Asia Market Review 2016 - insuranceasianews.com · 4 Asia Market Review 2016 While both insurance and reinsurance ... the acquisition of Amlin by MSIG and the continued acquisitive

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Aon Risk Solutions

Asia Market Review 2016Aon’s Third Annual Report on Insurance and Risk Trends

2 Asia Market Review 2016

Content

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

Market Review by Specialty

Aviation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

Captives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Energy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

Financial Lines & Casualty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

Health & Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

Marine . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Reinsurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Structured Credit & Political Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

Terrorism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Trade Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

Market Review by Country

China . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Hong Kong . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Indonesia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

Korea . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Malaysia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Philippines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

Singapore . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Taiwan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

Thailand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Vietnam . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

Aon Inpoint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

Contributors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Aon Risk Solutions 3

Introduction

Welcome to the 2016 Aon Asia Market Review, our annual publication providing our thoughts for the forthcoming twelve months, as well as a retrospective look at 2015 and the events that shaped the insurance and reinsurance market in Asia.

As in previous years, we have included reports on all speciality classes, reinsurance, and a short update from each Aon office in the region.

2015 saw continued pricing pressures across most classes, and a challenging investment environment that has pivoted discussions from underwriters around the need to improve underwriting performance. While both insurance and reinsurance markets continue to be very competitive, there is a growing recognition that continued reduction in rates and broadening of terms and conditions is not sustainable in the medium term, particularly in the current economic environment. However, market capacity generally remains plentiful.

Another relatively benign year saw very few significant insurable losses despite some regional and global insurers sustaining large losses, like the Tianjin China port explosion. This seemingly made little impact on the local Chinese market or the region as a whole. Coupled with more than adequate capacity in the region, the current competitive environment appears very sustainable.

Whether the recent El Niño effect causes any change of note remains to be seen; and how the industry deals with fast emerging risks that may present major imperatives to clients is a challenge for the market to step up to and offer innovative solutions. Where emerging risk is concerned, the more data and analytics that can be brought to bear is of immense importance to all involved.

Over the last twelve months, the firm has invested in its people so that they are adequately equipped to empower our clients to achieve their objectives in a market undergoing structural change. We have increased our broking capabilities across most classes, and have significantly improved our claims capabilities in the region, giving our clients a superior level of claims advocacy that will ensure their claims are dealt with in a swift, timely and professional manner.


While both insurance and reinsurance markets continue to be very competitive, there is a growing recognition that continued reduction in rates and broadening of terms and conditions is not sustainable in the medium term.


With the increased level of Mergers & Acquisitions (M&A) in the industry, Aon is well placed to ensure its clients benefit from the synergies between merged market entities, especially with the large Asian deals, for example the acquisition of Amlin by MSIG and the continued acquisitive trajectory of Chinese investors like Fosun and the Korean insurer, Dongbu.

Aon continues to look at innovation playing an extremely important role in growing the region. We have made significant investments in data and analytics in the recent years to further our innovation agenda and to help us better serve our clients. Among the many initiatives, one key proof point of this strategy is the development of our first ever Aon Client Treaty in the London market.

This new solution borrows the best practices from portfolio broking and underwriting, which is common in the reinsurance world, and applies these techniques to our primary wholesale and retail insurance channels. This results in a highly differentiated value proposition which is unique to Aon and truly impactful for our clients around the globe. Aon Client Treaty enables our clients to access up to 20% of pre-secured, exclusive Lloyd’s coinsurance capacity on any order placed through Aon’s Global Broking Centre (GBC), and encompasses virtually every industry segment, product range, and geography.

In the fast moving region we live in, Aon is committed to provide sustainable, long-term value and thought leadership, to empower our clients in this dynamic part of the world.

We wish our Aon clients much success for 2016.


Premiums have continued to fall for airline, aerospace, and general aviation (GA) as new capacity continues to enter the market.

AirlinesWeak orders at the Dubai air show served to highlight the difficulties the sector is facing after a tough year . In Asia, low-cost carriers (LCCs) started to come under greater pressure during 2015 due to aggressive pricing strategies . As a result, some are choosing to park a proportion of their fleet to reduce maintenance costs .

