Evolving risks means more volatility for APAC reinsurers: report

An analyst warns that these could cause some of the data for pricing risk to become obsolete.

Asia Pacific reinsurers will see more volatility as risks continue to evolve, according to a report by S&P Global Ratings

The report warns that APAC reinsurers will increasingly price their insured risk on scenarios that have limited history such as whether that be would be policies covering various catastrophe perils or changing landscapes following rapid urbanization. The result will be higher volatility in claims and earnings.

According to S&P Global Ratings Credit Analyst WenWen Chen, as risk markets rapidly evolve, some of the data for pricing risk will become obsolete.

The report said that climate-related natural disasters are the main key driver of change, as more frequent weather-related events upend historical patterns. Besides COVID-19, in recent years the Asia-Pacific region has endured severe weather and wildfires in Australia, destructive and costly typhoons in Japan and the Philippines, and this year's devastating flooding in Henan province, China.

"New variants of risk put the onus on Asia-Pacific's reinsurers to ramp up risk selection, control, and mitigation," said Chen.

The report also reviewed 15 APAC reinsurers, revealing that many of them are focusing on portfolio optimization whilst improving underwriting profitability. COVID-19 related claims have been manageable, whilst repressed economic activity has also led to fewer claims, particular motor insurance. Moreover, reinsurers with bigger international exposures have endured more volatility.

"But a curveball awaits. Asia-Pacific reinsurers' earnings volatility is set to increase from more extreme weather events, as well as persistent reinvestment challenges brought about by low-interest rates and volatile capital markets,” Chen added

Meanwhile, APAC insurance penetration remains low compared to developed economies, and the region's growth in insurance demand for property catastrophe and agriculture insurance has been accelerating.

“In addition to the rising awareness of environmental, social and governance (ESG), policymakers in the region are seeking to increase the sophistication of domestic insurance markets and foster economic and financial resilience to shocks, particularly climate change. The upside is heightened demand in underlying insurance markets and reinsurance needs,” Chen said.