Explore the key global reinsurance markets using the map below, or jump straight to the market overviews
While premiums have strengthened since the losses of 2011, the challenge of excess capacity remains. Further capital repurchases are likely to follow. The longer term challenge is how to re-balance capacity and develop investment opportunities.
ILS is set to play a crucial role in these developments. Bermuda has been one of the main focal points for the convergence of reinsurance and the capital markets over the past year. Indeed, while many expected to see the emergence of a ‘class of 2012’ in keeping with the start-ups of 2001 and 2005, the new class has actually been made up of ILS side cars and dedicated ILS funds.
The investment in ILS reflects its growing move into the mainstream. ILS provides opportunities to simplify risk transfer and an efficient way to match risk, capital and reward. Many investors have been attracted by the portfolio diversification, strong yields and flexibility of exit.
ILS’s position as a complement rather than a challenge to mainstream reinsurance in Bermuda is reflected in the number of companies and capital providers that are looking to both as part of their development plans. There is also a lot of crossover of talent and technical expertise. For more on ILS, read PwC's 'Unlocking the potential of ILS'
In 2007, the Brazilian reinsurance market was opened up following nearly 70 years of monopoly by the state-owned IRB (Law 126/07).
The liberalisation of the market included the admission of foreign reinsurers as either ‘local’ (incorporated and holding capital in Brazil) or ‘admitted’ (incorporated abroad with local representative office) or ‘occasional’ (operating through a nominated agent) entities. Insurers must place at least 40% of cover with a local reinsurer, but the admitted and occasional reinsurers can compete for the rest of the business.
The local reinsurers include a mix of Brazilian companies and international groups including ACE and XL*. IRB’s market share has declined in the face of new competition. But it remains the market leader and is showing signs of having turned the corner as it seeks to sustain its lead and compete with new entrants.
At 1.6% of GDP, non-life premiums are around half of a mature market (Germany is 3.7%, for example), highlighting the potential for growth. Facultative reinsurance is the most common type of cover in Brazil and will be in high demand as the country makes significant investment in infrastructure and prepares for the coming 2014 World Cup and 2016 Olympics.
As the reinsurance centres in Rio and Sãu Paulo continue to develop, Brazil has the potential to become the leading hub for this fast growth region. Further developments in talent and technology will be needed to realise this potential. While international reinsurers have contributed to the expansion and increasing sophistication of the market, most have come to recognise the importance of local knowledge in customising their operations to Brazilian risks and realities.
*CNSeg, Reinsurers authorised to operate in Brazil, updated 12.03.12
While the state-owned China Re (the shares are owned by the Ministry of Finance and a state-owned investment company) still dominates the reinsurance market, a number of global reinsurers and brokers have established operations in the country. Swiss Re and Munich Re are each generating more than $1 billion in premiums in the country despite a relatively small market share (Bloomberg, 10.08.11). Looking ahead, most of the companies taking part in our latest survey of sentiment among foreign insurers and reinsurers in China anticipated annual premium growth of at least 20% over the next three years. (See Foreign insurance companies in China, published by PwC, 12.12.11)
The development of the reinsurance market is an important government priority. Among the objectives outlined in the country’s 12th Five Year Plan are the ‘development of catastrophe insurance’ and to ’promote construction of the reinsurance market’*. There are also plans to set up an insurance exchange in Shanghai as part of the city’s development as an international financial centre. China Daily, 21.02.11
As China’s insurance market becomes more competitive and solvency regulation tightens – the country plans to introduce a new regime with strong parallels with Solvency II over the next few years ** – there will be a strong spur for the development of more capital efficient reinsurance solutions. Both China Re and its international competitors will be vying to meet this demand.
As China Re looks to extend its international reach and acquire new expertise, notable recent developments include its strategic partnership with Catlin. The partnership will allow Catlin to ‘increase its presence in this rapidly growing marketplace’ and, through the new joint syndicate at Lloyd’s, ‘help build a foundation for China Re to grow into an important player in the world reinsurance market’ ***. The tie-up includes sending a number of China Re staff on secondment to its UK partner, helping the corporation to build up its ‘experience of international reinsurance operations and management’.
