AM Best: APAC reinsurers to scrutinise cat XoL treaties for domestic insurers

Incurred losses in catastrophe excess of loss (XoL) treaties from the Taiwan earthquake in April will be a focus for domestic primary insurers at the upcoming January 2025 renewals, AM Best has warned in a new regional report.

The rating agency’s market segment report on reinsurers in Asia Pacific (APAC) noted that the majority of insured losses from the 7.2 magnitude earthquake that struck Taiwan in April were from high-tech firms that sustained property damage, with business interruption losses able to be minimised.

Domestic primary insurers participating in commercial risks impacted by the earthquake saw incurred losses in cat XoL treaties, which AM Best forecast as an area of focus at 1 January.

“To protect their balance sheets from further losses due to natural catastrophes for the rest of 2024, some primary insurers have already purchased back-up cover,” said the report.

However, at the end of July, Typhoon Gaemi swept across the island. The report noted that the potential impact on Taiwan primary insurers’ catastrophe XoL layers is still too early to determine.

“Nevertheless, a noticeable risk-adjusted rate increase is expected in forthcoming renewals for both catastrophe excess of loss XoL treaties for domestic insurers and facultative contracts for large commercial risks,” AM Best continued.

“The renewal of large, high-tech policies in the fourth quarter of 2024 will serve as a crucial indicator of how much support facultative reinsurers are willing to extend in terms of reinsurance capacity.”

Elsewhere, in China, loss-free programmes have seen a flat to single-digit risk-adjusted rate increase over the year, while those hit by Typhoon Doksuri last year experienced significantly higher rate hikes.

Despite this, Chinese renewals in 2024 were more orderly than in 2023, the report said, with support from onshore reinsurers and primary insurers with inward treaty books providing stable capacity for the non-life segment.

There was also an uptick in lower-rated reinsurers underwriting China reinsurance business through fronting partners, as well as in medium-sized primary insurers expanding their portfolios to inward treaties.

“Overall, attachment points have increased in the past few years, placing greater rate pressure on the lowest-attaching catastrophe layers,” said AM Best.

“By contrast, the upper layers have enjoyed ample capacity supply in the 2024 renewals, leading to more favourable positions. This environment has prompted some cedants to consider multi-year options for the bottom layers, to lock in pricing and secure capacity for the next three years.”

However, China still faces challenges driven by a weak post-COVID recovery and limited overseas investment, with many Chinese reinsurers struggling to achieve historic investment yields.

For AM Best’s composite of large APAC reinsurers, return on equity rocketed to 9.2 percent in 2023 from 0.1 percent under IFRS 17. As well as the new accounting standard, this was driven by a more stable investment environment (including the recovery of realised unrealised investment losses) and benign cat activity.

In general across the region, business profiles are characterised by a more traditional property line focus, and a relatively large book of proportional treaties – although this means the cohort have benefitted less directly from global reinsurance rate hardening.

In aggregate, the reinsurers posted a combined ratio of 91.6 percent in 2023, marking a 2.9 percentage point improvement from the prior year.

Insurance revenue grew by 8.8 percent under IFRS 17, although AM Best pointed out that this is mainly attributable to China Re’s international expansion through its overseas subsidiary Chaucer.

The report continued that optimism returned to lower layers in south and southeast Asia in 2024, driven by reinsurers’ growing confidence in current pricing levels, as well as the incorporation of stricter terms and conditions to limit their risk in the event of treaty underperformance.

“This shift in sentiment underscores the cyclical nature of the reinsurance market,” commented Chris Lim, associate director, analytics at AM Best. “However, reinsurers’ acute awareness of the ongoing challenges posed by climate risks indicates that the players will likely maintain a vigilant approach to risk assessment and pricing.”