Climate Change, Pandemic Drive Asian Reinsurers’ Transformation: Fitch Ratings

August 19, 2021 (MLN): The increased frequency and severity of natural catastrophes due to climate change highlight the greater role of Asian reinsurers in bridging the region’s protection gap between the economic losses brought about by natural disasters and insured losses, the latest report issued by Fitch Ratings says.

Fitch believes the protection gap signals the vast potential for reinsurance growth, but Asian reinsurers face challenges in enhancing their risk mitigation capability and managing premium pricing adjustments amid the frequent catastrophe losses. Appropriate risk modeling and catastrophe management frameworks are crucial to quantify the potential losses.

The Covid-19 pandemic has dampened Asia’s economic growth and development, but it has also raised the importance and demand for reinsurance. The rapid transformation during the pandemic has fuelled demand for adequate insurance protection for emerging risks such as cyber-attacks. The health crisis has also re-emphasized the need for life insurance. These give rise to the potential to accelerate reinsurance growth and encourage reinsurers to manage comprehensive risk assessment to determine policy coverage, rates, and premiums.

The reinsurers’ capital management is centered on the reduction of non-essential expenses and setting aside appropriate capital buffers to back up business growth amid economic uncertainty. Asian reinsurers’ capital remains commensurate with their business profiles, based on available statistics for selected reinsurers.

Regulatory relaxation of foreign shareholding limits to increase overseas investors’ interest in Asian reinsurers could lead to greater M&A, business rationalization, and economies of scale in the medium-to-long term.

Fitch expects the insurance-linked securities (ILS) market to gain traction in the medium term after seven catastrophe bonds were issued using Singapore-domiciled vehicles up to July 2021. Hong Kong is also becoming one of the regional hubs for the insurance-linked business after it finalized legislative preparations for ILS in early 2021.

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