Editorial. Content. Targeting further growth in Europe. Succeeding in China Challenges and opportunities in the world s most dynamic insurance market

Transcription

1 PEAK TIMES Issue 8 Sept 2017 Content Editorial Targeting further growth in Europe Succeeding in China Challenges and opportunities in the world s most dynamic insurance market Peak Re s Labuan licence coming at just the right point in time The second edition of Peak Insights is coming soon Himalayan Consensus and risk management Dear Readers Let me to start off with a quick review of our first half-year. Peak Re delivered solid results in the first six months of 2017, generating net profit of USD 36.1 million and an annualised return on equity of 7.9%, driven by good underwriting results and investments returns. With the strong relationships we have developed with our clients and our business partners, Peak Re has deepened our client penetration while capturing new opportunities to deliver strong results in an operating environment that remains challenging. Premiums were up at USD million as we continued to build our franchise across Asia, Europe and the Americas. Pursuing balanced growth at enhanced capital efficiency, we expanded across all lines of business and improved the technical profitability for the new business written throughout the year. Our investment portfolio continued to provide strong and sustainable long term returns, we are pleased to report an investment return of 3.4%. Our solvency ratio is an outstanding 550.9%, underlining our commitment to supporting our cedants with strong capacity at all times. Our administration expense ratio reduced further to a highly competitive 4.0%. As an important milestone, in July, we received our Labuan branch licence to write general insurance business in Malaysia. This approval comes at a crucial time as Malaysia goes through a process of detarrification in motor and property business which is further discussed on the following pages. Peak Re is looking forward to supporting its clients throughout this transition with its expertise and strong capital base. We also explore China s insurance sector, which continues to outpace the global insurance industry. We see continued market opportunities for those who understand the market s key risk drivers and have a detailed grasp of their cedants needs. In our global business expansion strategy, Europe assumes a prominent role. Late last year we received our licence to set up a reinsurance subsidiary in Zurich, Switzerland. This year, we will fully capitalise on the enhanced market proximity and Solvency II equivalence that the licence offers. We look forward to supporting our clients with those assets that they appreciate most in Peak Re: Our capital efficiency, global perspective and client-centric whole-account approach. Yours sincerely Franz-Josef Hahn Chief Executive Officer

2 Targeting further growth in Europe Peak Re remains on track to deliver on its plan for global business expansion. Within that strategy of building a balanced and well diversified portfolio, Europe assumes a prominent position. Today Peak Re writes about 17% of its premiums in this region, a region which generates about 30% of global premiums. In Europe, Peak Re s ambition has been underpinned by setting up a fully capitalised subsidiary in Zurich, Switzerland. Although the licence from the Swiss Financial Market Supervisory Authority (FINMA) came too late to benefit the firm in the 2016 year-end renewals, its compliance with the Swiss Solvency Test (SST) provides Peak Re with full Solvency II equivalency and demonstrates the long-term view that the company takes with regard to building its franchise. Going forward Peak Re will build on its portfolio in Europe and focus on expanding its client relationships. Cedants value Peak Re for the capital diversification that it brings to their panels, its global perspective and the client-centric whole-account approach it takes, which is in stark contrast to the layer-by-layer view that many of its competitors entertain. In growing its portfolio, Peak Re will maintain a balanced approach between its Asian home-base, which will continue to represent about two thirds of the company s book of business, and the Americas and Europe which account for the remainder. Within Europe, Peak Re P. 2 I Peak Times Issue 8 I Sept 2017

