Reinsurance - A global Asia: Local reinsurers setting their sights on a wider world


Source: Asia Insurance Review | Sep 2016 Categories: Cover Story


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Increasing interest in Asia has helped local reinsurers grow beyond their borders. Faced with competition, Asian reinsurers have learnt quickly and set their sights on the wider world. We speak to seven Asian reinsurers about their global plans.
By Ahmad Zaki
 
 
Asia has grown in importance for insurance and reinsurance as the economies in the region grew at a fast clip, some at double-digit figures for decades. International as well as domestic players have mushroomed and local companies have not only expanded their reach outside their countries into the region but are now going global too. 
 
   Singapore has long been known as an important reinsurance hub for Asia. With the opening of China Reinsurance (Group) Corporation’s (China Re) first overseas branch in Singapore, the island nation extends this role to one as a launching pad for (re)insurers wanting to go global as well.
 
   “This branch office will act as a bridge for the insurance market between China, Singapore and the Asia Pacific region, deepening the financial and trade cooperation between Singapore and China and contributing to the professional development of Singapore as an international reinsurance centre,” said Mr Yuan Linjiang, Chairman of China Re at the opening of the branch in Singapore.
 
Going global
Globalisation is a matter of practicality for most Asian reinsurers. According to the National Reinsurance Corporation of the Philippines (PhilNaRe), the emerging markets in Asia need to be more globally competitive in order to grow properly. 
 
   Mr Augusto Hidalgo, President and CEO of PhilNaRe said: “Operating in catastrophe prone Philippines means we need to increase geographical and line of business diversification. This means cautiously writing more global business within appetite and underwriting competencies.”
 
   Similarly for Japan-based The Toa Reinsurance Company (Toa Re), globalisation is the most direct path towards diversification of risks, helping them ensure a stable profit. 
 
Catching up with the global market
Within their own country, a local (re)insurer can depend on long-term relationships within the private and public sectors to remain competitive. However, expanding globally and regionally will prove challenging in terms of building such connections, so technical expertise is required. Said Mr Hidalgo, “We must enhance our emerging market customers’ competitiveness by raising competence in capital management and technical skill. With this, they can more easily defend shares at home and be competitive abroad.”
 
   The reinsurers we interviewed agreed that technical competencies and a customer-centric approach were important prerequisites for success. “What a reinsurer makes out of the market depends on these factors. That is why there are weather-beaten long-term players as well as fair-weather friends and fly-by-night operators in this business,” said Mr S.A. Kumar, President and CEO of Asian Reinsurance Corporation (Asian Re).
 
   “There is no doubt that how long you have been in the market makes a big difference in your technical expertise,” said Mr Jong-Gyu Won, President and CEO of Korean Reinsurance Company (Korean Re). “However, Asian players in the (re)insurance industry are catching up fast with their counterparts in the advanced markets. There may even be some areas where Asian regional players know better than international players, such as knowledge of local market conditions and needs. This makes it crucial to seek cooperation with each other whenever necessary.”
 
The need for technical expertise
In an environment where the biggest names have been dominant for decades, having built strong long-term relationships with clients and set roots down in every major market in the world, Asian reinsurers are doubling down on their technical expertise in order to remain competitive as they enter the global playing field.
 
   Mr Zainudin Ishak, President and CEO of Malaysian Reinsurance Berhad (Malaysian Re), said: “Technical expertise is important as this industry is driven by the quality of human capital and this is not only limited to underwriting expertise alone but other areas such as investment, risk management and actuarial are equally important.”
 
   Mr Chris Kershaw, Managing Director of Global Markets at Peak Reinsurance Company (Peak Re), expanded on the topic: “The expertise needed is no longer the narrow catastrophe focused expertise of yesterday, but rather the business savvy expertise that understands and adapts to the markets in which our clients and their customers live and work. The logic of their being a growth reinsurer active in Asia is not just to be closer to the markets, but to actively engage with and help to address the challenges which emerge.”
 
Building bonds for better business
Long-term relationships have always been important in the reinsurance business and always will be, as they are crucial in building sustainable business over multiple cycles and remain relevant in the highly competitive Asian market. Globalisation increases the need to build such relationships, utilising knowledge and expertise of local partners to be competitive in a new market.
 
   Mr Tomoatsu Noguchi, President and Chief Executive of The Toa Reinsurance Company (Toa Re) said: “We think these strategies lead to sound business expansion in Asia, eventually contributing to the development of the Asian insurance market.”
 
   From the perspective of Asia Capital Reinsurance Group (ACR), robust relationships are the cornerstone of the industry. Mr Hans-Peter Gerhardt, Group CEO said: “Clients expect us to be consistent, dependable and predictable. These are the key building blocks of a company’s brand and what our business partners continue to value and appreciate. It is therefore important to always be on the ground with your clients so that you can better understand their needs and be able to respond to these needs more efficiently.”
 
