Fitch Ratings
CIT catches up with Siew Wai Wan of Fitch Ratings to dig a little deeper into the firm’s recent reinsurance discoveries
How does the Fitch rating process work, and what areas of Asia does Fitch cover?
Fitch’s ratings are assigned by a committee of analysts according to published methodologies. For insurers, we look at key qualitative credit factors including sovereign and country-related constraints, industry profile and operating environment, market position and size/scale, ownership and corporate governance, as well as a number of quantitative factors. These include capitalisation and leverage, debt service capability and financial flexibility, financial performance and earnings, investment and asset risk, asset liability and liquidity management, reserve adequacy, and reinsurance, risk mitigation and catastrophe risk.
Fitch covers various geographical locations in the Asian region, including Singapore, Malaysia, Indonesia, Korea, Thailand and even Australia, considering a comprehensive reach of companies including non-direct life insurance, direct life insurance and reinsurance.
Fitch’s Asian reinsurance report states that the “robust development of insurance in Asia” has led to reinsurance growth potential. In what ways has the insurance market developed and what would you attribute the growth to?
Growth in the reinsurance market has been due to the strong economic development of the Asian markets coupled with the current low insurance penetration rates.
We have given some examples of penetration rates in the report. Markets where Fitch has seen very low penetration include Indonesia, which has a huge population and has one of the lowest penetration rates in the region.
The report claims that Asia’s regulatory landscape has undergone considerable changes in recent years. What changes have you seen being implemented and have they all been for the better?
We are most definitely seeing an improvement to the regulatory regime in Asia. In capital management, a lot of the markets have implemented, or are contemplating implementing, the risk-based capital regime. Previously they had a more simplistic solvency margin regime, so we can see the move forwards toward a calculated and adjusted capital regime.
In Indonesia, there is an increase in the amount of regulatory capital requirement on a company. This is viewed positively by Fitch as it will eventually lead to an improvement in the financial health of the local insurance industry.
Overall, we think that all the regulatory changes have led to a rethink in capital and risk management from the perspective of the companies because they’ve now given them a more refocused capital regime.
Companies now think more about how they are going to manage their capital resources in order to back their businesses more appropriately. Depending on the amount of business and the risk profile of the business, different capital requirements are attached to it so they have to rethink the risk profile as far as capital management strategies are concerned.
According to the report, reinsurance policies during 2012-2013 have reached a plateau. How do you predict that policies will fare in the future?
It really depends on the frequency and occurrence of the catastrophes in this region, because this will probably increase the claims experience of the companies and an adverse increase in claims experience would likely lead to an increase in rates during policy renewals.
In 2011, compared to 2012 and 2013, there were actually quite a few catastrophes in the region like tsunamis and various floods in Thailand that have meant that we have seen an increase in the rates of the policies as a result of the occurrences of the catastrophes and also in terms of the underwriting condition, generally the underwriters are actually more cautious in underwriting certain catastrophe- prone markets so that was the consequence of the 2011 catastrophes.
As the market has levelled out in the last two years we have actually seen marginal to flat rates in 2012 and 2013 because by comparison the extent of the damage from catastrophes in the last year or so is less severe compared to 2011.
Asia has seen its fair share of catastrophes, both natural and man-made. Is there any single catastrophe that could affect the way reinsurance is done in Asia?
We don’t think that there is any single catastrophe that could affect the way that reinsurance is written in Asia, it really depends on the severity of each individual incident.
We would like to highlight one event in particular—the Thai floods that occurred in 2011. The floods impacted the underwriters in a major way as Thailand was not previously considered a catastrophe prone market but we think the occurrences of the huge floods in 2011 have effectively changed the view of some of the underwriters who now tend to categorise Thailand as a market with some potential catastrophe exposure. That catastrophe has somewhat changed the way underwriters underwrite their business from the market.