This industry-wide emphasis on belt-tightening is pushing airlines to seek rate reductions, which are widely available thanks to the abundant capacity on offer in the market .

Loss activity has been benign compared to historical trends, though some high-profile accidents have raised issues that deserve attention . The AirAsia Airbus A320 loss in the Java Sea at the end of 2014 led to discussions over cockpit management .

Aviation


The crash of a GermanWings A320 in the French alps highlighted issues around pilots’ mental health, while the loss of a Metrojet A321 out of Sharm el-Sheikh put a focus on airport security . However, the market has not been proactive in addressing such issues, possibly due to competitive pressures .

AerospaceTraffic increased by about 5% at the region’s biggest airports during 2014, the latest year for which data is available, with more than 580 million passengers moving through Asia’s 10 biggest airports . This trend has led to increased investment in infrastructure and general improvement in the quality of risk management at many of the region’s smaller airports, which is creating a greater demand for insurance from operators .

General AviationOvercapacity remains the principal issue in the GA sector . Most markets are now writing 100% of risks and quoting reduced rates to win a greater share of business, which is squeezing some smaller capacity holders .

At the same time, demand in the sector has been affected by low oil prices, which has led to a significant reduction in exploration activity and a subsequent decline in orders for new helicopters . However, the investment in infrastructure is opening more airports to business jets, especially in Indonesia, and the Asian Business Aviation Association is starting to gain traction as an organising voice for the industry, which is supporting the growth of a sector that has lagged its counterparts in the US and Europe for many years .

The airline market is now at a position where rates are below pre-9/11 premiums, which is widely considered to be unsustainable.

OutlookIn the absence of a significant event, we believe rate decreases will persist, due to the continued overcapacity in the aviation market . The airline market is now at a position where rates are below pre-9/11 premiums, which is widely considered to be unsustainable . Combined accident and attritional losses in 2015 are circa US$1 .5 billion for the year, versus a premium pool of about US$1 .2 billion . This also has increased the concern of the narrowing gap between attritional losses and diminishing premium . At these levels the market will be unable to absorb a major loss .

Interest in cyber cover is slowly gaining ground, despite the difficult operating environment and desire to reduce costs . Most of the carriers in the US are now buyers after several attacks on booking systems and loyalty programmes . Asian carriers are interested but most are taking a wait-and-see approach .

c. US$3.6 billion in 2001

Total aviation premiums have reduced from

c. US$1.2 billion in 2015

c. US$1.5 billionTotal aviation losses for 2015


The vagaries of the soft insurance market have not dampened Asia’s growing interest in Captives. Aon’s 2015 Global Risk Management Survey (GRMS) reveals that Asian captive owners grew from 17% to 23% over the preceding two years. Globally captives grew at a rate of 7%1. This continuing interest and growth during a soft market cycle shows that clients are turning to captives as long term strategic vehicles. Our GRMS also finds that clients are ignoring the cyclical nature of the insurance market and finds that the major reason for forming a captive is for long term strategic benefits.

1 Business Insurance –March 16, 2015

Captives

Whilst interest is spread across the region, China stands out as a country that has finally embraced the captive concept with at least five onshore and offshore captives formed in the last two years . They represent some of the largest Chinese State Owned Enterprises (SOEs) . Formations will continue and when you consider that 80% of companies in the Fortune 500 own at least one captive while only five of the 100 Chinese companies that make up that list have a captive, growth is expected to continue at an increasing rate .

For industries that are likely to form a captive we can again turn to our GRMS, which tells us to expect growth to come from the following industries:

• Health related industries;

• Construction;

• Technology; and

• Energy and Mining .

