COVER STORY
Calmer times are ahead for APAC after tumultuous period
The Asian market is going through a transition phase, says Vicky Carter of Guy Carpenter.
After a tumultuous 12 months characterised by multiple challenges for insurers, including rising reinsurance costs, escalating retentions and more stringent terms and conditions, the Asian market in particular has now been through a transition and calmer times are ahead.
That is how Vicky Carter, chairman of Global Capital Solutions, International, at Guy Carpenter, and deputy chair of Lloyd’s, describes the unique dynamics at play in the Asia-Pacific market—and what cedants should expect as the market moves towards the year-end renewal.
She describes the last renewal as characterised by “extremely volatile” market conditions with many headwinds facing insurers. “The nature of risk is changing,” Carter told SIRC Today. “In 2023 there was a very dramatic shift in pricing which hit insurers hard. It led to a pretty hard market across most lines of business, with a few exceptions, notably around the D&O classes.”
The Asia-Pacific market, she noted, has been through a “transition phase”, and having come through this, she holds an optimistic outlook for 2024. She anticipates a “calmer renewal season” compares to the tumultuous one in 2023.
“We’re advising our clients in Asia-Pacific to expect a stable renewal season coming up in 2024,” she said.
While Carter expects disparities based on specific client situations, her general outlook remains consistent—forecasting a “more benign year” for Asia-Pacific. “There will be variances based on individual client circumstances. If a client has been hit by losses, adjustments to its portfolio may be needed.”
Supporting her perspective, Carter cited data from the Guy Carpenter Asia Pacific retention index which indicated that in the July 2023 renewal, some 30 percent of Guy Carpenter’s APAC clients showed an increase in their retentions—on average the hike was around 60 percent. But, she noted, “the impact on the Asian market wasn’t as dramatic as in other parts of the world, which is interesting”.
Globally, Carter said, 2023 has again been marked by high levels of insured losses from natural catastrophes worldwide. Yet she pointed out the relative stability of the region, noting that “only 6.2 percent of that comes from Asia-Pacific.”
The good news
There are other positives for the industry. “Capital is rebounding,” according to Carter. By mid-2023, Guy Carpenter and AM Best estimated that at least $4 billion of new reinsurance capital was raised, largely from existing players. According to Guy Carpenter estimates, the Asia-Pacific region specifically witnessed a jump in capacity utilisation from 108 percent in January 2023 to 137 percent by July 2023.
“We’re seeing plenty of capacity in this market at the moment, despite what’s happened globally. This is interesting if you look at when capital came in a couple of years ago,” she explained.
“We’re seeing plenty of capacity in this market.”
Vicky Carter, Guy Carpenter
“We had a big influx of capital into the market, particularly with alternative capital coming in and looking at sidecars protecting predominantly North American catastrophe risks.”
However, Carter warned, investors remain cautious. “Everybody is trying to achieve cost of capital, but until you can meet that cost or exceed it, potential investors will not be attracted back into the sector,” she said.
“We certainly see a rebound in interest in the market, but most capital providers would want to see one year or steady rating increase and stability before they come back into the market. So most of the new capital coming in now tends to be from existing players,” she added.
According to Carter, the imminent challenge for insurers is managing the volatility and the higher retentions they were forced to take in the 2023 renewal periods. “A lot of those losses have come into retentions and people have been hurt by those losses now sitting within their portfolios.”
Brokers, she believes, will have to be flexible and “more creative” around products to help manage that volatility, particularly at the bottom end of programmes. “There’s probably going to be ample capacity at the middle to higher end, but if you look at the bottom end, particularly around aggregation covers, that is where the shortage will be,” she said.
Economic instability, geopolitical shifts, climatic concerns, inflation, and ongoing challenges mean CEOs will need to consider novel strategies for portfolio management. Alternative structures, she pointed out, will take centre stage where the market is seeing a lot more interest in loss portfolio transfers, adverse development covers, structured risks and spread loss covers, especially in Asia-Pacific.
Exciting prospects
All this represents a double-edged sword for reinsurers—and brokers. “A challenging market always means opportunities,” Carter said. She described the market prospects as “truly exciting”.
“In my career, I don’t think I’ve ever seen the opportunities that are out there now,” she said, drawing attention to the prevailing area of environmental, social and corporate governance issues, rising interest around parametrics, captives and cat bonds.
Cyber in particular stands out in Carter’s analysis as a tremendous opportunity. “If you go back 10 years, nobody really knew what cyber was. Today, it’s the fastest growing line,” she said.
“But the penetration and uptake of cyber is still very small, and particularly in Asia, we see a huge opportunity around cyber, particularly in the SME and micro-SME markets.”
Carter sees a big opportunity for managing general agents, insurtechs and insurance companies to partner up to tackle challenges around potential systemic risks. She also sees an opportunities in the exploration of public-private partnerships such as Pool Re and Flood Re in the UK, she said, “to fill that huge gap between economic and insured loss in the future”.
“Lloyd’s is probably the most capital-efficient place to underwrite.”
Life at Lloyd’s
Carter has been re-elected as a member of the Lloyd’s Council and she continues to serve as the market’s deputy chairman. She believes that Lloyd’s will be at the forefront of change, helping drive innovation and transformation in the markets.
“It’s probably one of the most exciting times I’ve ever seen around the Lloyd’s Market,” Carter said. “Lloyd’s remains relevant and competitive in an ever-growing and more competitive landscape.”
She emphasised Lloyd’s current priorities: breaking down barriers to entry, enhancing competitiveness, and drawing multinationals. The Market’s efforts with captives and its commitment to technological advancement through the Lloyd’s Lab reflect a renewed approach to staying relevant, she said.
The results speak for themselves, she said. “The oversight has driven fantastic Lloyd’s results—the best we’ve seen for many years.” The oversight and compliance structures in place ensure that investments are secure and managed correctly, giving confidence to potential investors.
“Lloyd’s is probably the most capital-efficient place to underwrite. The hugely robust process syndicates have to go through should give a certain degree of comfort to anybody investing in the Lloyd’s Market,” she added.
Carter praised the Lloyd’s management for their ongoing work around making the marketplace “more attractive” for alternative capital to come in, diversifying the risk to generate more opportunities for profitability, encouraging innovations, attracting new talent and ventures with initiatives such as the Lloyd’s Lab.
“One of the most exciting things at Lloyd’s at the moment has been the development of the Lloyd’s Lab,” she remarked. “We’ve seen things around the use of parametrics and some very interesting things coming out of the Lloyds’ Lab, for example, insurance for couples going through IVF treatment.”
Concluding her insights, she reflected, “It is a very exciting time and great work is being done. Amid enormous global volatility lies huge opportunity for our industry. That’s an undeniable truth.”
Main image: Shutterstock / GRJ Photo