* Statement on the Chinese insurance industry made in the 12th Five Year Plan (2011-2015)
** CIRC media release, 08.04.12
*** Catlin media release, 18.11.12
Recorded at nine on the Richter scale, the March 2011 earthquake was the biggest ever to hit Japan since records began, with the ensuing tsunami claiming more than 20,000 lives and generating some $35 billion in insurance losses*. Hundreds of aftershocks of more than Richter scale five followed.
The industry’s response to the disaster has done much to enhance the perceived value of insurance and insurance companies within Japan, with steps taken to actively seek out and support claimants being strongly welcomed by customers, the media and the government.
The response from the industry has also included an overhaul of catastrophe model assumptions, reflecting both the higher than anticipated losses from the disaster and the pressure on other fault lines caused by the quake. The renewal season earlier in the year highlighted the pressure on catastrophe capacity, with both prices and the thresholds for the higher layers of cover increasing.
The Thai floods later in 2011 highlighted reinsurers’ vulnerability to increasing globalisation. Having already transferred a considerable amount of manufacturing to Thailand, Japanese corporations increased this still further in the aftermath of the earthquake. Once the floods in Thailand struck, some of the biggest business interruption claims came from Japan.
At the same time, this rapid economic development in the region opens up opportunities for Japanese insurers and reinsurers. Some are looking to make up for slowing growth at home through acquisitions and branch openings in other parts of Asia. Japan certainly has the well-established reinsurance businesses and depth of professional expertise to be a major reinsurance hub for fast growth Asian markets. The challenges include a relatively high tax rate. The market may also need to develop its electronic infrastructure and capacity for innovation.
*Swiss Re Sigma ‘Natural catastrophes and man-made natural disasters in 2011’, 28.03.12
Lloyd’s has set out ambitious plans to ‘grow, internationalise and diversify’ as it seeks to become the number one hub for specialist reinsurance in the new global marketplace (from Lloyd’s Vision 2025, published on 11.05.12). Key planks of the Lloyd’s Vision 2025 strategy include developing strong overseas hubs, encouraging new entrants and attracting more investment from fast growth markets.
The challenge is how to bring target business into Lloyd’s. Many Lloyd’s companies will continue to pursue multi-platform strategies in which reinsurance business is channelled to lower tax platforms in Bermuda or Switzerland or ceded on to them after it initially comes through London. Some business may also be channelled through London’s company market as this can sometimes be seen as more straightforward than Lloyd’s. In turn, while premium volumes in Asia are encouraging, competition for the best business is intensifying.
As Lloyd’s seeks to compete, it will therefore need to make sure that placing business is easy and efficient enough to attract target business. A key aspect of enhancing ease of business will be the development of one stop shops that allow brokers and clients to place all their risks together. In turn, the success of the overseas hubs will depend of being able to ensure enough presence on the ground to develop key relationships and bring underwriting expertise to bear.
Lloyd’s believes that its innovation and adaptability will be central to ability to meet its Vision 2025 objectives. A further and possibly under-sold advantage of Lloyd’s is its lead in the implementation of Solvency II. With the directive already part of business as usual within the market, Lloyd’s can put the disruption behind it and concentrate on commercial opportunities.
The strengthening of regulation and government efforts to raise awareness of insurance in the Middle East have spurred strong growth and attracted a flurry of start-ups, both from within the region and from international groups.
Yet while premiums doubled between 2005 and 2010 (includes Turkey and Central Asia), they are still only 1.5% of GDP, lower than the emerging market average of 3% (from Swiss Re Sigma, World Insurance in 2002 and 2010). The influx of new companies in a market that is still relatively small has resulted in overcapacity, leading to intense price competition and inadequate premium rates.
Reinsurance companies are feeling the knock-on effect of low direct insurance rates in a market that relies heavily on reinsurance protection (cessions vary from 35% to 65% of premiums in different markets (Saudi Re website, 16.07.12)). If one reinsurer seeks to raise rates or toughen terms and conditions, insurers know that they can generally get a more favourable deal elsewhere.
Some reinsurers may continue to offer below break-even rates to build up market share in a region that will continue to enjoy strong growth. But consolidation will be needed to bring capacity and premiums into equilibrium.
For reinsurers based in the EU, the demands of Solvency II may raise the capital charges on some of their business in the Middle East and so make it harder to sustain low premium prices.
