophe protection risk shortfall and is thus establishing a national natural disaster risk transfer program (similar somewhat to Japan’s in design) as part of its upcoming 5-year plan. According to Aon’s report, this new risk pooling program could lead to a spike in the uptake of catastrophe insurance and reinsurance policies and work to better address overall protection issues in the country for years to come.
Commenting on their new report, Malcolm Steingold, Aon Benfield CEO for the Asia Pacific region, explained that while China’s insurance industry would no doubt continue to expand, being able to solve explicit coverage gaps in the market quickly would enable the country to realize its sizeable commercial potential. “Over the past 10 years, China has emerged as an insurance and reinsurance market that cannot be overlooked. However, when we look beyond the macroeconomic growth, underlying opportunities and challenges are not necessarily what they first appear to be. For example, a detailed analysis of the property market shows that growth has been more in line with gross domestic product than with the faster overall market growth, which is largely driven by motor business,” Steingold said. Indeed, China’s motor vehicle insurance market could be subject to its own revision efforts, with the introduction of foreign insurance players potentially on the horizon.
Ralph Butterworth, Partner at an Aon Benfield consulting division, added that the Mainland’s transition to more refined and comprehensive risk management strategies would work to the benefit of their overall marketplace. “The evolution of Chinese insurance regulation is bringing the market closer to international best practice. Over time this should support increased transparency and improved profitability, potentially hand in hand with the entrance of more foreign insurers into the Chinese market and the global expansion of Chinese reinsurers,” Butterworth said, adding that “expertise and experience accumulated and tested in the global market are still of much relevance to China as it targets further growth over the next five years.”
In conclusion, Henry To, CEO of Aon Benfield’s China division, expressed confidence in the Chinese insurance industry’s ability to overcome recent hurdles. The CIRC’s latest 5-year plan, which introduces the national natural disaster risk transfer system and improves loss models and underlying data, should encourage sound risk strategy and ensure more protection options are available before disaster strikes. “Over the years from 2001 to 2010, the Chinese insurance market (P&C and life) was the second fastest growing national market in the world behind Malta and now represents close to 4 percent of the world’s total insurance premiums – up from about 1 percent in 2001. Given the still low insurance penetration rate and China’s comparative economic outlook, this share can only be expected to grow,” To concluded.
Aon is a provider of risk management services, insurance and reinsurance brokerage, human capital and management consulting, and specialty insurance underwriting. It is based in the Aon Center in the Chicago Loop area of Chicago, Illinois, United States. Aon bought Benfield in 2008. Aon Benfield Analytics is the industry leader in actuarial, enterprise risk management, catastrophe management, and rating agency advisory. Their track record of innovation and world-class position in analytics, modeling and client-facing technology helps companies to optimize their portfolios. Proprietary tools include ReMetrica, CatPortal, and ExposureView. Also, their Impact Forecasting team develops tools and models that help companies understand financial implications of natural and man-made catastrophes around the world.
Japan’s insurance industry has faced unprecedented natural catastrophe conditions throughout 2011, including earthquakes, tsunamis, typhoons, and now the ongoing Thailand floods, which have badly affected major Japanese manufacturers. Due to these considerable disaster losses, many Japanese insurers have begun turning their focus to risk management and are actively seeking alternative catastrophe reinsurance arrangements.
The March 11, 2011 earthquake and tsunami that struck off the coast of northeast Japan, and the widespread devastation that followed, has had a significant impact on the previously under-utilized catastrophe insurance market in Japan. The catastrophic event is now reported to have destroyed or damaged over 500,000 Japanese buildings, many due to the accompanying tsunami. According to the latest figures released this month by the General Insurance Association of Japan (GIAJ), the country’s non-life insurance sector has incurred total insured losses of ?1.3 trillion (US$16.9 billion) from the March 11 earthquake and tsunami and the two sizeable typhoons that have occurred since then in September.
