The post Hong Kong seeks to ‘enhance competitiveness’ of risk-based capital regime: IA appeared first on InsuranceAsia News.

As a “source of capital”, reinsurance’s strong loss absorption components serve a key role for insurers.

As insurers improve their understanding of the risks they are carrying and capital productivity.

“We are seeing discussions ranging from structured reinsurance, alternative sources of reinsurance capital right through to alternative value chain combinations”, Ward said.

“Across various jurisdictions, we have observed several distinct solutions emerging, including retrospective reinsurance, which acts like a ‘pseudo’ equity injection by releasing the capital associated with claims liabilities from the balance sheet.

“Growing interest and appetite in managing P&L volatility and valuation through solutions on the net retained position. This ultimately influences the ability of management to access other sources of capital on competitive terms.”

He also pointed to increased interest from private market investors seeking exposure to insurance risk, particularly risks with longer durations, which has resulted in a significant rise in sidecar-like facilities.

“At the same time, we continue to work with carriers to develop strategic reinsurance solutions that extend risk transfer and foster relationships enabling growth, capital and volatility management,” he added.

Prudential changes

With K-ICS in South Korea, RBC2 in Malaysia, new minimum capital requirements in Indonesia, and the Monetary Authority of Singapore’s consultation on the catastrophe risk charge under their risk-based capital framework, there are several regulatory reforms on the cards across Asia Pacific.

The risk-based capital framework in Hong Kong, which was adopted a year ago, has shown little demonstrable impact on consumer outcomes such as affordability and availability.

However, “has provided greater insight into balance sheet risks for many stakeholders, including regulators, rating agencies, and shareholders,” Ward noted.

“Insurers are becoming increasingly aware of the risks they are carrying, the interaction between these risks, including their interlinkages during periods of significant stress, and the controls used to manage them,” he added.

Meanwhile, insurers are increasingly building capabilities related to capital productivity by measuring capital consumption by risk and lines of business and explicitly allocating capital accordingly while considering the “Three R’s” – regulatory, ratings and risk-based capital.

“Finally, insurers are focusing on different sources of capital such as equity, debt or reinsurance capital, along with understanding the loss absorption characteristics of these sources,” according to Ward.

Keeping up

In the face of this rapid regulatory transition, best practice encompasses understanding the problem, identifying stakeholder requirements, learning from others facing similar problems, and drawing insights from other jurisdictions.

This is incredibly important in the Asian context, given the nature of change across multiple jurisdictions.

“We always advocate for compliance that achieves commercial outcome, not just meeting the minimum requirements,” he added.

“It is critical to meet these requirements while ensuring that insurers can drive commercial decision-making and outcomes from their compliance efforts.”

Bottomline

Expanding on how these regimes and regulatory reforms are impacting companies’ product strategies and expansion plans in the region, Ward said that, as with the introduction of any changes to prudential arrangements, signalling from the regulator to industry participants occurs.

“We don’t view it as a wholesale change related to product offerings or launches,” he said.

“What we see is a greater focus on ‘return’ metrics by product, and in some cases by product and channel, resulting in changes in product design, pricing and sometimes a reduction in appetite for certain lines of business.”

The post Distinct reinsurance solutions are emerging to address emerging capital strategies: Guy Carpenter appeared first on InsuranceAsia News.

“Structured solutions are broadly assisting re/insurers in three key strategic areas: capital management; efficient management of volatility, particularly in the lower layers of excess of loss programs; and market entry and exit strategy support. There is a significant demand for support in these areas across Asia Pacific,” said Ahmad.

However, the level of understanding of the capital and volatility benefits of reinsurance is evolving and varies across the region.

“Guy Carpenter has been at the forefront of educating market participants, and we see a bright future, as industry awareness grows with these solutions,” Ahmad said.

Market transition
“Structured solutions have always been tailored to meet specific client needs. As such, there has been constant evolution in the market. A key trend over the years has been towards more flexibility in terms for buyers, as these products gain mass appeal,” he said.

Regulatory changes and support play huge roles in how reinsurance solutions are used in the market.

The Asia Pacific region comprises more than a dozen countries and territories, each at different stages of regulatory sophistication and engagement.

“Structured solutions are broadly assisting re/insurers in three key strategic areas: capital management; efficient management of volatility, particularly in the lower layers of excess of loss programs; and market entry and exit strategy support. There is a significant demand for support in these areas across Asia Pacific.” Hussain Ahmad, Guy Carpenter

“We see a continued push to adopt risk-based capital frameworks, which open up more conversations around the use of reinsurance to manage capital,” Ahmad noted.

Additionally, some regulators in the region have been averse to allowing material changes to reinsurance structures, and we continue to engage with a few to facilitate common understanding of such solutions, he added.

ILS potential
The potential for the insurance-linked securities (ILS) market in Asia has been much talked about, however, it has yet to see widespread adoption.

While the usage and awareness are increasing in Asia Pacific, it is not on par with the US market.

Ahmad noted that there are a few factors that come into play regarding the differences.

One of the primary factors, Ahmad said is that the “availability and quality of underlying data from Asia Pacific remains a concern for investors, despite significant improvements in recent years”.

Regulatory acceptance of ILS and its impact on capital also needs to improve in markets around the region, he said.