3 focuses on the major Continental European markets such as Germany, Switzerland, France, Iberia, Italy, Austria, Benelux and the Nordics plus the UK. The lines of business offered include property and casualty lines as well as credit & surety, providing Peak Re with the full benefit of a broad diversification by product and geography. Peak Re s European clients can avail all resources of the company. On the one hand, they benefit from the proximity afforded by a Swiss subsidiary with its Solvency II equivalence. On the other hand, they are serviced on the company s single underwriting platform and are directly aligned with the firm s Hong Kong headquarters. Peak Re operates as one team, with the staff in the Zurich office part of the company s threecornered underwriting approach which is predicated on portfolio and risk analytics, market knowledge and of course product underwriting. Peak Re is convinced that its underwriting process is more rigorous, thorough and efficient than the typical reinsurer set-up. The firm s underwriting approach assures that Peak Re maintains a low expense ratio in an industry environment characterised by tight margins. At the same time, Peak Re can guarantee a quick turn-around when reviewing a cedant s portfolio because the three underwriting functions work simultaneously. In Peak Re s view, reinsurance trading conditions in Europe will remain challenging even though the Euro zone's economies are witnessing a rebound and concerns about the economic consequences of Brexit and the Trump presidency have yet to manifest themselves. Overall cedants premium volumes are not expected to grow while pricing will remain under pressure in an environment of more than adequate capital. Having said this, there are still profitable reinsurance portfolios to be found with clients which are not adequately served by reinsurers geared towards pure analytics and shorttermism. Peak Re s client-centric underwriting approach, coupled with its long-term mind-set and the capital diversification it provides will continue to identify and capture attractive business opportunities. It s highly cost-efficient business model, proven since the company s start in 2012, will enable Peak Re to trade profitably even in a market which seems to have found a new norm. Chris Kershaw Managing Director, Global Markets I P. 3

4 Succeeding in China Challenges and opportunities in the world s most dynamic insurance market China s insurance sector continues to outpace the global insurance industry. According to its insurance regulator, CIRC, and Credit Suisse, the sector grew by 29.7% in By contrast, the global insurance industry expanded by only 4.4%. Without the contribution from China, global growth would have been a mere 2.3%. Almost 50% or USD 80 billion of the new premium of USD 170 billion registered in 2016 came from China. However, China s current economic outlook is more muted. Down from 7% in 2015, it is expected to grow by about 6.5% and 6.3% for 2017 and 2018, respectively, according to the World Bank. Insurance growth will be affected by a combination of tighter regulation in life and non-life, slowing car sales, a reduced appeal of savings products and slower agency growth in life insurance. Still, in its thirteenth Five-Year Plan the Chinese government set the target of an insurance penetration rate of 5% for the country by In 2016 the industry made significant progress towards that goal by increasing the overall penetration rate to 4.15%, up from 3.6% in In life insurance China has become the global growth engine. In 2016, global life insurance premiums expanded by 2.5%. Emerging markets, very much driven by China, grew by 17% and without China by 5.7%. In emerging Asia markets, China now accounts for 70% of the total life market according to Swiss Re, Sigma. Going forward, the Middle Kingdom is expected to expand about 15-20% annually, comparable to the achieved 18.7% annually over the past ten years and an exceptional 41.3% in This growth was driven by strong demand for traditional life products and the government s interest that consumers invest in protection products. However, growth is also driven by strong demand for short-term savings products, sold under the life insurance label. Health insurance, although still only representing 2.3% China s total premium volume, even outgrew life. In 2015, premium volume stood at USD 36.7 billion, up 52% from premiums of USD 23.4 billion in In 2015 just five insurance companies were specialised in health insurance, while another 100 offer health insurance products. According to the CIRC currently, there are seven insurance companies were specialised in health insurance, with 2,300 health products are available in a market which is heavily driven by China s expanding middle class. According to BCG, 50% of all private health care spending is still paid in cash. Those who cannot afford these cash payments will either receive an inadequate treatment, or, in the worst case none at all. Since 2010 health insurance has grown at about 36% annually, primarily driven by indemnity products which are usually offered as riders to life insurance products. These products commonly pay out a lump sum, if the policyholder is diagnosed with certain stated conditions. Non-life in general experienced continued growth in 2016 too. The P. 4 I Peak Times Issue 8 I Sept 2017