The GIAJ furthermore reported that the country’s top 25 non-life insurance companies had received 831,130 claims inquiries related to earthquake insurance on housing risks, with 718,484 claims already settled. These same non-life insurers have, as of November 9th, paid out ?763.2 billion (US$9.86 billion) on insured properties in the north-eastern Tohoku region, settling 393,895 claims in the area closest to the original catastrophic event. In the eastern region of Japan including Tokyo, insurers have paid out ?413.6 billion (US$5.35 billion) in claims with 422,455 settled cases. The Hokkaido region and the other remaining prefectures meanwhile reported ?283.9 million (US$3.67 million) in insurance claims, according to the general insurance association. In total, the March earthquake and tsunami has lead to ?1.18 trillion in insurance claims for dwelling risks across the country.
In the second half of the year, Typhoon Talas caused ?33.18 billion (US$ 430 million) in insurance claims according to the GIAJ. The biggest claims came from fire insurance, accounting for ?25.8 billion (US$33 million) in insured losses. Another typhoon in September, Roke, resulted in a further ?88.8 billion (US$1.15 billion) worth of insurance claims.
The life insurance industry in Japan meanwhile has paid out ?185 billion (US$2.4 billion) in claims from catastrophe losses this year, including ?141 billion (US$1.8 billion) in claims for death benefits and a further ?44.3 billion (US$570 million) in accident-related insurance benefits from settling 18,391 claims. Usually these accident benefits would have excluded cover for earthquake-related damages, but the 47 members of the Life Insurance Association of Japan all agreed to pay out benefits without applying de jure policy restrictions, a previously unheard of conceit in Japan’s insurance market.
Despite these pervasive catastrophe events, the balance sheets for these Japanese insurers in general have not been badly affected by these losses, a reflection on the importance conservative risk management strategies currently play in the country. Since the earthquake in fact, Japanese general insurers have managed to successfully recover more than two-thirds of their gross insured losses via their pre-existing reinsurance coverage agreements. Most of Japan’s insurance companies are big conglomerates and remain financially strong, well reserved, with solid risk management practices designed to counter these adverse market conditions.
Japan’s national earthquake reinsurance scheme has also proven particularly effective. The system at present is a private-public mixed scheme, in which domestic insurance companies retain most of their costs locally by reinsuring each other, with the national government providing backstop support. The insurance claim mechanism allows for indemnity liability to be shared, with a reinsurance system limiting exposure for any single insurance company. The Japanese government also keeps a residential earthquake relief fund, expanded in May to ?4.8 trillion from ?4.3 trillion, which is reserved to help the non-life insurance industry meet cost obligations. For the country’s general insurers, the government reinsurance system has been important in maintaining stability in the aftermath of this recent string of natural disasters. Furthermore, the Japanese government, Ministry of Finance, and GIAJ members are now starting to promote residential earthquake insurance to fill in the funding gap, as market penetration was under 25 percent as of March 2011.
However, while Japans’s insurance industry has been able to largely absorb natural catastrophe losses so far, a new report by Fitch Ratings suggests more will need to done to preserve the sector’s solvency under adverse conditions going forward. In ‘Japan Earthquake Insurance: The Great Tohoku’s Effects,’ the ratings agency forecasts that the sharp rise in global reinsurance premium pricing, driven by the greater frequency of catastrophic events across Asia and the United States, will prove particularly costly to Japanese insurers and will necessitate greater involvement in catastrophe bonds and other mechanisms designed to offset rising coverage costs.
Japan’s general insurance companies have historically had no problem affording reinsurance cover due their massive buying power in the international reinsurance market. However, with reinsurance rates already hiked between 30 and 70 percent for 2012, and more increases likely once risk modelling firms update their Japanese catastrophe models, insurers may have to further diversify their risk portfolio options. Fitch Ratings explain that catastrophe bonds could offer a solution, instead of just passing higher reinsurance coverage rates onto the consumers themselves, “As the accuracy of the Japan’s earthquake loss model are further improved, with wider acceptance among specialised investors of participating in Japanese earthquake risk as a proxy for portfolio risk diversification strategy, catastrophe bonds could potentially become more important as an alternative to traditional earthquake reinsurance.,” Fitch wrote, adding that these solutions are only available through Japan’s increased involvement in the international reinsurance markets, “Risk sharing via reinsurance or catastrophe bonds will become more important in the market place given their important role in managing this high frequency and high magnitude risk in Japan and throughout the globe.”
