First steps into Asia and the case for diversification

First steps into Asia and the case for diversification

First steps into Asia and the case for diversification 972 530 Freddie Scarratt

One of the major reinsurance trends of this decade is the growth of the Asian reinsurance markets. Research by Trust Re estimates that Asian reinsurance markets are expected to outgrow the region’s GDP with reinsurance premiums expanding by 7.8% from US$ 51 billion to US$ 55 billion. Singapore and Hong Kong remain strong hubs for reinsurance, but China is by far the largest with reinsurance premiums of US$ 24.6 billion. The populous tiger economies of Indonesia and Thailand are also experiencing premium growth driven by increasing market penetration. Asia is now a huge and sophisticated market with capital to deploy and the intelligence to seek out the right opportunities.

Yet the Asian reinsurance market is not immune to wider global reinsurance trends, notably excess reinsurance capacity driven partly by the rise in ILS. Many conventional reinsurance lines are under pricing pressure and this is where mortgage risk offers an opportunity as the margins remain comparatively attractive compared with other risk classes. So far, within Asia, Hong Kong and Korea have taken advantage of the benefits of mortgage reinsurance showing that the area has a successful history of this class of business.

Throughout 2018 we undertook two major visits to Asia: Singapore and China, meeting with 20 local (re)insurers and discussing the benefits of international MI. Our mantra of identify, educate and recruit has helped reinsurers to understand the opportunities offered in this space and the true nature of the risks presented. These conversations help us understand how our knowledge of mortgage risk and complicated mortgage transaction can apply to Asian housing economies. China Oceanwide’s $2.7 billion ongoing acquisition of Genworth Financial is a clear statement that the Chinese market is accepting and interested in mortgage risk, including the world’s largest mortgage indemnity market- the US.

Steven Rance, Managing Partner of mortgage risk, and Rupert Swallow, CEO of Capsicum Re, visited Shanghai and Beijing for productive meetings regarding Chinese appetite for mortgage reinsurance. Steve and I also attended the Singapore Reinsurance Conference (SIRC) to explore Asian reinsurer appetite for US mortgage risk, this time accompanied by the world’s largest mortgage insurer, Arch Capital Group. This was the first step in marketing Arch’s unique Mortgage Risk Transfer program, which provides an innovative approach to facilitating credit risk transfer for the Government Sponsored Enterprises (GSEs) — Fannie Mae and Freddie Mac.

Our Asian partners have seen the success of the GSE mortgage risk transfer programme, which matches the understanding of mortgage risk assessment in an operational framework (via Arch Capital Group) with a highly rated panel of international reinsurers – who are diversified by both risk lines and geography.

We feel it is vital to engage with all stakeholders from the outset and understand each of their requirements. Each economy and mortgage market has its own nuances and this need to be understood in order to constitute a unique programme. Asian reinsurers are looking for support from a broker who specialises in this space and can demonstrate a depth of understanding and our specialist team has decades of experience and is a single centre for global mortgage expertise. We provide the perfect platform for Asian markets to take small, but significant lines in U.S. risk without having to buy an MI.

The benefits of writing mortgage indemnity insurance are clear: it both diversifies one’s book of business and offers an almost zero correlation to Nat Cat events. It is a class of business which causes a certain apprehensive due to the recent Global Financial Crash (please see my previous Big Short post). This is where we come in, offering support, analytics and a structure process to help deliver Asia’s sophisticated capital into a profitable class of business, which, as Arch Capital Group’s Annual results show, can bring down Group-wide loss ratios to return a positive result for shareholders.

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