Insurers in the region could push reinsurers to alter the structure of some coverages in the upcoming renewal season, as the hard market continues and retentions rise, according to Tony Gallagher, chief executive officer–Asia-Pacific, Guy Carpenter.

As the market moves away from aggregate covers and lower layers of cover disappear, reinsurance buyers will be looking for earnings protection or ways of smoothing losses from their reinsurers, perhaps using different structures, Gallagher told SIRC Today.

“Earnings and capital protection is something that they will need to talk about, because there is a change in the deductible levels that moves some form of volatility to the insurance company’s balance sheet,” he said.

“There will be a lot of conversations around what we call structured products that could provide some smoothing for results across a period of two or three years.”

Products such as loss portfolio transfers and quota shares could be mechanisms to help insurers as they look to preserve capital and protect their balance sheet, he added.

Broadly, Gallagher expects a stable renewal for 1/1, after a relatively standard year for catastrophe claims, although outcomes will vary by country and company. He said tight capacity is not as much of an issue as it was a year ago.

According to Guy Carpenter’s own benchmarks, overall capacity utilisation typically sits around 130 percent. It dropped towards the 100 percent mark last year but, as of 1/7, 2023, it was back at 137 percent.

“It’s moved pretty quickly back to what we would say is an average,” said Gallagher. “At 1/7 we had all the capacity we needed, plus some, to get the placements done.”

Capital coming back into the market has eased capacity constraints, said Gallagher. It has chiefly come from medium or large, well-capitalised traditional players, rather than new startups that are often launched during hard markets.

“Investors are seeing reinsurance delivering double-digit returns again.”

Gallagher said some of the better returns from reinsurers are due to higher deductibles they have applied. He says the overall Guy Carpenter deductible index has also moved. At the 1/7 renewals, over 30 percent of Asia-Pacific clients saw retention increases. These increases varied widely, but on average, they were around 60 percent, reflecting reinsurers’ avoidance of unexpected frequency perils.

“That’s the biggest increase we’ve seen in our index, which means that the attritional losses or losses in the lower return layers are being retained,” said Gallagher.

“So, from some of the events around the globe in the first six to 10 months, there’s a lot more retained losses being kept by insurance companies, which then would mean lower recoveries through reinsurance.”

Guy Carpenter’s Rate On Line Index for catastrophe cover moved up 15 percent on average in Asia-Pacific for 1/1 2023 renewals, said Gallagher. “That’s significant. Deductibles change the way that losses are passed through reinsurance. That changes the whole dynamics of the reinsurance relationship.

“When you look at unmodelled peril losses, or some of these flood losses, a lot of that has now been retained within the insurance industry rather than being passed on.”

However, Gallagher stressed, rates on line are still below the peaks of 2012 in Asia, after the 2011 Japan earthquake and tsunami.

Coming challenges

Gallagher said Asia was ahead of other regions in tightening wording, especially over COVID-19 business interruption cover. “Asia had some of its coverage changes in prior years. Some of the pandemic issues that came up outside Asia were excluded in prior years due to SARS and some other things.”

Gallagher added that the industry needs to adapt to the changing nature of risk, for example battery storage, or the shift to electric vehicles. “Systemic risk is different from five or 10 years ago. The industry needs to have a look at property risks, how they are managed.”

Gallagher identifies cyber cover as a growth area in Asia. “Cyber is very interesting. There are pockets of cyber at a corporate level and on a personal level, but that is going to play out over the next 12 to 24 months.

“The industry also needs to step up and really support renewable energy.”

Economic slowdown in Asia could be a challenge for players in the region. “It will be an issue, because it affects the ability to get insurance coverage.”

That, along with more specific issues within reinsurance, will feed into the upcoming renewal discussions, said Gallagher.

“Clients are expecting a stable renewal, because it does get to the point of affordability,” he said. “Reinsurance costs need to be passed on, coverage changes need to be impacted on the original policies, and there will be an affordability issue at some trigger that leads to economic vs. insured losses.

“If insurance is not affordable, it ends up being an economic loss. This is the gap that the insurance industry needs to focus on trying to reduce.”