   Korea Re’s partnership with Beazley, which allows them to enter the Lloyd’s market, is an example of building such a relationship as a foothold to going global. Mr Won said: “The access to the Lloyd’s market will give us the opportunity to experience advanced reinsurance practices and techniques, helping to increase our presence in the global reinsurance market. Under the partnership, Beazley would in turn gain access to Korean Re’s local expertise, which would help them expand their business in Korea and Asia. Both companies are learning a great deal from the partnership, and I expect the partnership to create exciting synergies for mutual growth of our two companies.”
 
Capital is still important
Capitalisation levels is another factor that is vital for expansion and for simply staying in business. Mr Won pointed out a growing trend of tightening capital requirements from regulators and changes in financial reporting standards, which is causing some minor concern.
 
   “In Korea, for example, the planned introduction of IFRS4 Phase II is forcing us to place a greater focus on capital strength. It is thus imperative that we explore effective capital management strategies with a view to strengthening and optimising our capital position,” he said.
 
   While capital does not automatically translate to profits, it does serve as a crucial tool for longevity. “With M&A of the sector at record levels which resulted in larger reinsurers, strong capital buffer is now very crucial to compete for business. Not only that, (re)insurers with low capital buffer will also be at disadvantage should there be more refinement to regulatory requirements that involves capital measures,” said Mr Zainudin.
 
   Mr Gerhardt is also of the opinion that capital is vital for a company that takes risks, highlighting its importance in maintaining its ratings and its client relationships.
 
   While capital does not automatically translate to profits, it does serve as a crucial tool for longevity. “With M&A of the sector at record levels which resulted in larger reinsurers, strong capital buffer is now very crucial to compete for business. Not only that, (re)insurers with low capital buffer will also be at disadvantage should there be more refinement to regulatory requirements that involves capital measures,” said Mr Zainudin.
 
Taking advantage of innovation
In keeping up with global competitors, Asian reinsurers have made significant strides to set themselves apart, innovating and transforming their business at a rapid rate. Integration of new technology, expanding into new lines of business and even restructuring parts of the company to improve efficiency and effectiveness are just a sample of the strategies employed.
 
   In June 2015, Korean Re made the biggest reorganisation of its underwriting operations in its 52 years of history. The Overseas Department was dismantled, and the business that it had undertaken was broken down by line of business and integrated into underwriting teams such as Property, Engineering, Marine and Casualty. 
 
   “The Global Business Team was newly created as the control tower in charge of establishing global business strategies and making sure overseas operations are conducted and managed in line with such strategies. The new structure is aimed at enhancing Korean Re’s professional expertise, client services and business management,” said Mr Won.
 
   Other reinsurers pointed out that innovation was built into the companies’ foundations. “We built our initial platform here in Asia-Pacific from which we had always intended to grow into the rest of the world, both developed and emerging markets,” said Mr Kershaw. “We established a low cost and efficient operation in Hong Kong without sacrificing quality or professional standards and capabilities. This cost advantage coupled with the fact that we started operating in the strong growth emerging markets give us a unique position.”
 
   Technology remains a strong driving force in innovation, with Mr Noguchi saying that they monitor the impact of new technology and telematics in the life and automobile sectors, and the inevitable effects it will have on their clients’ needs for reinsurance and risk management. 
 
   “For example, there is a possibility that policyholders’ needs may change due to the progress of preventive care by the development of wearable technology or genetic testing technology. In such case, new insurance products with more risk segmentation will be developed in accordance with the change of policyholders’ needs,” he said.
 
   ACR has also been exploring technology-based methods, and have been investing in new online distribution mechanisms to share with their clients. “At the same time, we are also bringing in products that have been tried and tested in markets around the world and adapting it to the region and the needs of our clients,” said Mr Gerhardt.
 
Revenue diversification needed for secure growth
For Malaysian Re, they have been employing several strategic measures to ensure revenue diversification, in the face of the many challenges existing in the market today. 
 
   “One of the strategic measures our organisation is looking at is to offer a retakaful service. It is our strategic move that this retakaful division to become an alternative revenue contributor so that Malaysian Re will remain on a sustained footing amidst increasing industry competitiveness,” said Mr Zainudin.
 
   And with the Malaysian financial market moving towards a more liberalised outlook, which would lead to greater business opportunities at the cost of higher levels of competition, Malaysian Re is placing strategic partnerships at the top of their priority list, in order to collaborate on and implement innovations in markets they have a strong presence in.
 
   “Moreover, the establishment of retakaful window is expected to be a salient point to attract other reinsurers who are looking to have cooperation along the retakaful products,” added Mr Zainudin.
 
Forging ahead
The Asian reinsurers have always faced forward, and have been hungrily eating up the distance between them and solidly established global players. Despite the volatility of today’s financial environment, many of them are taking bold steps to catch up to, and even pull ahead of their competitors.
 
   Talent development seems to be the main focus that is shared between most Asian reinsurers, many of them noticing the need for specialised expertise and skills in an increasingly sophisticated underwriting environment. With intentions of going global, Asian reinsurers are also faced with the challenge of dealing with different global regulations.
 
