While it remains too early to predict how the January 1st, 2023, reinsurance renewals will develop in Asia, current trends suggest that tight market conditions will persevere as demand for protection rises, according to Franz Josef Hahn, Chief Executive Officer (CEO) of Hong Kong domiciled reinsurer, Peak Re.
Reinsurance News spoke with Hahn around this year’s meeting of the industry in Monte Carlo. He discussed current market conditions in Asia and beyond, his outlook for the upcoming renewals, and the influence of macro-economic conditions on the industry.
“Most pundits in the market expect a continuation of tightening markets while the assumption of ample capacity is increasingly being challenged,” said Hahn. “The evolving macro-economic conditions will likely have a substantial impact on the market.”
“With inflation persistently exceeding market expectations, central banks have by and large embarked on a synchronised phase of global monetary tightening. As a result, the rising cost of capital and withdrawal of excess liquidity will likely have a negative impact on the reinsurance capacity,” he continued.
Alongside the tightening of financial conditions around the world, Hahn explained that other factors will likely contribute to price pressures in both Asia and global property and casualty (P&C) markets.
“These include high catastrophe losses propagated by climate change, large claims arising from the Ukraine-Russia conflict, particularly in aviation and marine, rising economic and social inflation, declining adequacy of casualty reserves and increasing cyber losses, among others,” said Hahn.
In terms of demand, the CEO told Reinsurance News that it’s fair to assume that as monetary conditions tighten alongside rising interest rates, an expected slowdown in economic growth will translate into more timid demand for P&C insurance and reinsurance.
Although, at least in the near to medium term, Hahn expects that this trend will likely be over-shadowed by inflation driving up the value of the goods and properties to be insured.
“Furthermore, we have seen that in Asia, sustained economic growth and rising risk awareness, for example about supply chain disruptions, are driving demand for more protection,” he continued.
Expanding on the inflationary environment, Hahn said that following decades of stable of falling prices, inflation has become highly uncommon in many markets, meaning there is no longer a tested playbook to follow.
“Reinsurance can help insurers manage their exposure to the impact of high inflation. For instance, insurers can transfer more frequency and severity risks to reinsurers through excess of loss contracts. It is an opportunity for the re/insurance sector to take the lead and help customers navigate these challenges through effective product design and improved transparency, ultimately narrowing the protection gap so that gains made in recent years are not lost,” said Hahn.
On the upcoming renewals in Asia, Hahn said that it remains too early to predict the development at 1/1, but did add that “tight market conditions will persist based on current trends” and various other factors.
“We have seen increasing discussions focusing on the impact of inflation on reinsurance placement, even though inflation is less severe here in Asia than in the West, and there are tangible variances across regional markets in terms of inflation trends. The use of reinsurance to mitigate frequency and severity risks of large losses will remain a key topic, as well as the use of indices to manage exposures,” said Hahn.
Adding: “The past years have seen secondary perils driving most of the cat losses. This, in all likelihood, will remain the case as climate change is increasingly making itself felt in many loss scenarios. Consequently, topics including the frequency of those losses and the modelling of secondary perils will stay topical in the coming renewals.
“Growth yet will stand out as one of the key drivers in Asia. Economic fundamentals are still reasonably robust in most Asian markets, including China. While China’s GDP growth disappointed in the second quarter, the stepping up of policy easing with large public spending, tax rebates, policy rate cuts and a more dovish stance on the property sector will likely see the year’s GDP stabilises at a healthy 4%. As a result of the sustained attractiveness of Asian markets, we will likely see increasing competition as more reinsurers look to grow their books in Asia.
“Peak Re is well positioned in this scenario, given our close proximity to the Asian markets and our long-standing client relations.”
