Last year, the Global Reinsurance Forum (GRF) identified 54 major markets that have implemented, or are in the process of implementing, barriers to global reinsurance. This is a 17% increase on the 45 territories that the industry body identified in 2019, suggesting that the problem of closed markets is getting worse.
“Although the situation has been improving over the years, in some areas things are moving in the wrong direction, mostly because of inertia towards rules that are already in place as well as a few new restrictions coming in,” says the regional manager of an international insurer.
According to the GRF report, five countries have introduced, or are thinking of introducing, restrictions to cross-border reinsurance. These are Australia, Bhutan, Mongolia, Myanmar and New Zealand. For the sake of comparison, two countries in the region – Saudi Arabia and UAE – have been taken off the list of territories that impose such restrictions.
On top of this, certain countries that already had restrictions in place – such as China and India – have further tightened their rules for ceding risk overseas. Some countries, such as Vietnam, have introduced new local retention limits, while new risk-based capital rules in Thailand appear to favour local reinsurers over international ones.
Regional Manager
International insurerThe regional manager says that the case of India is particularly troublesome. While the country appears keen to establish itself as a reinsurance hub, the current right-of-first-refusal model still creates too much of a disincentive to take risk overseas, he says.
“You have to ask yourself what is behind these various regulations? Are they genuinely in the interest of the insured in a particular country?” says the regional manager. “I’m not saying that there’s anything nefarious going on, but regulators often get influenced by those in the country without fully appreciating the bigger picture.”
The benefits of open reinsurance markets
For Javier Sánchez Cea, Chief Regional Officer for Asia Pacific at Mapfre Re, the benefits of open reinsurance markets are clear.
“Facilitating cross-border reinsurance capital flows fosters market stability, enhances competitive dynamics, and, in turn, affords insureds enhanced access to global best practices,” says Cea.
New Zealand’s Earthquake Commission, a government organisation, knows the value of being able to distribute risk to the international market.
Javier Sánchez Cea
Chief Regional Officer for Asia Pacific at Mapfre ReBetween September 2010 and the end of 2011, four major earthquakes shook Christchurch and surrounding towns on New Zealand’s South Island. In 2016 another major earthquake, with a magnitude of 7.8, struck the South Island. According to estimates from Moody’s RMS, the earthquakes resulted in combined losses of more than NZ$40 billion (US$23.6 billion).
The earthquakes completely wiped out the EQC’s NZ$6 billion pool of reserves, leaving the New Zealand government on the hook for some of the damages. At the time, the EQC’s scheme was capped at NZ$100,000 per event for building repairs and up to NZ$20,000 for contents – plus goods and services tax. This building cap has since been increased to NZ$300,000, while contents has been removed from EQC coverage.
The cost to government coffers would have been much worse had the EQC not transferred a lot of its risk overseas.
In 2010-2011, EQC’s reinsurance contract provided NZ$2.5 billion of cover with an attachment at NZ$1.5 billion. One key feature of the programme was that reinsurance contracts contain an automatic reinstatement of cover clause. This means that if there are two events in the same contract year, the second event is also covered by reinsurance. EQC made two claims for reinsurance for the September 2010 and February 2011 events.
“The cost of a natural disaster in New Zealand can be very expensive compared to the size of our GDP. Having these offshore reinsurance agreements in place helps take pressure away from the Crown’s balance sheet,” says Chris Chainey, the EQC’s Chief Financial Officer.
Chris Chainey
Chief Financial officer at EQCSince the 2011 earthquake, the EQC has continued to expand its reinsurance programme. At last year’s renewals, in June, it managed to secure a record NZ$8.2 billion through the reinsurance markets.
“The Christchurch earthquake is a very good example of the benefits of open reinsurance markets, and in some ways has probably strengthened our relationship with global reinsurers,” says Chainey.
He adds that the EQC works closely with its reinsurers, “not just around capital but on building resilience and trying to mitigate the impact of future natural disasters”.