Outside of catastrophe losses, growth prospects for the Japanese general insurance industry have remained low due to a stagnant economy, and a mature, saturated and overtly competitive market. Overall the industry’s profitability has been on the decline, with the automobile insurance market under particular duress due to the increase in traffic accidents, injury claims, and skyrocketing prices for auto parts. This consequently has kept underwriting results for these businesses at a level and often below the break-even point. Despite these concerns however, Fitch Ratings affirmed all of the five Japanese non-life insurers it observes by June.
Fitch Ratings is a global rating agency and provides ratings and analytical services for thousands of banks, financial institutions, insurance companies, corporations, and national governments. Fitch was founded in 1913 and now features dual headquarters in New York and London with over 50 offices worldwide,
The global reinsurance industry could be set to rebound, with rates finally rising to offset the record catastrophe losses incurred this year by an unprecedented series of natural disasters in both the Asia Pacific region and United States. New analysis released this week by worldwide credit and insurer rating agencies looks to assure clients that over the coming 12-18 months, positive market trends should be able to offset the significant challenges currently facing the industry.
On Tuesday, Moody’s Investors Service issued a report, indicating they had revised their outlook on the international reinsurance sector up to “stable” from “negative.” The New York-based agency based their ratings decision on a combination of factors. Moody’s believes that the good risk management and underwriting discipline displayed by the industry in the past year, combined with a hardening market and increased demand, would enable reinsurance companies to raise rates and respond to recent catastrophe losses. Moody’s previous negative rating had been in place since 2009.
Moody’s reported that reinsurance prices had already risen considerably in recent months, and not only in the regions and lines of business most affected by natural disasters. Recent renewal data has indicated that the price for catastrophe reinsurance cover in the United States was firming from between a 5 percent to 10 percent increase. Moody’s predicts further price increases at 1 January 2012 renewals as well. The lead author of the report, Moody’s VP and senior credit officer, Dominic Simpson explained that the aftermath of the worst quarter for natural catastrophes since Hurricane Katrina could become an earnings event for the industry. “Recent catastrophe losses loom large in our decision to revise the outlook to stable, as they have provided momentum for reinsurance rates to harden. However, over the longer term, it remains uncertain whether this expected plateau is a temporary halt to further pricing weakness or whether it will be followed by sustained market improvements,” Simpson wrote.
Moody’s indicated that the imbalance between supply and demand for reinsurance cover, in which overtly intense competition had kept pricing soft over the past few years, could be moderated by the current market environment. High catastrophe losses have already cut some of the excess capacity in the sector, and future supply could be further constrained by more expensive cover and consolidation within the industry, in which Moody’s anticipate market conditions to remain favorable. In terms of demand, Moody’s is confident that insurers will continue to take out reinsurance policies, despite tighter budgets. Natural disasters are one of the best reminders to have adequate protection against catastrophic loss. Moody’s noted that while the balance sheets for insurers were strong in 2010, allowing them to retain more risk on their own, now many companies would have “little flexibility left in further reducing reinsurance usage.” Insurers seeking further protection due to the updated Risk Management Solutions (RMS) hurricane model, as well as increased capital demands through Europe’s Solvency II regulatory regime, could also increase demand for reinsurance in the future.
Even though possible gains are on the horizon, Moody’s notes that short-term profitability for reinsurance companies remains “under meaningful pressure.” Reinsurers had already exhausted their 2011 catastrophe budgets before the Atlantic Hurricane and investment returns have been muted during the period as well due to low yields. Despite catastrophe budgets being stretched and a downward pressure on profits, Moody’s believes reinsurer loss ratios will stabilize during 2012 as prices harden and companies adapt to the new market. Reserve levels for most major reinsurers have remained adequate. The ratings agency remains concerned, however, about reduced investor activity and confidence in the sector. In the long-term, Reinsurance companies with low equity valuations may struggle to replenish their equity capital after another major catastrophe. Security would be weakened for policyholders and bondholders of these insurance companies who cannot recapitalize to meet their obligations. “Against this background, and notwithstanding the existence of a number of credit challenges, including the low investment yield environment and constrained financial flexibility, we have revised our outlook on the sector to stable from negative,” Moody’s concluded
The other major worldwide credit ratings agencies, including Standard & Poor’s and Fitch, have confirmed Moody’s outlook, each with their own stable rating for the global reinsurance sector. This week AM Best was the latest to offer its analysis in its Special Report, ‘Reinsurers are Ready to Move as the Market Begins to Stir.’ The Oldwick, New Jersey-based agency indicated that the reinsurance market may finally be able to tackle years of soft pricing and high catastrophe losses.