5 sector expanded by 18.8% for the past ten years, according to CIRC and Credit Suisse. In 2016, it grew by another 20%, partly due to the demand for health products, rising interest in specialty products, but also due to high auto sales, which benefited from government subsidies and tariff liberalisation. Growth opportunities persist China, and insurance in China will continue to grow. Future demand will arise from China s expanding middle class, its continued urbanisation and the ageing population. According to Credit Suisse, China is the most underinsured country in Asia with the largest protection gap in monetary terms. In life, the bank estimates that a USD 32 trillion mortality protection gap exists, which widened by 17.2% annually from 2004 to 2014, highlighting the large demand for protection-oriented life insurance products. Health insurance, China s fastest growing line of business, reckoned to expand by more than 35% annually until The government incentivises its sales by offering tax breaks for individuals who buy private health insurance and by encouraging partnerships between health insurance companies and private hospitals. Furthermore, consumers have also become more insurance literate and prepared to use insurance to fund their own protection. In property and casualty, China s One Belt, One Road (B&R) initiative, encompassing six international economic corridors and one maritime Silk Road, will initiate substantial activities in construction, engineering, property and marine, but possibly also leading to liberalisation in trade relations. According to Willis Towers Watson, from now to 2030 additional premiums of USD 16 billion are expected to be generated by projects from the B&R initiative with Chinese insurers earmarked to benefit the most. China s insurance industry will continue to enjoy profits generated by the innovative products and digital platforms. According to the CIRC and Oliver Wyman, Chinese Insurtech related premiums will surge to USD 174 billion by 2020, driven by online sales of traditional products, upgrades of existing products and the introduction of entirely new insurance products. However, China s InsurTech companies demonstrate the enormous success insurers may harvest, if customers appetite is met. Zhong An, the Chinese online insurer, which was only founded in November 2013 by Ping An, the Alibaba Group and Tencent, has already sold more than 8 billion policies to roughly 600 million customers. Its main product, which still accounts for more than 50% of its sales, insures customers against the cost of returned shipments for their online purchases. In June 2017 Zhong An filed for an initial public offering (IPO) at the Hong Kong Stock Exchange that might value the firm at USD 15 billion to USD 30 billion. Regulatory reform Concurrent with this backdrop of strong growth, CIRC has started to reform its regulatory approach. In Life, it tightened regulation on short-to-medium term life policies, curbing the aggressive sales practices of some life insurers. Life insurers had bundled conventional life policies with so-called universal life products to guarantee policyholders short-term gains and flexible surrender terms. In May 2017, the CIRC banned these products that had been a key driver in life policy sales since Already initiated in 2013, the CIRC commenced to detariff China s auto sector, which currently contributes about 75% of premiums to the non-life sector. By 2015 it approved six provinces for the reform pilot. An additional 12 provinces followed in I P. 5

6 2016. The new programme allows more flexible rates to better reflect loss experience and auto value. This liberalisation of the market, coupled with the excessive oversupply in the sector, intensified competition and led to a further decline in rates. According to Marsh, in 2016, rates were lower in motor, marine, aviation, D&O and financial institutions, while liability, environmental and employee benefits were almost stable. Potentially slower automobile sales might add to the industry s insurance challenges as sales are expected to drop from 18% in 2016 to 7% in 2017, according to Credit Suisse, largely due to changes in subsidies and taxes. The industry was also affected by the decline in investment returns, which is a major source of income for the majority of China s insurers. As the Chinese insurance market continued its amazing growth momentum, China s regulator CIRC leapfrogged several stages in regulatory development and introduced the China Risk-Oriented Solvency System (C-ROSS) in January Similarly to Solvency II, the new solvency capital regime is a three-pillar risk and solvency framework, which is more reflective of individual risk profiles and ERM program quality. The latter is being viewed vital to the sector s future healthy development. Particular emphasis is being laid on Pillar 2. An insurer s ERM quality can even impact the final minimum capital requirement. Nevertheless, C-ROSS impacts on reinsurance purchasing as it lowers the amount of solvency capital needed to underwrite motor risk, enabling insurers to significantly increase their retentions. As a result, reinsurers hardly benefit from the growth of insurers top line. Reinsurance pricing is further affected by the shift from the previous business tax to a VAT system, as implemented by the Ministry of Finance since 1 May Not only does the new VAT exceed the former business tax, it is also accrued differently, thus affecting insurers results. Nevertheless, the introduction of C-ROSS encouraged the international reinsurers to move onshore in response to the lower capital requirements that the Mainland businesses enjoy in comparison to the off-shore playaers. As Lloyd s forecasts, this resulted into a 400% increase of onshore capacity. In May 2017, the CIRC and the Hong Kong Office of the Commissioner of Insurance signed an agreement that aims at the mutual recognition of the solvency regimes between Mainland China and Hong Kong. To be implemented within the next four years, the 18 international reinsurers operating from Hong Kong are set to benefit from this recognition of equivalency. C-ROSS is perceived as more sophisticated than Hong Kong s rule-based capital adequacy regime. However, Hong Kong is currently in the process to introduce a risk-based capital regime which is likely to be introduced in a few years time. The emergence of the world s largest reinsurance market Prior to 2016, there were only a few domestic reinsurers in China. As of this year, CIRC already granted approval to several reinsurance players to set up local operations and another 20 are expected to apply in the coming years. By 2022, as Willis Towers Watson predicts, China might be the world s largest reinsurance market driven by the growth of its direct insurance market and the ambitious penetration targets set by the government. As to be expected in a fast-growing market place, competition is fierce in China. Players will only succeed in this fast changing and complex market environment, if they develop an intimate know-how of the major business risk drivers and a detailed understanding of the differences between cedants. Careful risk selection and knowing one s client are thus key to success in China too. This story will be published in Reactions magazine s annual CEO Risk Forum in September Franz-Josef Hahn Chief Executive Officer P. 6 I Peak Times Issue 8 I Sept 2017

