Despite continuous reliance on investments to generate bottom-line profitability, reinsurance businesses in South and Southeast Asia (S/SEA) reported a better combined ratio in 2021, according to AM Best. However, underwriting performance is still under pressure.
According to the most recent Best's Market Segment Report, "Meeting Cost of Capital Elusive for South and Southeast Asian Reinsurers Despite Improved Underwriting Performance," S/SEA reinsurers had a combined ratio of 108% overall in 2021, which is 5% higher than the peak in 2019.
Investments
Despite the improvement in technical performance, AM Best observes that due to poor investment yields and a persistently low interest-rate environment in the majority of S/SEA economies, the overall return on equity fell to 3.4% in 2021.
Even if rising inflation in the region is going to make it difficult to meet the cost of capital prospectively, investment returns are predicted to rise during the short term along with a recovery in interest rates, according to AM Best senior financial analyst Kanika Thukral.
The main insurance market expansion brought on by the recovery of the economy and more insurance penetration is expected to sustain the segment's continued steady growth, according to the global credit rating agency.
International reinsurance players have contributed to the growth of the S/SEA reinsurance markets alongside local and regional reinsurers because they see the region as essential to their expansion and portfolio diversification plans. Particularly for big property, engineering, and maritime risks, international reinsurers continue to be essential.
Trend
The research states that because reinsurers in the region anticipated a difficult investment climate and an inflationary environment, they approached 2022 renewals with an emphasis on achieving technical profitability. For accounts affected by losses, a retrocession price hardening trend persisted; nonetheless, S/SEA reinsurers have not considerably changed their retrocession tactics and continue to rely on conventional retrocession methods despite rising prices. Instead, in light of these retrocession conditions, market participants have attempted to concentrate on prudent exposure management while maintaining or slightly raising retention levels.
According to Michael Dunckley, director of analytics at AM Best, "Even with rate improvements in the past two renewal seasons, the pricing increases may not be adequate to show significantly better technical profitability given predicted increases in loss costs should higher inflation persist." "Reinsurers will need to maintain their underwriting rigor along with a sound investment and retrocession plan."
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