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Major reinsurers pull back on China underwriting

8th February 2017 - Author: Steve Evans

Three of the world’s largest reinsurance firms have all pulled back on their China underwriting, as margins for the business become increasingly thin and local competition starts to influence the market.

China has been seen as one of the big opportunities for reinsurance firms, a fast growing economy, significant industrial and infrastructure development, a growing middle-class and rising wealth, all signaling a need for increasing volumes of insurance capital and as a result the need for more reinsurance protection.

But it doesn’t always work out the way reinsurers had planned. The Chinese reinsurance market has seen a number of local companies launch in the last year and this is assumed to be one of the factors ramping up pressure in the region for reinsurers.

First to reveal this trend was Hannover Re, when the reinsurance firm released its portfolio update last week, and said that due to competition some business was not as profitable as before.

The company explained that with competition increasing across the Asia Pacific reinsurance market, “It proved impossible to avoid making share reductions in unprofitable business – above all in China –, which consequently led to lower premium income in this market.”

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Munich Re revealed in its quarterly and full-year results yesterday that the reinsurer has withdrawn from underwriting business that no longer meets its profit expectations and explicitly gave China as an example.

Member of the board at Munich Re Torsten Jeworrek said that this was an example of “skilful cycle management” and an example of Munich Re being “able to react with flexibility in relation to changes” in the reinsurance market.

It transpires that this was large quota share reinsurance arrangements that Munich Re largely withdrew from in China, as the terms and pricing became less attractive.

Finally, SCOR joined the party and revealed in its January renewal portfolio update yesterday that reinsurance pricing in China is not always adequate anymore for the firm.

SCOR pulled back on a number of areas of underwriting in China, including motor proportional reinsurance business, that overall its premiums written in Asia Pacific declined in 2016 largely due to portfolio management in China, and that natural catastrophe business as well as non-proportional casualty risks in China are no longer adequately priced for its portfolio needs.

With all three of these major reinsurers facing competitive pressures in China there is no doubt that this is a market-wide phenomenon and that other reinsurers, such as Swiss Re, Lloyd’s players and the Bermudian market will also be experiencing the same.

Munich Re CFO Jörg Schneider gave some colour on the issue during the reinsurers earnings call, saying that active underwriting is vital in the China market, hence the company is not simply targeting growth in China, a trend he expects will remain.

“China is a big opportunity because we have the phenomenon of under-insurance there, so enormous exposure to natural catastrophe and when we compare insurance density with that in other mature markets, then there’s a lot of additional potential in addition to the economic potential of a still strongly growing market; Schneider explained.

He said that the Chinese reinsurance quota-share business that Munich Re withdrew from largely had “high top-line numbers, but very low bottom-line,” and as a result he, “wouldn’t be so worried about the most recent development in the renewal of 2017.”

Schneider said that China is a very competitive reinsurance market right now, but that Munich Re is fighting for its share, with a strong presence in the region. However he noted that even Munich Re has “no gifts to grant there,” which he said means the results in China will remain volatile from year to year.

That suggests that Munich Re is feeling the effects of the Chinese tendency to seek to bring sectors within their borders and under their control. The major reinsurers have in some cases spent years helping to create a Chinese reinsurance market, but now it seems that local start-up reinsurers may increase their share, at the expense of foreign players.

SCOR also shifted away from the large quota-share reinsurance business in China, we assume Hannover Re’s shift was quota-share related too.

Analysts at J.P. Morgan Cazenove cited the recent solvency rule changes, under the China Risk Oriented Solvency System (C-ROSS) as also having a bearing on reinsurers decisions to pull-back on underwriting there.

The upshot is that China is not looking like the profitable panacea that many reinsurance firms believed it was going to be and with new local reinsurers emerging all the time it is unlikely to become any easier there in the foreseeable future.

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