Q&A: Aon's Yen Chu Choo
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Q&A: Aon's Yen Chu Choo

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Yen Chu Choo discusses the factors shaping insurers' capital management needs in Asia, from regulatory changes to market dynamics.

What is the backdrop for insurers’ need for capital management?

In Asia, a confluence of factors drive the need for continuous and effective capital management. Regulators are increasingly implementing enhancements to capital regimes, aimed at strengthening the overall resilience of the insurance industry. This will lead to an increased need for capital from insurers, especially in countries where the market landscape is relatively fragmented with small capital bases.

We are seeing reduced capacity and increased costs in the current reinsurance market environment in Asia. Some insurers were forced to increase retentions, which leads to greater retained volatility and potential capital strain. Climate change remains a key driver of uncertainty, as secondary perils are increasingly being recognised as a systemic risk in APAC.

Emerging Asia in particular is a growth region, where many insurers have seen rapid expansion and are looking to continue this growth trajectory. Capital management is essential to ensuring that the growth is sustainable. This becomes especially relevant in light of current reinsurance market dynamics; Asian insurers generally have a heavy reliance on reinsurance to grow, particularly on proportional capacity.

The spectre of inflation is still looming and may impact capital; the impact is more nuanced by country, but in general as structural repair and labour costs increase, there may be an uptick in loss ratios before pricing catches up.

All of this calls for strong capital management. Aon is very well positioned in this regard, with a wide range of capabilities and solutions to help clients navigate volatility, ensure business resilience, and support their growth aspirations.

What about ratings agencies? What impact do they have?

We are seeing an increasing number of insurance companies in the region either exploring or obtaining ratings by global rating agencies, as this significantly improves their prospects for growth. Rating agency capital is therefore of increasing relevance. In addition, depressed operating performance and market outlooks during the pandemic years have led to some stressed rating capital positions, which companies will have to carefully navigate and defend.

We do note that, in their initial stages, companies generally undergo a learning curve to understanding how their business risks and strategic decisions influence the rating agency capital adequacy assessments. It is also important that insurers understand the impact of changes in ratings criteria and capital models, the most recent example being S&P’s new model, which will likely be implemented towards the end of the year.

In this regard, our experts are educating clients and helping them to shape better business decisions.

What should companies learn from the current challenges?

In the current environment, portfolio differentiation is key for insurers in Asia. Companies that can clearly articulate their strategic direction and technical expertise, supported by strong data and analytics, have a distinct advantage in securing capacity and managing reinsurance costs.

Having a custom view of risk to managing accumulations and any inflationary impact will also aid efficient capital utilisation. Companies should adopt a more diversified view of capital, to avoid over-reliance on a single form of capital such as a surplus treaty or an excess of loss with low-attaching deductibles. The current market volatility has hinted to the benefit of a capital framework that incorporates multiple forms of capital, and ideally is flexible enough to take advantage of opportunistic market conditions to match risk and capital effectively.

How important is it for capital advisors to provide clients with an holistic outlook?

It is essential that our clients are aware of all capital options available to them, in order to make a balanced decision. These include traditional reinsurance, structured reinsurance – such as multi-year XL layers, capital relief quota shares and legacy reserve deals – debt and equity. Beyond that, companies can consider alternative risk transfer solutions, including catastrophe bonds or parametric covers. If scale permits, captives or Internal Reinsurance Vehicles (IRV) could be potential solutions to supporting capital optimisation.

We help our clients with assessing a wide range of capital opportunities, and provide data-driven advice to substantiate their business strategies.

What impact do legacy dynamics have on capital provision?

Legacy reinsurance is often used to release locked capital for more profitable growth, or to refocus business strategy and reallocate capital. These transactions are not limited to discontinued lines, but can also include active lines of business.

We see relatively fewer legacy deals in Asia compared to the US and Europe; however, there is material capital in the legacy space which can be utilised if the need arises. These can be very effective balance sheet solutions, but there are a myriad of considerations that require careful assessment, as these solutions are more complex than traditional reinsurance.

How are clients responding to your advice, and are you seeing any trends in your service provision?

We are seeing a growing demand in the structured reinsurance space, as a result of recent capacity challenges. Companies are increasingly exploring multi-year XL bottom layers, due to the uptick in retained volatility and costs. Capital relief quota shares are also gaining traction as companies look for avenues to grow sustainably. Parametric covers have achieved some momentum, and we anticipate this to continue.

Due to the relative complexity of these solutions, compared to traditional reinsurance, there is more groundwork to be done in terms of assessing the costs and benefits. We work closely with our clients on this, to support them in making better capital decisions.