APAC reinsurers’ capital stays robust, retro cost could drive underwriting volatility

Net premiums grew 8.1% year-over-year in 2022.

Major reinsurers in Asia-Pacific (APAC) have maintained robust capital positions, benefiting from global expansion and diversification to mitigate the risk of domestic natural catastrophe accumulation. However, the availability of aggregate excess-of-loss retrocession capacity may pose challenges, potentially resulting in higher underwriting volatility during active catastrophe years.

In 2022, major APAC reinsurance companies achieved an impressive 8.1% year-over-year net premium growth, despite significant catastrophe losses outside their home markets and a challenging investment environment, according to AM Best report titled "Operating Performance, Retro Cost Drive Asian Reinsurer Strategies," which is part of AM Best's analysis of the global reinsurance industry.

The report focuses on a group of APAC-domiciled reinsurers among the top 50 largest globally. 

Despite a drop in net income to $166m in 2022 from $688m in 2021 and a decline in return on equity to 1.8% in 2022 from 7.0%, these reinsurers managed to maintain stable operating and combined ratios. 

The combined ratio improved slightly to 100.8 in 2022 from 101.1 the previous year, which is lower than the five-year average of 101.0.

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Christie Lee, senior director, head of analytics at AM Best, explained that APAC reinsurers upheld their underwriting discipline in 2023 renewals to ensure reasonable profit margins and adjust pricing in proportional treaties to enhance performance. 

Primary insurers also followed suit, aligning with reinsurance pricing, terms, and conditions, which is expected to yield better revenue and underwriting results for reinsurers.

While shareholders' equity for APAC reinsurers in the composite declined by 9.5% year over year, it was a far more favorable outcome compared to the 38% capital decline seen among the European "Big Four" composite. 

This discrepancy is attributed to monetary easing in some Asian countries. 

Chris Lim, associate director, analytics at AM Best, noted that the adoption of the new IFRS 17 accounting standard in 2023 will likely cause a one-time movement in shareholders' equity levels, varying by company depending on factors such as business profile mix, investment classifications, and actuarial assumptions.