According to the GRF report, New Zealand is considering tightening up rules on cross-border transfer of risk by imposing new conditions on reinsurers who want to continue to do business in the country, but nothing has yet been set in stone.
Prudent risk-taking
The challenges to cross-border insurance of risk are not just to do with regulatory barriers. The quality of the risk that is being offloaded can also make it difficult for cedents to secure decent cover from international players.
There are few better markets to look to for an example of this than Indonesia, where for years the domestic regulator, the OJK, refused to allow insurance risk to be transferred overseas, for fear that this would contribute to the country’s already ballooning balance of payments deficit.
It was only in 2020 that OJK eventually removed this restriction, allowing reinsurance to be purchased from firms with onshore offices in the United States, Japan or Singapore (effectively capturing all global reinsurers).
Delil Khairat
Technical and Operations Director at Indonesia ReHowever, according to Delil Khairat, Technical and Operations Director at Indonesia Re, by then it was too late.
“Government intervention in the reinsurance markets created complacency among local reinsurers, and led to a reduction in the quality of business being underwritten,” says Khairat.
This means that, even though the regulator has now eased restrictions on cross-border reinsurance, cedents are still finding it very difficult to secure overseas coverage at competitive rates. The problem has been compounded by the fragmented nature of Indonesia’s market, which consists of 72 general insurers, 49 life insurers and seven reinsurers, according to Fitch Ratings.
“Managing a risk portfolio is about two things: diversifying risk and increasing capitalisation as risk exposure grows. This didn’t happen, which is why domestic (re)insurers are now struggling to place risk in the overseas market. The quality is not up to the standard of foreign reinsurers,” says Khairat.
OJK is now making an attempt to resolve this problem, and last November published a roadmap for reform. Part of this roadmap will address what the OJK regards as “unhealthy competition” that it says has encouraged domestic (re)insurers to set “premium rates that do not align with the risks covered”.
Khairat’s comments certainly chime with the views of international reinsurers.
“In assessing markets, we need to look at the way domestic (re)insurers conduct business, and how they underwrite risk,” says Victor Kuk, Head of Client Markets for P&C Reinsurance at Swiss Re. “If a particular reinsurance market – due to various developments – focuses more on distribution, rather than underwriting, this may deter foreign reinsurers from doing more in that market.”
Improving local markets
Swiss Re is very keen to deploy its expertise in Asia in order to help strengthen local underwriting capabilities. In 2022 the global reinsurer struck up a partnership with Indonesia Re in order to provide the market with access to better analytics solutions and risk consulting services.
Victor Kuk
Head of Client Markets for P&C Reinsurance at Swiss Re“Indonesia is a unique market, which has grown significantly in insurance penetration and exposure,” says Kuk. “The use of better data analytics can help the market strengthen its underwriting capabilities. We are seeing this progressively improve at the moment, which is encouraging.”
Global reinsurers, such as Swiss Re, also like to see well-designed risk-based capital measures in place. More advanced markets – such as Malaysia, Singapore and Hong Kong – have already issued such rules. Some of the less developed markets, such as Vietnam, are currently working on similar frameworks, but have not yet issued such guidelines.
“RBC frameworks put more emphasis on different risks, because the more risks you have the more capital you need,” says Kuk. “This pushes domestic insurers to focus on underwriting, risk selection, as well as how they manage claims and reserving – which is positive as it ultimately allows us to engage with them more.”
A couple of years ago, there was considerable fear that a new capital charge for Chinese insurers that wanted to place risk overseas (enshrined in the country’s solvency regime) would kill the market for cross-border reinsurance. However, this appears not to have happened. The regional manager quoted at the start of this piece suggests that this is because China’s domestic insurance market is very well-capitalised, so the additional capital charge wasn’t a significant problem.
“APAC is definitely a growth region for us. What we now need to focus on is making sure that premiums catch up with the risk exposure, otherwise the protection gap is just going to get bigger and bigger,” says Kuk.