AM Best, like the others, believes that recent events have triggered an increased focus on the value of reinsurance and this could be just the lift the industry needs. “The recent spike in global catastrophe activity, combined with changes in catastrophe models, is expected to bring about some change in the perception of risk on the part of the primary companies,” the report said, adding that a severe hurricane on the US mainland could further push the market. “This, together with increased regulatory pressures on solvency margins, may turn the tide on reinsurance demand, which should help to bolster current pricing for property-related business,” Best added.
Ratings agencies have long recognized catastrophic loss as the primary threat to the solvency of both reinsurers and property and casualty insurers due to the severe, rapid and unexpected impact that can occur. Global demographic and economic trends have been pushing property values and concentration risk in catastrophe-prone areas upwards and insured exposure has in turn escalated rapidly in the past decade. As more and more people (and clients) inhabit these areas, insurers must take on more responsibility to provide coverage against a wide array of new concerns, including terrorism. As a result, the worldwide insurance industry’s exposure to catastrophe losses continues to rise and solutions need to be found.
A.M Best Company was founded in 1899 and is a full-service credit rating organization dedicated to servicing the financial services industries, including the banking and insurance sectors.
Moody’s Investor Services provides credit ratings, research, credit risk management, and other services for more than a hundred thousand commercial and government entities around the world.
Swiss Re announced this past week that it had submitted its application to Brazil’s industry regulator, the Superintendence of Private Insurance (SUSEP), for a local reinsurance registration in the populous South American country. A local license would enable the world’s second largest reinsurance firm to better participate in the emerging Brazilian insurance industry, servicing a more comprehensive range of clients and risks, and lending its vast international experience towards future market development in the country.
Brazil’s insurance industry has undergone a significant evolution in the past few years, delivering sound growth as a result of improving macroeconomic conditions and the loosening of market regulations in the country. In 1996 the Brazilian insurance market was first opened up to foreign participants, who have since brought substantial investment and the introduction of new products, technologies and expertise to the domestic industry. In 2007, the country’s reinsurance market underwent similar reforms with the elimination of the 70 year state monopoly that the Instituto de Resseguros do Brasil S.A. held over the industry. The goal of these reforms has been to open the local insurance markets to increased competition and to improve the availability of coverage and lower the costs for Brazilian citizens.
Despite this noted progress, international firms have found their capacity to invest in the Brazilian reinsurance market curtailed by a resurgent regulatory effort by the national government to rollback market liberalization, which has added to the cost of doing business in the country substantially. Through two new regulations that came into effect March 31st 2011, 40 percent of all reinsurance business must be allocated to local Brazilian companies and these same local insurers are prohibited from ceding more than 20 percent of premium, related to coverage provided, to affiliated intra-company reinsurers located abroad. Many insurance industry observers are concerned that arbitrarily reducing foreign insurance capacity for handling large commercial risks in Brazil will drive up prices and it will be become more difficult and expensive for Brazilian insurers to diversify and access foreign reinsurers.
Swiss Re has been involved in the Brazilian insurance market since 1924 and opened its first branch in Sao Paulo in 1996. The Zurich-based reinsurance group has decided to adapt to recent government regulation by applying to become a local reinsurer under the reinsurance registration for its operations in Brazil. Swiss Re’s Region Head for Brazil and Southern Cone Reinsurance Rolf Steiner, explained in a company news release that the South American country’s continued economic development together with the impending infrastructure projects surrounding the World Cup and Olympic Games have increased the need for their services to be more readily available in the region.
“Brazil is a key growth area for Swiss Re. The economic expansion coupled with large infrastructure projects to support this growth, the World Cup, and Olympics have increased the need for risk management support,” Steiner said, adding “As a global re/insurance leader, Swiss Re has the expertise and capacity to serve the growing demand in this thriving region. With 100 years of service to the Latin American market, we have seen Brazil evolve as a leader and we view the local registration status as further evidence of our support for our clients.”
