August 27, 2020 (MLN): Fitch Ratings has revised its sector outlook for Asia-Pacific (APAC) life and non-life insurers, including reinsurance companies, to negative from stable, following the coronavirus outbreak and its impact on the performance and credit quality of (re)insurers.

According to a report issued by the international rating agency, Asian reinsurers’ losses related to the coronavirus pandemic appear to be on a manageable scale thus far due to tight measures to curb the spread of the virus. In addition, they entered the crisis well-capitalized.

However, business growth will slow as the coronavirus pandemic takes its toll on economic growth and financial market stability, which will slow the premium growth of direct insurers. Fitch Ratings believes the maintenance of sound capitalization will be crucial to cushion against unexpected capital consumption due to a potential spike in claims as the pandemic continues to evolve.

PANDEMIC IMPACT ON FINANCIAL STABILITY

Fitch expects Asian reinsurers' business growth to slow as the economy and direct insurers' premium growth decelerate.

The pandemic may also affect claims development, although Fitch has not yet seen widespread, significant pandemic-related losses for Asian reinsurers. The tight measures to curb the spread of COVID-19 likely helped to limit the possibility of a sharp spike in related claims. Fitch will continue to monitor insurers' claims trend, the report highlighted.

Premium Growth to Slow

Based on statistics available from certain Asian reinsurers, as per the report, Fitch estimates that Asian reinsurers' premiums rose by more than 10% on average in2019. However, this is unlikely to continue in 2020 as direct insurers' business growth slows.

In Thailand, even though demand for health insurance remains strong, propelled by high medical costs and an aging population, consumers may delay taking up new insurance policies as well as renewing existing ones amid the economic downturn. This could in turn undermine demand for overall reinsurance coverage.

In contrast, Fitch expects insurers in China to accelerate their expansion in non-motor insurance in 2H20, as the government has eased restrictions on travel and allowed factories and stores to re-open amid a decline in infections since March.

Limited Pandemic and Business Interruption Claims

Pandemic-related claims on (re)insurers are contained in key Asian markets. For instance, in China and South Korea, basic medical expenses for infected individuals are covered by public medical insurance funds, so the spillover to the (re)insurers is low. Claims related to the pandemic have also been low in Sri Lanka and Indonesia, where treatments are usually offered on a no-fee basis by public-sector hospitals.

In terms of business interruption claims, Fitch has not seen widespread claims of such nature in Asia and consequently does not expect non-life reinsurers to be severely hit by such losses at the moment. Fitch will continue to monitor claims developments in this area in Asia.

Business interruption products in China generally contain an exclusion clause for epidemics. The Insurance Association of China said accumulated claim payments from the non-life sector related to the pandemic amounted to only CNY148 million as of May 2020.

Japanese life insurers' exposures to business interruption claims in their domestic business are also limited, given that the products cover only physical property damage and generally contain exclusion clauses for new pandemics.

Similarly, business-interruption claims in Australia and Thailand are limited given the exclusion of pandemic risks.

Fitch observes that Asian reinsurers are refocusing on capital management to enhance their risk-adjusted capitalization to build buffers against a potential increase in claims and investment losses. Slower business growth is likely to offset insurers’ need to inject additional capital.

To optimize the investment strategies, most industry players are increasingly working to balance the investment challenges in terms of assets and liabilities in a low interest rate environment which has been a challenge for regional (re)insurers for several years.

TIGHTENING OF (RE)INSURANCE PROTECTION AMID CATASTROPHE LOSSES

Fitch expects a renewed emphasis by(re)insurers to ensure the adequacy and appropriateness of their existing (re)insurance protection, following significant catastrophe losses in 2019 and 1H20 and in expectation of the tougher operating environment ahead.

Some Asian (re)insurers have also taken up catastrophe reinsurance/retrocession cover in excess of the minimum regulatory requirements to improve risk mitigation.

Gap in (Re)insurance Protection Persists

Insurance penetration, particularly emerging APAC markets, is still among the lowest in the world. The penetration rate is still below 10%, leaving many individuals and businesses at risk of huge losses when disaster strikes.

For reinsurers, the gap is an opportunity to extend their reach. However, closing the protection gap will be a challenge because many countries still suffer from coverage inadequacy. Raising the awareness of reinsurance products, service improvement, and collaboration among reinsurance-related entities should help to narrow the protection gap.

Catastrophe Losses Remain a Key Concern

Asia accounted for the world’s largest share of economic losses from catastrophes in 2019, at USD66 billion, or 45% of the global total. These events included typhoons Faxai and Hagibis in Japan which caused losses of over JPY1 trillion (USD9.5 billion) in FYE20.

Heavy rainfall from early June 2020 caused severe floods in southern China. Direct economic losses came to more than CNY69.6 billion (USD10 billion) as of 10 July 2020.

The catastrophe exposure of Sri Lankan insurers has gradually increased over the years as the country has experienced more frequent floods and landslides.

Enhancement of Catastrophe Protection Coverage

Fitch observes that the frequent catastrophes in APAC have pushed insurers to have more rigorous reinsurance arrangements to mitigate the losses.

Indonesia’s domestic cession policy has led to more risks being retained domestically, with most local reinsurers holding catastrophe cover of around 1:400 return periods.

Australian insurers' balance sheets have been relatively well protected as a result of extensive use of reinsurance

CONTINUED INTEREST IN ILS ISSUANCE

Fitch believes the issuance of insurance-linked securities (ILS) in Asia continues to increase, as it is a viable alternative to traditional reinsurance in providing protection. The scope of ILS has also extended beyond traditional catastrophe losses to include potential pandemic-related losses as well.

The first catastrophe bond covering Asian national catastrophe risk was issued in February 2019, followed by the first Asian sovereign bond to cover catastrophe losses in the Philippines in November 2019. Issuances were originated in Singapore, which is the ILS hub in Asia thanks to its ILS grant scheme, which it extended to end of 2022.

SIGNS OF RATE HARDENING

Fitch observes that the reinsurance pricing in Asian markets has been holding up well, with larger premium increases in certain business classes and the extent of increase varying by market. For instance, according to Marsh’s Global Insurance Market Index Report for 1Q20, property insurance pricing generally rose by more than 5% in Asia.

M&A ON HOLD AMID PANDEMIC DISRUPTION

Due to ongoing economic uncertainty and the risk of market turmoil, according to Fitch, business alliances i.e. merger & acquisition (M&A) activities have become more difficult.

REGULATORY DEVELOPMENTS ON CHANGING ENVIRONMENT

Fitch sees regulatory changes in several Asian markets that have the potential to shake up the way in which reinsurers currently operate. The regulatory changes will push reinsurers to develop the necessary internal capabilities and risk-management frameworks to manage the impacts.

Fitch

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