“Cat bonds can compete on price/terms with traditional reinsurance particularly well for layers with low expected losses. However, we see the amount of catastrophe limits purchased in certain large countries in Asia Pacific to be lower (with higher expected loss) than their counterparts in the US and Europe, making traditional reinsurance more competitive,” Ahmad added.

“It is just a matter of time before we see markets evolving to adopt ILS in Asia Pacific, by sponsors as well as investors.”

Traditionally the largest issuers in the region have been the Japanese carriers. But Ahmad said that in addition to Japan, Guy Carpenter and GC Securities have helped sponsors in mainland China, Hong Kong, South Korea and Australia to access ILS capacity.

“At Guy Carpenter, we are taking the initiative in educating all the stakeholders on newer tools and structures that are becoming available to manage the evolving natural catastrophe risk,” he said.

The post ‘Bright future’ for structured solutions in APAC as awareness grows: Guy Carpenter appeared first on InsuranceAsia News.

“The quality of shareholders’ equity is satisfactory and the equity level is increasing, supported by retained earnings,” said Jeffrey Liew, head of insurance, APAC.

This stability is particularly evident among reinsurers in Asia, where several companies in Japan, South Korea, China, and Hong Kong have successfully implemented IFRS 17.

These firms report “stable-to-improved returns on equity (ROE), driven by improved underwriting performance and investment gains.”

Regulations
The regulatory shifts in Hong Kong and Indonesia are expected to have moderate impacts on reinsurers’ strategies.

“The new RBC regime, effective from 1 July 2024, aims to enhance financial stability by being more responsive to each insurer’s risk profile and aligning with international standards,” Liew said.

This will likely prompt reinsurers to adopt more rigorous risk management and capital allocation practices to ensure compliance and maintain solvency.

In Indonesia, the increase in minimum equity requirements will likely reduce the number of operational companies, fostering a healthier competitive landscape.

“Reinsurers will need to bolster their capital positions to meet these new thresholds, which could lead to consolidation or exits by smaller players,” Liew said.

In Indonesia, tougher minimum equity requirements are set to reshape the competitive landscape.

“The tougher minimum equity requirements for Indonesian insurers are likely to reduce the number of companies operating in the sector and encourage a healthier competitive landscape,” Liew said.

By 2026, insurers must meet a new regulatory threshold of IDR 500 billion, with a higher requirement of IDR 2,000 billion by 2028.

Currently, “one out of the eight reinsurers in Indonesia has not met the new regulatory requirement,” prompting concerns about market consolidation and operational viability.

Capital management
Reinsurers must focus on disciplined risk selection and prudent investment portfolios to remain profitable in a tighter regulatory environment.

This may involve a strategic shift toward lower-risk investments that require less capital buffer.

Additionally, “several reinsurers increase their use of retrocession by ceding more risk to retrocessions,” which supports them in reducing the capital required to cover higher risks, particularly those arising from natural catastrophes.

“Rising awareness of cyber risk protection is driving potential premium growth, but reinsurers face challenges in exercising proper risk management and underwriting practices to effectively mitigate this emerging risk.” Jeffrey Liew, Fitch

ILS
Liew anticipates a gradual increase in insurance-linked securities (ILS) transactions across Asia, stating that this growth is “supported by rising investor interest and emphasis on climate change mitigation.”

Besides that, the establishment of an ILS hub in Hong Kong in 2021 is expected to bolster market growth and stability.

However, challenges such as “the need for further development and increased participation from Asian investors” have emerged.

Cyber risk
“Rising awareness of cyber risk protection is driving potential premium growth, but reinsurers face challenges in exercising proper risk management and underwriting practices to effectively mitigate this emerging risk,” Liew said.

Recent ransomware attacks and cybersecurity incidents, such as the CrowdStrike outages in July 2024, highlight the systemic nature of cyber threats.

Liew said that “the reinsurers’ ability to manage the systemic nature of cyber risk has not been established,” emphasizing the need for robust reserving and pricing policies.

Reinsurers can enhance their data analytics capabilities and collaborate with cybersecurity firms to better prepare for potential cyber catastrophes.

Improved data on cyber incidents will lead to more accurate reserving and pricing models.

Implementing cyber risk models and conducting regular stress testing can help assess vulnerabilities and ensure that reserves are adequate.

“Clear and updated policy terms are essential to reflect evolving threats,” while conservative pricing strategies can help manage the inherent uncertainties, Liew said.

The post Capital management, technology key to adapting to changing reinsurance landscape: Fitch appeared first on InsuranceAsia News.

The post HKIA extends transitional period for RBC reporting to 3 years appeared first on InsuranceAsia News.

The post Insurers face headwinds from pace of regulatory changes: Zurich’s APAC CRO appeared first on InsuranceAsia News.

The post Cautious approach on Aswata’s reinsurance dependence and panel: Fitch appeared first on InsuranceAsia News.

The post Indian government reneges on capital support to state-owned general insurers: report appeared first on InsuranceAsia News.

The post Korea’s new standards regime and IFRS 17 to squeeze insurers’ capital buffers: Fitch appeared first on InsuranceAsia News.

The post Fitch downgrades Sri Lanka Insurance as crisis bites appeared first on InsuranceAsia News.