Dubai has become an important regional hub for reinsurance and is now reaching into other growth markets such as North Africa. But as with reinsurance in the region as a whole, the development of local talent will be critical in reducing the costs of bringing in expatriate personnel and providing a sustainable platform for long-term growth. Greater availability of experienced underwriters, claims professionals and other key personnel will be important in improving risk selection, reducing claims leakage and ultimately strengthening margins. Further investment in technology and operational infrastructure will also be important in enabling the market to reach its potential.
As a major Asian reinsurance centre, Singapore plays host to a range of leading global reinsurance groups, many of whom service Asia-Pacific markets from their offices in the city. Singapore is also home to Lloyd’s Asia and the number of Lloyd’s syndicates with a presence in the market continues to increase.
Singapore’s offshore general insurance business has grown significantly over the years. 20 years ago, the offshore segment (for both direct and reinsurance business) made up only 40% of Singapore’s total general insurance business (in gross premiums terms). By 2011, the offshore ratio had grown to 65%.
For the reinsurance sector, offshore gross premiums have grown by an aggregate of more than 70% over the last five years * The leading sources of demand are China (19%), Australia/NZ (18%), Japan (13%), South Korea (11%), India/Pakistan/Sri Lanka (9%) and Indonesia (8 %).
The longer term fundamentals and growth prospects for Singapore remain strong. Key opportunities include infrastructure development and increasing trade within Asia and between Asia and the rest of the world. In turn, increasing urbanisation, an expanding middle class, rising affluence and longevity will all stimulate greater demand for insurance and reinsurance. There will also be a growing need to cover large, specialised and complex exposures in areas such as trade credit, political risks and aviation/aerospace risks.
Further opportunities centre on the impact of climate instability on the frequency and severity of catastrophes and the growing asset values at risk as economies develop. A significant proportion of the world’s natural catastrophes occurred in Asia in 2011. The limited insurance pay out following the terrible tsunami of 2004 highlights the under-insurance in many markets.
For Singapore, the attractions for international businesses include a skilled labour force, well-developed regulation and competitive tax environment. Challenges include the continuing review of Singapore’s Risk-Based Capital Framework as regulators look to update regulation and bring their framework into line with the updated IAIS core principles.
* Market statistics from MAS website
Switzerland continues to attract new entrants from around the world as international insurers seek to develop their business in continental Europe. Building on its established expertise and stable regulatory platform, Switzerland is also providing the launch pad for moves into the Middle East and Africa.
Swiss Re is at the forefront of moves into SAAAME markets, with a long-term plan to develop expertise and relationships on the ground. Within the European market, small and mid-size players are picking up business from the diversification of reinsurance portfolios and the ability to offer flexible and cost-efficient cover. Many are also looking to win new business and enhance the value of reinsurance by working with cedants to develop long-term relationships and tailored risk mitigation strategies.
Technology is going to play a key role in allowing Swiss reinsurers to sustain margins and market share in low-growth mature markets. This includes the development of automated pricing tools capable of consolidating and analysing data from across multiple information sources.
US reinsurers have moved in two directions following the high catastrophe losses of 2011. Some of those that had sought out more geographically diversified natural catastrophe exposures are now opting to withdraw following the losses of 2011 and concentrating on better understood domestic risks. Others that weathered 2011 relatively well have continued their expansion in key mature and fast growth markets, taking advantage of the relatively favourable acquisition prices where possible.
In some cases, underwriting results have fallen short of expectations even after allowing for various catastrophe losses. Some forward-looking US reinsurers are looking closely at the reasons for these divergences so that any weaknesses in underwriting processes, pricing discipline and the level of rigour and consistency around permitted changes to terms and conditions can be addressed ahead of the next market upturn.
A key feature of the market is surplus capacity, notably in the primary market. The response of primary carriers and reinsurers alike includes stock buyback programmes. It also includes moves towards consolidation, which are likely to gather pace over the coming year if the gaps between vendor and buyer valuations start to close, and investment in internal programs.
The significant investment in technology and advanced risk management techniques is going to have a key impact on the market and how businesses are managed. Insurers and reinsurers are looking to enhance underwriting through real-time monitoring, new pricing and modelling platforms and automated capture of key risk metrics. They are also looking improve efficiency through greater automation in underwriting, quotation, submission and administration.
A more embryonic development that is set to emerge as an important competitive differentiator focuses on advances in the monitoring of emerging or horizon risks, allowing agile reinsurers to make strategic entries and exits into specific segments more quickly than their peers.