Asia-Pacific reinsurers can use ILS capital to compete with global peers: AM Best

Reinsurance companies in the Asia Pacific region can leverage insurance-linked securities (ILS) and alternative capital to capture hardening market opportunities and become more competitive with their global peers, rating agency AM Best has advised.

Alternative capital and insurance-linked securities (ILS) can help to make regional reinsurers more competitive in their home countries and also globally, as they seek out diversification, AM Best said.

While major reinsurers from the Asia Pacific region have delivered stable performance, compared to global reinsurance peers, and have stable positions in their home markets, they are consistently seeking to diversify and expand abroad.

Generally robustly capitalised, the Asia Pacific reinsurance cohort are now also expanding their use of capital sources, AM Best explained, saying that tapping into the capital markets to support retrocession needs is one area of adaptation.

But, it’s about more than just protection, as leveraging ILS and alternative reinsurance capital can also fuel growth and expansion.

“Alternative capital solutions can offer growth opportunities and bring regional players to pay with global peers,” AM Best believes.

Reinsurers in the Asia Pacific region are “relatively late bloomers” when it comes to alternative capital and insurance-linked securities (ILS) use, as part of their retrocession strategies, a key difference to many global reinsurance players, AM Best notes.

But the rating agency believes that, “ILS capacity can support regional reinsurers in capturing rate hardening opportunities.”

This is especially true in market’s like Japan, but increasingly so in other markets like China, where reinsurers are less prone to using large amounts of retrocession, but are beginning to shift in that direction, something initiatives like Hong Kong’s ILS regulatory regime and marketplace are set to support.

These local ILS markets, such as Hong Kong and Singapore, and their respective ILS grant schemes can “raise the economic attractiveness of a catastrophe bond issuance over traditional reinsurance capacity,” the rating agency explains.

AM Best said of Hong Kong specifically, “The ILS grant scheme could support the proof of concept for Asia Pacific (re)insurers with significant nat cat accumulation, as well as to prepare for when the company may need to use alternative capital in post-event hard market conditions.”

On the investor side of the equation, AM Best notes that catastrophe bonds covering Asian perils are typically quite attractive, which we’ve seen in our tracking of global cat bond activity can result in particularly strong execution for issuances.

However, the rating agency also notes that education is still needed to help investors understand certain Asia Pacific catastrophe perils that are less familiar in the insurance-linked securities (ILS) marketplace to-date.