A spate of catastrophes in Asia-Pacific in the past two years is making reinsurers in the region more risk-focused as they brace themselves for the next calamity, Fitch Ratings said today.
Major loss events including the earthquakes in New Zealand and Japan in 2011, the Thai floods last year and floods and typhoons in China earlier this year have all 'battered' the financial performance of reinsurers in the region.
Incurred insured losses from the New Zealand earthquakes were estimated to be between 15bn and 23bn USD, while Japanese insurers and cooperatives registered incurred losses of above 37.5bn USD from the Japanese earthquake the same year.
Chinese government figures indicate that the weather-related events last month resulted in economic losses of above 13.5bn USD.
As a result, reinsurers have begun to 'take stock of their existing portfolio and re-evaluate their underwriting approach and risk appetite', Fitch said.
In particular, they are gradually moving out of proportional reinsurance and increasing their non-proportional business. Under the former, the reinsurer takes a proportional share of all losses incurred by an insurer whereas the latter means reinsurers are only affected if the insurers' losses exceed a certain specified level.
The amount of losses insurers directly bear before they can claim under their reinsurance programme has also increased. 'While the shift in underwriting approach may result in a reduction in top-line premium growth for the reinsurers, Fitch believes this could improve their overall profitability,' the agency said.
In the most catastrophe-prone markets, Fitch also highlighted a 'more proactive stance' being taken by reinsurers when monitoring and evaluating their accumulated exposure to risk. In particular, reinsurers have begun imposing limits on policies that cap their losses if a catastrophe occurs.
'For instance, in the Thai market, reinsurers are likely to limit the level of flood coverage to less than 100% of total loss,' it explained.
It noted, however, that catastrophes had also increased business opportunities for reinsurers and capital markets.
'Reinsurers, especially those who were relatively unscathed from the recent calamities, have capitalised on the increasing rates to underwrite more and higher quality business from the Asian markets,' it said.
'In Japan, the rates of earthquake programmes are reported to have increased by 30% - 50%, while the wind and flood coverage were renewed with a 15% rate increase in April 2012. In addition, New Zealand property policy renewal prices have doubled,' it added.
As a result, Fitch expects the growth momentum of Asian reinsurance markets to continue to be strong, even as reinsurers continue to face the challenge of obtaining the data needed to accurately model and manage their catastrophe risks.