Large global reinsurers enjoy dominant positions in the major markets of Central and Eastern Europe, the Middle East, and Africa (CEEMEA). This leaves smaller regional reinsurers in these regions in a precarious position and at risk of being further marginalized. By contrast, in the Asia-Pacific region, local reinsurers have significant market shares, giving them better established and more defensible competitive positions. Standard & Poor’s Ratings Services considers that Asia-Pacific reinsurers are better positioned to withstand global competitive pressures such as increasing reinsurance capacity and pricing pressure. As a result, our financial strength ratings on regional reinsurers in the Asia- Pacific region are generally higher than their regional peers elsewhere.
Global Reinsurers Are Increasingly Expanding Into Regional Markets As reinsurance capacity globally increases, global reinsurers are increasingly seeking to use their brand power and expertise to tap new, faster- growing markets. Global players dominate a significant proportion of primary companies’ reinsurance panels in CEEMEA. Their expansion into Asia- Pacific has met more resistance, however. In our view, regional reinsurers in Asia- Pacific are better positioned to withstand such competition. Local reinsurers such as Korean Reinsurance Co. (Korean Re) in Korea or Toa Reinsurance Co. (Toa Re) in Japan tend to have significant market share, and they are better established, with more defensible competitive positions. Long-established local reinsurers in Asia-Pacific have built solid relationships in their markets, where continuity of capacity is valued. This has provided some resilience against new entrants or transient and opportunistic players whose capacity is less certain. Our financial strength ratings on Asia-Pacific reinsurers reflect their resilience and are generally higher than those on their CEEMEA peers.
Changing Demand Patterns Put Smaller Reinsurers At A Disadvantage
Because primary insurers are finding it difficult to achieve their organic growth targets, they are striving to further optimize their reinsurance spending and generally reduce the amount of business they cede externally. This is fueling a growing trend for centralized reinsurance buying programs across large insurance groups. Such programs
Global Reinsurance Highlights 2014
“In developing markets in Asia-Pacific, the primary market is often concentrated, and much of the premium is ceded to the local reinsurer.”
can offer insurers economies of scale and a better view of their aggregate exposures, and the resulting cost savings mitigate difficulties in growing their top lines. However, they often favor reinsurers with larger capacities that can reinsure a broader range of risks. Some markets of Central Europe, in particular, are dominated by large multinational insurance groups such as Allianz, AXA, and Generali that use this approach. By contrast, in Asia-Pacific’s less mature markets, multinational insurance groups have a more limited presence, and smaller, local primary insurers still often use a decentralized buying approach and cede a higher proportion of their risks. These smaller retentions by primary insurers have an obvious positive knock-on effect on demand for reinsurance products. Some reinsurers may benefit from primary insurers’ need to diversify. Cedents are often reluctant to place large shares with a single counterparty, which can result in a concentrated credit exposure. Although we expect primary insurers to continue to value the benefits of a diverse reinsurance panel, the number of regional reinsurers that may be included in such panels is bound to be limited. In developing markets in Asia-Pacific, the primary market is often concentrated, and much of the premium is ceded to the local reinsurer. This gives external reinsurers less opportunity to build meaningful relationships with local insurers and take on a significant presence on their reinsurance panel.
Upcoming regulatory changes could increase competition for regional reinsurers, as global players enter the mix As regulators in Asia-Pacific increase their risk-based capital requirements, many small and midsized insurers are conducting capital relief transactions with reinsurers to sustain their growth. Regional reinsurers could then face a capacity constraint and be unable to meet their clients’ coverage needs, while
strongly capitalized global players could use this opportunity to expand their reach. Because market conditions are currently soft, reinsurers’ ability to generate earnings to expand their capacity is under pressure. It will be costly to increase capacity through equity capital raises, although debt and hybrid issues are likely to be less expensive while interest rates remain low. Purchasing retrocession cover from a larger competitor could be the most attractive way for a smaller company to extend its capacity at this stage in the insurance cycle. The demand for retrocession encourages well-capitalized global reinsurers into a market. They could choose to provide capital relief to both primary insurers and reinsurers in the region. In our opinion, the markets which they enter and their level of participation depends more on the regulatory capital requirements for the incumbents, than on limits affecting foreign participation. In Korea, for example, reinsurers face considerable increases in regulatory capital charges, and China is also strengthening its regulatory metrics. We believe global reinsurers’ capacity may thus be welcome in these markets.
Regional Reinsurers With Sufficient Capacity Can Exploit Their Proximity Advantage CEEMEA reinsurers are at a scale disadvantage, in our view. There is plenty of capacity within the sector, but for regional reinsurers the capacity they can offer is limited by their smaller size—CEEMEA reinsurers’ average capital base is under $200 million. By contrast, rated reinsurers in Asia-Pacific have an average capital base of more than $750 million. Nevertheless, we anticipate that some regional reinsurers, especially those with weaker capitalization metrics, may need to increase their resources if they are to meet the reinsurance needs of the primary market. Larger and more diversified reinsurers can offset volume reductions by expanding in other product lines where market conditions are more favorable. Regional reinsurers’ smaller scale can restrict their flexibility for disciplined cycle management—often, they find their scope for cutting back on business in soft market conditions is limited. To counter their smaller scale, long- established local reinsurers in Asia-Pacific have built solid relationships in markets where continuity of capacity is valued. This has increased their resilience against new entrants or transient and opportunistic players whose capacity is less certain.
39
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92 |
Page 93 |
Page 94 |
Page 95 |
Page 96 |
Page 97 |
Page 98 |
Page 99 |
Page 100