Asian re/insurance regulators have continued the trend towards localisation and protectionism to stop capital outflow from insurance premium cedance, with this year seeing India join the ranks of countries introducing further “order of preference” rules.
These rules require insurers to give local reinsurers and branches of onshore foreign insurers first ‘right of refusal.’
Fitch said in its Asian reinsurance briefing, this protectionist stance may benefit the countries’ local reinsurance industry growth in the long-term, but could stifle market growth over the short-term.
“Protectionism is a common stance adopted by many Asian countries. This may alter risk- reward dynamics and the extent of foreign interest in local markets, limiting the diffusion of knowledge, pricing know-how and risk diversification,” said Fitch.
Last year, Indonesia’s domestic reinsurance premiums increased by 38% after the country introduced “order of preference” rules, in the four previous years this figure was at 29%.
This had a slight adverse impact on the Indonesian industry’s retention ratio, which dropped from 71% in 2015 to 67% last year, which Fitch said implied reinsurers showed some capital constraint in dealing with the increased premium volumes.
For Asian industries and markets in early stages of development, regulators’ protectionist stance enables fledgling local firms to gain a sure footing in the market, but complicates the growth and sophistication of the industry.
Fitch said the government plans to inject capital into its state-owned reinsurers in coming years to secure the solvency of its industry in the case of large-scale natural disaster.
The Indian government appears to be caught between a dilemma of opening up its insurance sector to boost its access to global reinsurance capital and create a more competitive reinsurance pricing environment, and wanting to ensure the growth of its own industry and stem capital outflow.
Fitch said in the short-term, the government’s regulatory stance may “affect reinsurance costs and ultimately, insurers’ underwriting capacity, creating an impediment to reinsurance market growth.”
Over the long-term, the protectionist agenda of Asian nations could boost the local industry and economy, but reinsuring risks within the locations of the same risks covered is also a risky position to take, in the face of large-scale catastrophes, local reinsurers’ may come to see their solvency challenged.
