The Intelligent Quarterly from the publishers of The Insurance Insider

Autumn 2017

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SIRC 2017

There are complex dynamics around the regulation of reinsurance in emerging markets, including much of Asia.

Asian regulators look at successful mature businesses in continental Europe, London and Bermuda and see a model of what can be achieved.

Multi-billion dollar franchises have been created and governments and regulators will be wondering whether there is a way that they can build a presence in the sector.

The temptation is to look to use legislative and regulatory measures to foster the creation of a homegrown industry to challenge the international players.

This could take several forms, whether by loading additional capital charges onto offshore players writing local business, putting in place frameworks that give domestic reinsurers preferential access to business or creating state-backed reinsurers, as has been seen in Indonesia.

Some of this is geared towards the creation of a domestically-owned industry, with Qianhai Re and Taiping Re in China and ITI Re in India being good examples.

With so much latent potential for growth in these markets and the impression that revenues and profits are being ceded out of the country, there is a clear logic behind efforts to build true domestic private market players to sit alongside state-backed peers such as China Re and GIC Re.

The other related aspect is the attempt to bring more offshore players onshore.

The latter brings capital closer to the risk, creates jobs and allows closer regulatory control - all potential benefits that could appeal to governments and financial regulators.

South Korea has recently gone down this path, pushing reinsurers to set up a local presence to gain access to business, and China has taken a similar approach by imposing capital charges on cedants that use offshore capacity.

However, there is a danger that this strategy will prove counterproductive.

Ultimately, reinsurance capital is global. The market's whole operating model depends upon its ability to take advantage of diversification between different countries, and to trade across borders.

In particular, when new domestic players are created with a high concentration of exposure in a single country, there is a risk that the lack of diversification exposes those young reinsurers - and ultimately their ceding companies - to blowout losses.

Global reinsurers looking to service Asian markets are also privately complaining that the need to establish local infrastructure is causing problems in territories that are often already loss-making or running with minimal margins. Creating a local presence loads reinsurers with additional staff, real estate and compliance costs, eroding profitability. But the requirement for highly rated groups to park capital onshore, hurting capital efficiency, is perhaps even more damaging to returns.

Looking out for the investors in global reinsurers is not within the remit of Asian governments and regulators. But they need to be conscious that reinsurers will price business to a return. If a market burdens reinsurers with additional cost and requires them to hold uneconomic amounts of capital, then it will ultimately find that this drives the cost of reinsurance higher.

The essential argument in favour of allowing global capital unfettered access to regional markets is that if everything works the way it should it will create the most efficient market possible, keeping pricing competitive.

But then I suppose one could readily counter that Asian rates have been on a downward trajectory for a decade, aside from the 2012 uptick, at a time when regulatory pressures have been adding costs to doing business in the region.

Which is to say that perhaps, with growth such a lure to international players and domestic capital in places like China plentiful, it is unlikely any one regulatory change in isolation would apply upward pressure to pricing that cedants cannot cope with.

To view our special edition from the Singapore International Reinsurance Conference 2017, please click here.

Adam McNestrie, Editor-in-Chief

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