7 Peak Re s Labuan licence coming at just the right point in time In July 2017 Peak Re received its licence from the Labuan Financial Services Authority to establish a branch for general insurance business in Malaysia. This approval coincides with important changes beginning to affect the country s non-life insurance market. Over the course of the coming years Malaysia s motor and property lines will undergo a phased detariffication, presenting both challenges (e.g. increased pressure on rates) and opportunities (e.g. the scope for risk-based pricing). Based on our global expertise and strong capital base, Peak Re is looking forward to supporting its clients in transitioning to this new business environment. According to Franz-Josef Hahn, CEO of Peak Re, as one of the fastest growing regions in the world, the ASEAN markets and Malaysia in particular play an important role in the company s growth strategy. The Labuan licence affirms Peak Re s commitment to the Malaysian market, assuring utmost proximity to locally operating insurers. The branch will provide Malaysian clients with immediate access to the full-service proposition of Peak Re and its threepronged underwriting approach comprising rigorous portfolio and risk analytics, market knowledge and product underwriting. In addition, the Labuan licence will strengthen Peak Re s ability to access business opportunities arising from the wider ASEAN region. Malaysia s insurance sector is considered as one of the most advanced and robust markets in the ASEAN region. Equally, its insurance regulator, Bank Negara Malaysia (BNM) is applauded for its highly professional market oversight. As a forerunner of Risk Based Capital (RBC) solvency regulation, introduced as early as 2009, it assures both a proper capitalisation of regulated entities and sophisticated corporate risk management practices, to the ultimate benefit of the policyholder. Malaysia s insurance sector continues to mature In addition, looking back on a remarkable journey, Malaysia s economy having sustained steady average growth of about 6.4% per year I P. 7

8 since Growth has moderated in recent years at 4.2%, but it still remained robust in In 2017 and 2018, the Malaysia s economy is expected to continue expanding by 4.3% and 4.7%, respectively (source: World Bank). Today, gross national income per capita of its 32 million population stands at USD 9,850. Absolute poverty has been largely eliminated. Almost 50% of the population are categorised as middle class (according to BCG), well ahead of its ASEAN peers, excluding Singapore. While private consumption remains the country s growth engine, the government s attention is shifting from reducing inequality to sustainable improvements in individual and societal well-being. Changes to insurance regulation are part of this structural reform. Malaysia s current insurance penetration is at 4.8%. Although this is still below the global average at 6.3%, it is already well ahead of the average for emerging markets worldwide at 3.2% and of Asia s emerging markets at 3.7% (source: Swiss Re Sigma). Rates are depressed, given the unabated inflow of capacity in search of growth. As a result, at 3.7% annually, Malaysia s non-life insurance markets have grown slightly slower than GDP from whereas life insurance outpaced economic growth at a 4.8% rate of expansion. Compared with other ASEAN markets the consolidation of Malaysia s insurance industry is fairly advanced. In non-life insurance, the top five companies account for 50% of the market share. Similarly to Indonesia, motor insurance is the largest business line with a share of 46% of premiums, followed by property with 19% of premiums. Phased detariffication of motor and property insurance As initially announced in 2012 and confirmed in its Financial Stability and Payment System Report 2015, BNM started a phased liberalisation of motor and fire tariffs, commencing in July The gradual detariffication brings to an end a 30 years-old practice of regulatory price setting in both lines of business. For motor insurance, the tariff regime has resulted in claims exceeding premiums by a wide margin. According to BNM for every single Ringgit (RM) paid in premiums, claims in third-party bodily injuries amounted to RM 1.30 to RM The rate liberalisation aims to close that gap and gradually move tariffs towards a more appropriate level commensurate with drivers individual risk profiles, reducing the current practice to cross-subsidise the tariff lines. In addition, the BNM hopes that the detariffication will also spur the P. 8 I Peak Times Issue 8 I Sept 2017