Insurance companies have been competing for lucrative contracts that will cover the massive infrastructure projects planned by Brazil to host the 2014 FIFA World Cup. Over 1 million people are expected to visit the country for the month-long soccer tournament and an estimated US$ 29.4 billion is being spent on major construction projects in 12 Brazilian cities to accommodate them. This investment, largely through public money, could provide a huge boost to the local insurance market. Outside the World Cup and Oylmpics, Brazil presents an attractive opportunity for insurers as well. Brazil’s real GDP grew by 30 percent in 2010. Domestic insurers have benefited from the strong level of economic activity, higher availability of credit, and growth in employment; all factors that have driven strong internal demand for coverage. In 2010 the Brazilian insurance industry outpaced the country’s GDP and grew 16.6 percent, with gross written premiums totaling R$ 99.4 billion (US$ 62.7 billion).
The Brazilian insurance market is the largest in South America, and offers the potential to become a more prominent global insurance market across all disciplines. Recent economic stability, positive credit trends, and regulatory reforms that have stabilized the currency and promoted domestic savings, are producing sound growth across the insurance industry in Brazil. Despite continued regulatory hurdles, large multinational insurers cannot ignore the market’s size and growth potential and will be looking to invest themselves further in Brazil, and other emerging economies, to offset the continued static performance of the established North American and Western European markets.
Swiss Re, like many, has identified that increased life expectancy and healthcare expectations in conjunction with the rising cost of long term care, has been a chief proponent in dragging down performance in more mature insurance markets. In a new report, titled “A Window into the Future: Understanding and Predicting Longevity,” the company addresses how and why rising life expectancy has been consistently underestimated and what insurance companies can do to develop advanced models to better understand the issue. While modern medical advances in technology have helped increase life expectancy worldwide, a large healthy elderly population provides a significant challenge in retirement financing. According to figures released by the European Commission, currently for one person aged over 65 there are four people of working age compensating pension funds, insurers and government social safety nets. By 2060, this ratio could be down to one retiree for every two persons of prime working age. A report from the OECD issued earlier in the year confirmed that aging populations will cause overall global spending on long-term care to double or maybe even triple by that time.
A collaborative approach between governments, businesses and insurers is recommended by Swiss Re to collectively develop a long-term sustainable infrastructure for retirement financing, which would need to include the appropriate sharing of longevity risk. Insurance actuaries meanwhile need to update their mortality models to encompass the most up-to-date medical advances and disease related risks, and to discard historical information that has made the industry slow to react to the increase in life expectancy and long-term care costs in the past. “The future is highly uncertain, but a key benefit of predictive approaches is that they can increase confidence in the pricing and funding of future retirement income solutions,” the report states, concluding that “However, holding longevity risk continues to be a major challenge for pension funds, insurers and governments and better methods need to be developed to share the risk appropriately.”
Swiss Reinsurance Company Ltd was established in 1863 and is present in more than 20 countries. Swiss Re provides reinsurance products and financial service solutions. It offers various reinsurance products covering property, casualty, life, health and special lines – such as agricultural, aviation, space, engineering, HMO reinsurance, marine, nuclear energy, and special risks.
A number of financial reports released by Qatari insurance companies on Monday indicate that the country’s insurance sector may be poised to experience a significant slowdown. Five Qatari insurance companies, operating mainly in the non-life insurance market, have indicated that the sector’s total net profits have risen by only 2 percent during 2011, compared to 9 percent for the same period in 2010.
The companies, which include Qatar Islamic Insurance, Qatar General Insurance and Reinsurance, Al Khaleej Takaful, Qatar Insurance, and Doha Insurance, saw the sector’s net profit for January – June 2011 reach QR 545.96 million (US$ 149.91 million), compared to the QR 537.11 million (US$ 147.48 million) in profits seen for the same reporting period in 2010. The data on the general profitability of these five Qatari insurance companies was released by Qatar Exchange data.
One of the primary reasons cited by the insurers with regards to the lower than expected profits in the first half of 2011 is due to the rise in premiums yielded to reinsurance companies. Reinsurance premium yielding has risen by 8 percent for Qatar’s insurance companies in 2011, with three companies actually yielding more than 55 percent of total written premiums to reinsurers. With the levels of premiums being yielded to reinsurers outstripping the total growth in premium revenue for the market, profits have inevitably come in at lower than expected levels.
