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Asia-Pacific reinsurers must adapt or lose market share

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Reinsurers in the Asia-Pacific region will find their “home-court advantage” eroded by the hard-to-predict nature of urbanisation and chaotic weather, bringing more complex pricing challenges, and the need for risk diversification, S&P warns.

These reinsurers need to update pricing models and technology and expand geographically to avoid losing market share to global rivals, the ratings agency warns.

“Asia-Pacific's reinsurance markets remain the world's fastest growing. That is undisputed. Less clear is whether the region's major players will maintain their dominance over this landscape,” S&P says in its report, Asia-Pacific's Reinsurers: Evolve Or Dissolve?

A financial review of 18 Asia-Pacific providers of reinsurance revealed many suffered underwriting losses in recent years. Their average net combined ratio rose above 102% in 2017 and 2018, from 96.8% in 2016. Average return on equity (ROE) stood at 2% last year, less than half the return of 2016.

S&P says three structural weaknesses need to be addressed: pricing models, technology and geographical diversification.

Pricing models have not kept up with Asia's rapid urbanisation. As cities become denser, exposure to greater financial losses from catastrophes escalates. This is yet to be explicitly modelled and presents new opportunities for reinsurers to provide calibrated covers, S&P says.

“The need to incorporate updated coastlines and urban planning maps calls for enhanced catastrophe models, [thus] levelling the playing field,” it says.

Investment in technology would lower expenses in the long run and S&P forecasts Asia-Pacific reinsurers will invest in drones to assess crops, and better distribution and client-outreach equipment.

Geographical diversity would help limit earnings volatility, S&P says, noting overseas acquisitions by China Reinsurance.

Recent firmer pricing trends should help the region's reinsurers, the report adds.