The catastrophes of 2011 – particularly the floods in Thailand – saw some reinsurers reassess or adjust their strategies for Asia. But despite the difficult operating environment, the region remains an essential part of the business for some Arab reinsurers.
By Wong Mei-Hwen
Despite its risk profile, Asia has always attracted reinsurers looking to diversify. Although reinsurers like CCR of France and Lloyd’s Syndicate 1965 withdrew from the region in the aftermath of the 2011 floods in Thailand, others like Berkshire Hathaway have stepped in to ensure ample capacity.
The interest of MENA reinsurers in the region is not a new phenomenon. However, the 2011 disasters put their business plans under the microscope, as Mr David Forrest, CEO of underwriting agency Kay International, pointed out in a recent interview with Middle East Insurance Review. He said: “Are they writing business that they understand, employing underwriters located in the region, or are they growing their income by moving into areas that they simply do not have the expertise to manage?”
Learning from major events
Bahrain-based Arig, which has branches in Singapore and Labuan, Malaysia, has learnt from CAT events and has tightened underwriting guidelines for both its facultative and treaty businesses, said CEO Yassir Albaharna. “For property proportional treaty business, we are enforcing event limit for natural perils in all countries and territories. As far as facultative business is concerned, our preference goes for risks with sub-limit for natural perils.”
He added: “With the economic development of the last 10 years in Asia, insurance exposure in particular to natural perils has grown significantly, especially in coastal regions. It is therefore necessary to closely monitor the exposure we are absorbing when accepting any business.”
Catastrophes may contribute to improving the underwriting environment and can present opportunities, said Mr Fahad Al-Hesni, CEO of Saudi Re, pointing out that the floods in Thailand “highlighted contingent business interruption exposures and cheap catastrophe cover.” Saudi Re, however, had no exposure – direct or indirect – to the floods.
Thai flood exposure
Perhaps the most serious impact of the 2011 floods on Arab reinsurers was seen in the case of BEST RE, which moved its headquarters from Tunis to Labuan in 2010. Although details were not revealed, Standard & Poor’s (S&P) said in a recent press release that the flood-related losses of 2011 and 2012 were “somewhat higher than we anticipated”. It added, however, that the losses have now been paid or fully reserved.
Other Arab reinsurers have been relatively less exposed to the floods. Arig’s treaty book, said Mr Albaharna, “does not target pure catastrophe business in order to avoid the high volatility that implies this type of business. We are writing Asian CAT covers mainly through our quota shares supporting the Lloyd’s market. As a result of better diversification, our losses from the Thai flood were considerably lower than for our regional peers.”
Kuwait-based Al Fajer Re paid no more than US$2.1 million in claims related to the 2011 floods, considering that all losses were from foreign insurers with incidental exposure in Thailand, said CEO Mohamed El Dishish. “Bearing in mind the company’s portfolio composition, Al Fajer Re’s underwriting strategy remains unchanged with the focus on avoiding or reducing cross-country sub-limits and incidental exposures,” he added.
Algeria’s Compagnie Centrale de Réassurance (CCR), which regards Asia – especially Southeast Asia – as a priority market, saw a similar level of losses, at slightly more than $2 million. “We regard this claim as exceptional and in no case calls our current strategy into question,” said Chairman and General Manager Hadj Mohamed Seba.
Trust Re paid over $40 million in claims related to the floods in Thailand, disclosed its CEO, Mr Fadi Abunahl. “Yes, we do want to make profits but at the end of the day, clients pay premiums to give them security when it comes to claims. (Events like those in Thailand) only increased our commitment to the region, and we reassured our clients that we were there to settle their claims safely and securely.”
Diversifying portfolios
For Trust Re, which operates a branch office in Kuala Lumpur, Far East and Southeast Asia contributes 53% of total production. “We are looking for that to grow with time, but naturally we do look to diversify our portfolio so maybe the percentage concentration will not be in the Far East,” said Mr Abunahl. “We are trying to balance it with the fact that Far Eastern investors are going into Africa, and we want to complement it by giving them a turnkey solution in territories where they don’t have representation.
“If the terms and conditions of the market over the next three years make sense, we aim to grow (the Far East business) between 2% and 5%. The emphasis is on ‘if the terms and conditions are correct’. We aim to grow steadily, to maintain our presence. We are not growing for market share, yet rather for writing technically good business.”
The 25% contribution of the Far East to Al Fajer Re’s gross contribution income will not change significantly, said Mr El Dishish. The company is active in all markets in the Far East, focussing on China, Korea, Malaysia, Indonesia and the Philippines, but “this can obviously change depending on future market terms and conditions”.
In addition to its focus on takaful clients, mainly in Malaysia and Indonesia, Al Fajer Re also targets conventional clients to build a balanced and diversified portfolio, he added.
