Upgrades outweigh downgrades across Asia Pacific in latest AM Best study

Improved balance sheet strength and favourable operating results meant (re)insurers in the Asia Pacific (APAC) region saw more upgrades to long-term issuer credit ratings (ICRs) than downgrades last year, according to AM Best.

In a special report, AM Best noted that the region is split between mature and emerging markets, with the former supported by strong capital adequacy standards and diversified risk profiles, while lower insurance penetration among the latter means more competitive premiums and less adverse claims development.

The types of companies rated across the region include reinsurers, insurers, mutuals, captives, takaful operators and P&I clubs, AM Best said.

Eight long-term ICRs were upgraded, with three upgrades in New Zealand, two in Singapore, and one each in Hong Kong, South Korea and Vietnam.

Downgrades were generally driven by falling Best’s Capital Adequacy Ratio scores and weakening operating results, with one downgrade apiece in New Zealand, Singapore, Thailand and the Philippines.

Despite elevated cat activity in recent years, the majority (87 percent) of outlooks on APAC (re)insurers were stable at year-end 2023. A larger proportion of companies operating in mature markets were assigned stable outlooks (91 percent) than those in emerging markets (82 percent).

AM Best defines mature markets in the region as Australia, Hong Kong, Japan, Macau, New Zealand, Singapore, South Korea and Taiwan.

Positive outlooks were assigned to just 8 percent of all ICRs, up slightly from the prior year. Of the outlook revisions that occurred last year, three-quarters moved to positive from stable for companies operating in mature markets, particularly in New Zealand and Singapore.

Impact of country risk on ICRs

More than 75 percent of ICRs for APAC (re)insurers carried a long-term rating of “a-” or higher, with stronger ratings generally handed to those in mature markets rather than their emerging markets counterparts. Country risk often plays an important role in determining the overall rating assessment for (re)insurers in emerging markets, with ICRs ranging more widely from “a” to “bbb”.

AM Best added that most (re)insurance groups at the lower end of the rating scale are domiciled in countries characterised by elevated levels of economic, political and financial system risks.

The rating agency defines country risk as the risk that country-specific factors could adversely affect – whether directly or indirectly – a (re)insurer’s ability to absorb key risks in its operating environment and to meet its financial obligations.

The report added a caveat that country risk tiers are not directly comparable to a sovereign debt rating, although it does have a bearing on (re)insurers’ overall ratings, particularly those operating in CRT-3 to CRT-5 countries (which make up approximately 37 percent of AM Best-rated units).

Three countries in APAC are in the CRT-3 tier (China, Malaysia and Thailand), while India, Indonesia, Philippines, Vietnam are rated CRT-4.

CRT-5 is the most common country risk tier in APAC, including Bangladesh, Bhutan, Cambodia, Lao PDR, Myanmar, Nepal, Pakistan, Papua New Guinea, Sri Lanka and Uzbekistan.

Insurance penetration and balance sheet strength

In mature markets, balance sheet strength is assessed as “very strong” for most (re)insurers – partly owing to strong regulatory regimes, including well-established supervisory frameworks and stringent regulatory requirements, for example around insurers’ capital adequacy standards.

“In addition, mature markets generally have more stable economic conditions, including lower levels of economic volatility and political risk than emerging markets,” said AM Best.

“This stability lessens the need for insurers to hold excess capital to mitigate macroeconomic uncertainty. Insurers may also face fewer underwriting risks, which may be due to better-established risk management practices, more accurate actuarial modelling, and a deeper understanding of market dynamics.”

The financial flexibility offered by access to the capital and debt markets also enables insurers to maintain adequate capital without solely relying on retained earnings or other sources of funding.

AM Best added that mature markets often have higher levels of insurance penetration, providing insurers with more diversified revenue sources and enhanced risk profiles.

On the other hand, low insurance penetration in emerging markets means insurers typically have simpler products, resulting in a lower probability of adverse claims development.

“Emerging markets may have strict regulatory requirements, leading insurance companies to

maintain higher capital reserves to comply with regulatory standards and mitigate risk associated with regulatory changes,” said the report.

“However, these markets may have rigid and simplistic regulatory capital requirements which may or may not appropriately match the risks the companies face. They are also vulnerable to greater perceived risks such as currency volatility and political instability.”

Nevertheless, emerging markets in APAC offer significant growth opportunities for insurers in countries with expanding middle-class populations and growing urbanisation, which leads to increased demand for insurance.

However, competition can be intense as local and international insurers vie for market share – highlighting the importance of strong capital levels to take advantage of growth opportunities.

Exposure and claims development hits RoE

Unlike balance sheet strength, operating performance metrics for APAC (re)insurers has a somewhat similar distribution across both mature and emerging markets, with companies generally concentrated in the “adequate” and “strong” categories.

Just one Singapore-based company has an operating performance assessment of “very strong”. AM Best noted that many firms in the “strong” category are market leaders or large multinational (re)insurers that benefit from diversified earnings and economies of scale.

The report warned that when assessing operating performance, (re)insurers’ profiles and exposures can vary widely – for example, nat cat events can occur across the development spectrum.

The average yearly return on equity (RoE) for carriers in mature markets tends to be significantly lower than in emerging markets because they experience higher claims payouts, leading to negative underwriting results.

AM Best added the caveat that operating performance metrics of (re)insurers in emerging markets across APAC must be considered carefully, as performance may not be as good as nominal figures may suggest.

This is because emerging markets often have faster-growing economies and expanding middle-class populations, leading to rising demand for insurance products which can translate into higher premium growth, greater profitability and higher RoE.

Lower market penetration also drives greater competition, which allows insurers to charge higher premiums and achieve better underwriting margins.

“Underwriting strategies for 2024 are diverse and depend on the reinsurers’ ability to secure retro capacity, as well as their ability to manage the underwriting cycle the past two years,” said AM Best.

“Large Asian reinsurers have adjusted their cat capacity offerings in their home markets to minimise their cat exposures, while others have deployed a mature market growth strategy to capture the benefits of material rate increases.”

It concluded: “In addition, geographic expansion and diversification of their lines of business from traditional property treaties such as building liability, L&H, and specialty books will allow reinsurers to better manage the reinsurance cycle.”