   “To respond promptly to drastically changing business environments and diversified needs, we essentially need to further improve our expertise and skills on a companywide basis and cultivate personnel who can show appropriate leadership at worksites,” said Mr Noguchi. “Employees are irreplaceable assets for (re)insurers that handle invisible products. We regard human resource development as one of our top-priority issues.”
 
   Mr Won also revealed similar plans, calling it a necessary element of the global expansion. “For the rest of 2016 and 2017, we will remain focused on developing and expanding our pool of experts as we believe it will be a critical element of our competitiveness on the global market.”
 
   Korean Re launched their global expert programme in March 2015, intended to improve their knowledge and information on various foreign countries which could be their potential markets. 44 countries were initially selected as targets for their research. 
 
   “Going forward, this programme will be further developed to build an extensive global market database, which will be an invaluable resource for our efforts to expand into overseas markets.”
 
   Asia’s reputation as the next frontier of insurance has grown rapidly over the past five years and (re)insurers in Asia have grown steadily as a result. With this growth comes a rising ambition to spread their wings and plant their flags on foreign shores, and the Asian reinsurers are leading the way.
 
Highlights
• Technical expertise is more important than ever, but that expertise needs to be adaptable and client-focused
• Reinsurers have been employing innovations in technology, corporate restructuring and revenue diversification
• Building long-term relationships and talent development are the most critical methods to beating out the competition
 
Increasing interest in Asia
 
Key challenges for Asian reinsurers
 
A wishlist for regulators 
Adopt a global view
“The localisation of reinsurance domestically that we have been seeing in the recent years is a worrying trend that seems to be working against th6e notion of a global market. Countries that retain all of their exposures domestic will suffer if a major catastrophe occurs. Therefore, if I had one wish for Asian regulators, it will be for a more open minded global approach because reinsurance only works where there is a global diversification of peak risks.”
Mr Hans-Peter Gerhardt
Group CEO, ACR
 
 
Help markets to take precautions against market volatility
“Most of watchdogs in the Asian financial field have been doing well, but currently they found themselves confronted with a variety of challenges. Considering the growing concerns on consumer protection and financial market stability, they have no option but to strengthen the regimes for capital adequacy and risk management on credit, market and natural catastrophe risks. 
 
   Supervisory bodies need to monitor the global economic outlook and financial market conditions that can impact the market’s underwriting and investment performance. Based on their analysis, they need to take precautions against market volatility and encourage businesses to take pre-emptive measures.”
Mr Jong-Gyu Won
President and CEO, Korean Re 
 
 
Consolidated guidelines for insurers and reinsurers may not work
“To streamline the regulatory measures and to have a joint effort by the regulators, Islamic scholars and industry players to promote retakaful for international community to be more receptive of this product. There seems to be consolidated guidelines applicable to both, insurers and reinsurers which are putting reinsurers at disadvantage. For example, the risk-based regime looks into direct insurers and reinsurers broadly in the same way whilst the risk exposures may be vastly different.”
Mr Zainudin Ishak
President and CEO, Malaysia Re
 
 
Balance globalisation pressures with national interest
“They should compare notes more often. Philippines is aiming for minimum capitalisation more than twice Japan’s. How will this affect entrepreneurship and innovation? They should invest in capacity building for regulators and appeal to government for insurance capacity building at Finance, particularly Treasury. They should balance the pressures of globalisation with the national interest: sustainable capital development by locally owned business.”
Mr Augusto Hidalgo
President and CEO, PhilNaRe 
 
 
Free trade between nations is crucial
“There is much noise in the world at the moment which smacks of erecting barriers, whether it be walls in the US or barriers to trade.  We would like to see a return to prudential regulation which favours free trade between nations. Reinsurance is a global business, and developed economies benefit from diversification of the capital that will support them in a major event, just as developing countries will benefit from inflows of foreign currency after a major loss. This will help to rebuild shattered lives and communities, and not internalise the consequences of the event. Internalising will just slow down recovery and rebuilding.”
Mr Chris Kershaw
Managing Director of Global Markets, Peak Re
 
 
Fair market competition and standardisation of ORSA rules needed
“In the Asian region, there is a movement to implement a regulation that makes ceding to domestic reinsurers a higher priority or beneficial than to foreign ones. This is creating a barrier for reinsurers like Toa Re that are conducting business on the worldwide basis through a limited number of offices.
 
   To realise the sound growth of the insurance market while convenience is ensured for policyholders, we consider that it is important to create an environment where all reinsurers can conduct their activities in a fair manner. We wish the regulatory authorities would draw up highly transparent rules based on the principle of fair competition.
 
   The implementation of ORSA (Own Risk and Solvency Assessment) rules is underway globally including in Asia, but relevant regulations may be finalised differently in each country. Accordingly, we are afraid that (re)insurers may incur more costs to deal with them. It is desirable that requirements based on the ORSA rules be standardised through cooperation among regulatory authorities of each country so that the incurrence of unnecessary costs for (re)insurers can be avoided.”
Mr Tomoatsu Noguchi
President and Chief Executive, Toa Re
 

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