Despite benefiting from the increase in compulsory cessions to 50% in 2010, state-owned CCR has maintained its strategy to “expand everywhere in the areas we (have) targeted”, said Mr Seba. Asia, he added, “remains an important market to go into and our action will be done progressively,” building on its current business in South Korea, India, Pakistan, the Philippines, Indonesia, China and Vietnam. The region is likely to account for 20% of CCR’s turnover in three years.
Saudi Re recorded gross written premiums of SAR35 million ($9 million), or 14% of the total, from Asia in 2012. Its markets include China, South Korea, India, Pakistan, Vietnam, Sri Lanka, Malaysia and the Philippines.
Facing keen competition
The downside to Asia’s lure is its soft market conditions which have seen some players take a step back.
Al Fajer Re renewed all its existing business at the 1 January 2013 renewals and also saw many more offers, said Mr El Dishish. “Nevertheless, due to increased competition in all markets, Al Fajer Re reduced its involvement in the Far East. The competition was mainly driven by new market players like Berkshire Hathaway, Peak Re, Santam Re, BOC HK and Tokio Millennium Re and reinsurers getting back into markets afterwards.”
As it develops business in the region, it counts Nat CAT information, aggregates and reliable assumptions for different scenarios as some of the major challenges. “This obviously limits expansion in various Far Eastern markets.”
Arig foresees a “more challenging business environment in the prevailing soft market conditions, especially for Taiwan and South Korea” in 2013. “On the other hand, we have also seen some degree of consolidation in view of the fact that soft retro has become a scarce commodity following the large regional losses in 2011. With retro capacity being more limited and more expensive, net line underwriters such as Arig are having a relative advantage,” said Mr Albaharna.
Renewals
While Arig has grown its facultative book in recent months, its treaty portfolio showed some reduction for the business renewing at 1 January 2013. “We believe that this should have a positive influence on our technical profitability as we consider many of the treaty markets to be under-priced,” noted Mr Albaharna.
For Saudi Re, “responses from our Asian clients were positive, and January renewals were excellent”, observed Mr Al Hesni, adding that there were, in general, improvements in terms and conditions.
In for the long haul
Major catastrophes of recent years seem to have proven little deterrence to reinsurers serious about Asia’s prospects. Though there were fears that some could follow France’s CCR in pulling out of the region, the fact is that there is always a market for the prudent. The challenge for them now lies in furthering their understanding of the markets and improving familiarity with the risks.
Far East forays
“Al Fajer Re has carefully selected its clients within the Company’s territories in order to continue to put together a diversified portfolio. The Company embraces a business culture of ‘adding value’ that requires a thorough understanding of the risks covered in order to better provide appropriate risk solutions to existing and potential clients, particularly takaful clients.”
– Mr Mohamed El Dishish, Al Fajer Re
“The Asian markets remain competitive as there are plenty of excellent capacities. Still, we are of the opinion that many of the new arrivals need to show sustainable profitability. Arig has weathered the storms for 33 years now. We are still here and our capital is strong enough so that even a catastrophe year like 2011 did not require the company to look for new capital or quota share reinsurers.
“In accordance with our strategy we have grown our facultative book in the recent months while our treaty portfolio is showing some reduction for the business renewing at 1.1.2013. We believe that this should have a positive influence on our technical profitability as we consider many of the treaty markets to be under-priced.
“A very large portion of our business is emanating from ‘more technically underwritten markets’ such as South Korea, Taiwan and China. Nevertheless, we are aware that even in more technical markets there is competition and the rates are softening in the absence of major claims.”
– Mr Yassir Albaharna, Arig
“The interest of CCR is to develop its portfolio, mainly the Southeast Asia zone. Our ambition in the medium-term is to be established in this part of the world, to (build) good relations with our partners in order to be able, later, to open an office on the spot in the area. Thus, this is an intermediate phase (for us).”
– Mr Hadj Mohamed Seba, CCR
“Profitable growth and portfolio diversification are key in Saudi Re’s strategy and we continue to adhere to high and prudent underwriting standards and risk management principles. We target companies with good reputations and well-thought-out business plans. Business mix is important as is quality of delivery on said business plans.”
– Mr Fahad Al Hesni, Saudi Re
“We are seriously looking at potentially setting up a representative office in the Far East; we’re not saying this will happen in the next year or so but it’s something we’re looking at very closely. We have to understand the country, the competition and find gaps where we can add value. We’re not looking to provide only capacity, we’re looking to provide training and to see if we can introduce new products. We go back to our core values; one of the core values is added value. Of course in the Far East there is a lot of competition, however, there are also a lot of opportunities.”
– Mr Fadi Abunahl, Trust Re