9 introduction of a broader and more flexible product offering, incentivise proper risk management among the insurers and encourage safer driving. In the first phase of the liberalisation from July 2016 to July 2017 rates were still fixed for existing products, but insurers were already allowed to introduce new products at market rates. Since July 2017 premium rates for Motor Comprehensive and Motor Third Party, Fire and Theft are liberalised. Prices for Motor Third Party are gradually adjusted upwards by the BNM, until the progress of liberalisation will go through a final assessment to determine the readiness of consumers and industry for full liberalisation eventually. For fire insurance, the practice has been slightly different. Only policies of less than RM 20 million (USD 4.7 million) were subject to the tariff. Above this threshold there was no rate regulation. Besides, the line was regarded as profitable. Similarly to motor insurance, as of July 2016 new products were allowed to be offered at market rates. As of July 2017, rates will be gradually adjusted for identified risk groups by BNM. Introducing risk based pricing For both lines, the liberalisation will not necessarily translate into higher rates. Quite the contrary. According to a recent poll conducted by Willis Towers Watson, insurers may seek a strategy to grow their market share and thus decrease rates. In fact, in fire business 80% of the insurers polled expect that prices will decline. In motor insurance, there is a controversial discussion, with 45% of the executives interviewed expecting rate decreases and 35% foreseeing increases. Peak Re s commitment to the market In order to succeed in the new deregulated environment, insurers will have to introduce risk-based pricing and strengthen their underwriting as well as their risk selection and risk management processes. Ultimately, they will have to strike the right balance between their top and bottom line objectives. Reinsurance can support this process as detariffication will result in an increased volatility of insurers earnings and solvency position. As a reinsurer in Malaysia, Peak Re is looking forward to supporting its clients with proactive approach throughout this critical transition period. We are here to provide solvency relief products that enable cedants to meet tighter capital requirements and solvency position. Peak Re is committed to establishing long-term partnership and growing along with our cedants, and we understand the importance of knowledge transfer and exchange that we are happy to support our partners on training and education in specialty areas with Peak Re s expertise. Jasmine Miow Director, South Asia, SEA and MENA Markets I P. 9

10 The second edition of Peak Insights is coming soon government budgets. The Central government is well aware of the challenges associated with narrowing the protection gap in rural areas. Hence, it may also steadily increase its share of the total subsidy, which would relieve the financial pressure for local governments and facilitate a meaningful reduction of the agricultural insurance protection gap in China. Peak Re is going to launch our annual research paper the second edition of Peak Insights shortly. In this edition of Peak Insights, we look at agricultural insurance in China, where premiums have grown substantially in the past ten years to become the world s second largest agricultural insurance market after the United States. The rapid transformation of the agricultural insurance market in China can be traced back to the introduction of premium subsidies in The Central government had started to view insurance as a financial tool to help stabilise farmers incomes, achieve its goal of food self-sufficiency and maintain social stability. Crop insurance plays a vital role in protecting the rural population against the impact of weather-related catastrophe events, which reduce yields and destroy assets and livelihoods. To continuously narrow the protection gap, the Chinese government has launched an effective public-private partnership, subsidising agricultural insurance premiums and continuously implementing initiatives to better protect the interest of the rural households. Under the government subsidy scheme farmers pay only 20% of the premium, making agricultural insurance feasible for insurers and affordable for farmers. Until subsidies were introduced, agricultural insurance was viewed as prohibitively expensive by farmers. From a premium growth and covered area perspective, the subsidy scheme can be regarded as a success story. However, despite its rapid growth, the scheme only covers 16% of the total value of China s agricultural production. Clearly, much remains to be done to narrow the agricultural insurance protection gap in China. Making agricultural insurance more attractive to Chinese farmers is a difficult task as it needs to strike a balance between the buyers needs and the reality of Closing the insurance protection gap goes to the heart of Peak Re s mission to support its clients in offering effective risk transfer and financing solutions for sustainable economic growth. We hope this publication provides useful insights, in particular for insurers already operating in the market or considering entering this important segment. The full report of Peak Insights will be available on Peak Re s website in October Please visit and download the full report. Arina Tek Vice President, Market Research and Analysis P. 10 I Peak Times Issue 8 I Sept 2017