Profit growth for the first half of 2011 for the five companies, compared to the same period in 2010, stood at:
Qatar Islamic Insurance: 1.83 percent growth in 2011, up from 0.43 percent in 2010.
Qatar General Insurance and Reinsurance: 1.83 percent growth in 2011, up from -7.31 percent in 2010.
Al Khaleej Takaful: 11.29 percent growth in 2011, down from 46.85 percent in 2010.
Qatar Insurance: 10.74 percent growth in 2011, down from 65.77 percent in 2010.
Doha Insurance: -8.80 percent growth in 2011, down from 60.55 percent in 2010.
While the slowdown of the non-life insurance sector in Qatar does not pose major concerns at present, it has highlighted the need to create innovative policies with which to cover underserved segments of the Middle Eastern insurance market.
One company taking notice from the Qatari slowdown is the Dubai Islamic Insurance and Reinsurance Company, also known as Aman, which is headquartered in Dubai, UAE. Aman’s CEO, Hussein Al Meeza, announced the creation of two new types of protection policy which would focus on affording medical cover to Indian expatriates working in the United Arab Emirates.
The Indian Expatriate Medical Insurance plans from Aman are being run in conjunction with ICICI Lombard, one of India’s leading insurance companies. On creating the plans, Hussein Al Meeza said;
“If you check the structure of the population in the UAE and what relation it has with Emiratis, they are our partners; they are our brothers. They are also the people who (are) behind all the work that has been done here. The relationship that we have with the Indian population was not (built) today or yesterday. Also, we have (an agreement) with ICICI Lombard, which is one of the top names in the Indian market.”
Mr Hussein went on to say;
“Europeans already have the culture of insurance. They have very advanced products. We are looking to see where the opportunities are to provide services. We are looking at the Arab world, Pakistanis, Bangladeshis and Filipinos. It needs a background from the countries, because India has a platform for service providers… The Indian (expatriate population) is a big market and there are a lot of opportunities. Also, we got the right partner for the products.”
The policies, named “Rishtey” and “Health on Return,” aims to give Indian expatriates in the UAE a wider choice with regards to their medical cover than they have previously been afforded. The Rishtey plan would see UAE expatriate workers obtain medical insurance cover for their families in India, while the Health on Return policy would provide health insurance protection to those same expatriate workers in the event that they return to India for a short stay. Additionally, the Health on Return plan also offers the expatriate Indian workers the option of having retirement health insurance cover, creating a far more flexible and comprehensive health insurance product than any which currently cater to this niche market segment.
While a slowdown in Qatar’s general insurance market may pose a concern for the region, industry analysts are aware that there exists significant potential with regards to developing ever more unique products for the GCC insurance sector.
Insurance Companies Mentioned
Qatar Islamic Insurance
Founded in 1995, Qatar Islamic Insurance, also known as QIIC, operates a number of lines of insurance coverage. Offering insurance based on Islamic principles QIIC offers coverage for all risks from Aviation to personal protection.
Qatar General Insurance and Reinsurance
Qatar General Insurance and Reinsurance was founded in 1979, and is a Qatari national company. Qatar General Insurance and Reinsurance offers both individual and business insurance products in Qatar.
Al Khaleej Takaful
Founded in 1978, Al Khaleej Takaful operates primarily in the general insurance and reinsurance markets. Covering risks including Property, Engineering, Liability, General Accident, Marine Transit, and Marine Hull, Al Khaleej has proven time and again to be an innovative insurer.
Qatar Insurance Company
Founded in 1964, Qatar Insurance Company, also known as QIC, is Qatar’s oldest insurance provider. Operating a number of personal and business insurance products across the GCC, QIC is one of the most established insurers in Qatar.
One of the younger insurance providers in Qatar, Doha Insurance was founded in 2000. Establishing a Takaful products company in 2006, under the name Doha Takaful Insurance, Doha Insurance company offers a range of general insurance products.
Dubai Islamic Insurance and Reinsurance Company
Dubai Islamic Insurance and Reinsurance Company, also known as AMAN, was established in 2002 to provide comprehensive Islamic insurance products to residents of the UAE. Offering Motor, Home, and Medical Islamic insurance products, AMAN is one of the leading insurance providers in the UAE.