Softening premium rates in Asia and the market’s broad potential for growth is spurring a regional spike in demand for reinsurance, Fitch Ratings has concluded in a new report.

What’s more, that expansion is coming at a relative bargain, Fitch said.

“Several companies have taken advantage of the current market to expand their reinsurance coverage at a lower cost,” Fitch noted, citing factors including softening rates due to fewer natural catastrophes, new reinsurance startups, Asian operations set up by global reinsurers and the relatively lower cost compared to other older markets. New regulatory initiatives to boost reinsurance have also helped.

In general, Asian reinsurance market growth is drawing interest from others, Fitch added.

“The growth momentum of the Asian reinsurance markets is strong, with increased risk awareness and continued market demand by the cedents, spurred by frequent occurrences of natural catastrophes in the region,” Fitch said. Reinsurance interest has particularly focused on China and Indonesia, which Fitch said is relatively untapped as far as insurance/reinsurance needs.

This potential is drawing a number of foreign reinsurers to set up shop, Fitch said. For example, Swiss Re entered China through its acquisition of Sun Alliance Insurance in China from RSA Group, Saudi Re gained approvals at the end of 2013 to set up shop in Malaysia to underwrite general reinsurance business, and Transatlantic Re in New York begin doing business in Singapore, also in 2013. As well, Fitch Ratings noted that AIG wants to set up a (re)takaful business operation in Malaysia this year (a financial service similar to insurance that complies with Islamic principals).

Beyond foreign competitors, Fitch Ratings said new Asian-based reinsurers also likely to launch or set up shop to tap the region’s reinsurance business potential. Among those players: Peak Re, which launched in 2012, underwrites property and casualty reinsurance across Asia, and has recently added capacity. Peak inked a deal recently with Australia’s MacquarRe, a reinsurance consultancy, to tap into both the Australian and New Zealand markets.

“This is in line with its plan to provide a comprehensive range of reinsurance business to its clients to broaden market reach in the region and raise its competitive edge,” Fitch said.

Fitch added that it is encouraged by a number of regulatory initiatives in various countries in Asia designed to “boost the overall financial health and transparency of (re)insurance markets.” The ratings agency said the new regulations and laws should boost demand for technical expertise, risk transfer and reinsurance capacity by direct insurers” that enables them to hit those higher regulatory requirements.

Among the countries that have made changes:

  • Indonesia has added requirements that reinsurers meet new, higher minimum regulatory capital standards by the end of 2014.
  • China’s insurance regulator will introduce a risk-based capital framework.
  • Australia’s regulators have required each insurer to set aside a certain amount of capital to cover its net retention, based on a single large 1-in-200-year catastrophic event, or accumulated from a series of smaller loss events.
  • In 2012, Thailand’s government has set up the National Catastrophe Insurance Fund, a de facto reinsurer that helps improve the insurance industry’s financial cushion to better deal with future catastrophes.

Source: Fitch Ratings