11 Himalayan Consensus and risk management The Himalayan glaciers support the river systems of China, South Asia and South-East Asia, the source of water and food security for one third of humanity. The Himalayan region is also one of the most fragile ecological systems in the world today. The threats are both hydro-climatic and politically induced. Flash-floods have displaced people in Pakistan. The Maoist-Nepalese unrest and its fall out held the country hostage for almost 20 years with negative consequences on major projects and developments. The examples are legion and the consequences are dire: the region remains densely populated and poverty-stricken. In the absence of sustainable development options for the region, the current emigration in search for better job opportunities could lead to a much larger stream of refugees with knock-on effects on neighbouring countries. Water shortages or sudden changes in agricultural and climatic conditions have triggered migrations across history. Economic disempowerment and identity marginalisation are potent ingredients for conflict. Himalayan Consensus is a holistic economic development paradigm that emphasises the integrity of our eco-systems as an indispensable basis for socio-economic development. Its five integral principles are: identity, community, business, finance and environment. By integrating heritage and culture as an identity construct and the knowledge embedded in traditions with modern technologies, new approaches are being promoted. If the concerns of communities, the needs of the natural environment and commercial enterprise become harmonized, stability ensues. With its focus on stability and conflict avoidance, the Himalayan Consensus Process is consistent with India s Act East policy and China s One Belt, One Road initiative. While embracing the growing interconnectivity of regions as a consequence of globalisation it prevents conflict. Any development initiative must become self-sustaining to succeed. Philanthropic support and/or donor monies from the international community can seed initiatives. The Himalayan Consensus initiative is based on the belief in the entrepreneurial spirit of men. In the end we want to see profits financing future growth, creating opportunities for all, but not at the expense of the environment. This applies for investments in hydroelectric infrastructure and water management as well as for the benefits generated through commercial activity. Peak Re contributed through the introduction of risk management concepts. Because infrastructure projects and business create profits over time they are sensitive to disruption, through catastrophes such as earthquakes or flooding which hit the region on a regular basis. An initiative was launched to develop a pre-disaster funding structure which would protect the heritage of Kathmandu valley after a major earthquake. The focus is on kick-starting community rebuilding efforts after an earthquake. Rather than waiting for the donor machinery to roll in with their big funding capabilities, the idea is to provide local communities with some means to get business going again. To avoid the intricacies of politics, the initiative is entirely private. Because it is commercial, it must be profitable for investors in most cases. Because it is a first for this part of the world, the initial objective is modest and focused. Nepal is going through a lot of institutional transition right now, which augments the challenge. What may sound daunting at first, will become easier by learning from the experience of similar initiatives in Caribbean, Southern Africa or the Pacific islands. The reward lies in the contribution it makes to a sustainable development of a region which is key to the well-being of Asia. Eckart Roth Chief Risk Officer IP. 11

12 For more information, please contact Property & Casualty: Life & Health: General: Peak Reinsurance Company Limited Tel: +(852) Fax: +(852) Address: Room , ICBC Tower, 3 Garden Road, Central, Hong Kong Peak Reinsurance AG Tel: +41 (0) Address: Fortunagasse 28, 3rd floor, 8001 Zurich, Switzerland Disclaimer Peak Re provides the information contained in this document for general information purpose only. No representation or guarantee can be made as to the correctness or suitability of that information or any other linked information presented, referenced, or implied. All critical information should be independently verified for correctness and Peak Re accepts no responsibility, and shall not be liable for any loss which may arise from reliance upon the information provided. Neither Peak Re nor its affiliates accept any responsibility for any loss occasioned to any person acting or refraining from action as a result of any statement, fact, text, graphics, figure or expression of belief contained in this document or communication. All rights reserved. The information contained in this document is for your internal reference purpose only. No part of this document may be reproduced, stored or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without Peak Re s prior written consent.