Most captives are formed in jurisdictions that feature captive enabling legislation . Singapore is the best example of a recognised and reputable captive domicile attracting captives from the Asian Pacific region in the main . More recently we have seen interest from

Latin America, which along with Asia, is an emerging captive region . Captive domiciles, particularly more recent entrants, tend to develop a niche or comparative advantage for certain types of captives or owners . This appears to be evident when you look at the more recognised captive domiciles in the Asian region:

• Hong Kong, seems to be purely focused on mainland companies;

• Labuan, which is mostly home to Malaysian-sponsored captives;

• Micronesia, which appears to purely cater to Japanese captives; and

• Singapore, which is the domicile of choice for Australian captives .

Our Asian clients are also learning from other Aon clients who already have a captive and the benchmarking collateral we provide gives valuable information about why captives are formed, what they do and who owns them and where they are located .

To compete effectively in global markets means benchmarking against international peers and adopting best practices .


Captive domiciles in Asia

Hong Kong 3

Micronesia 18Labuan 40

Singapore 68

OutlookInsurers are also taking a keen interest in captives and wanting to work with captives and their owners and managers to provide services that can enhance or at least compliment multinational captive programmes . This extends to policy administration services at the front of the captive to additional capacity in the form of traditional or alternative risk transfer programmes behind the captive .

On the regulatory front, Solvency II in Europe appears to make little or no distinction between captives and general insurers despite talk of proportionality . We believe there may be a level of fallout that could benefit Asian domiciles as European captives seek to move to less onerous jurisdictions . The globalisation of insurance standards and increasing concern by the Organisation for Economic Co-operation and Development (OECD) and regulators around base erosion and profit shifting (BEPS) will be issues that captive domiciles, managers and owners will need to navigate .

The Asian captive market is expected to continue its upward trajectory and will in the main underwrite traditional lines such as property and liability risks but

we expect that well established captives will be looking to expand their insurance portfolios into areas where traditional insurers do not provide a complete solution . Exposures such as cyber risk, environmental liability, trade credit and employee benefits are likely to find their way into captive programmes where the risks can be incubated or tailored hybrid solutions can be adopted .

Aon Captive Insurance Manager’s Benchmarking Dashboard Captive Summary Charts

Strategic risk management tool

Cost efficiencies

Control on insurance programmes

Access to reinsurance market

Reduction of insurance premiums

20.3%19.3%

19.2%

19.5%

17.9%

13.3%

10.8%

18.5%

18.2%

12.7%

10.2%

17.9%

16.8%

11.4%

10.9%

Chart:Reasons for Captive

Type of CaptiveAll

Captive DomicileAll

Parent IndustryAll

Parent CountryAll

Parent Revenue Size BandAll

2014 20122013

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22%


Across the region there has been relatively strong demand and investment in infrastructure, though the reality during 2015 is that the development cycle has slowed for a number of reasons:

•Weaker economic growth in China;

•The global macro context has led to a slowdown from international banks and multilateral lenders;

•The dynamics of Japan, Korea and China investing in infrastructure across South and South-East Asia has persisted but the number of projects moving forward has fallen; and

•Certain country dynamics across the region, such as in India, Indonesia and Vietnam, have inhibited investment in infrastructure.

One example of the challenges faced by infrastructure construction in the region is the US$4 billion Japanese-backed Central Java project in Indonesia, which has faced more than five years of delays due to land-acquisition issues .

Even so, compared to other regions there is still more investment taking place in Asia than elsewhere, which has made for a very competitive insurance marketplace . Capacity continues to increase, both from the regional centres of Singapore and Hong Kong, but also from London and elsewhere in Europe, as the market seeks opportunities for portfolio growth .

The lack of significant losses has also helped to fuel appetite for construction risk . There have been no major project delays and insured losses from natural catastrophes in key markets, such as Indonesia and the Philippines, were below historical trends during 2015 .

At the same time, some local markets have sought to counter the slowdown in the number of projects by retaining as much business in-country as possible . Combined, these dynamics are helping to push rates down across the sector .

Construction


Notable developmentsThe latest generation of power projects across the region has led to the introduction of some evolutionary technology, particularly enhanced gas turbines that are more efficient . This technology was challenging for insurers to deal with when it came into the market 12 to 18 months ago, but the market has developed a lot more comfort with the risks as time has passed and it is now the case that even the more difficult power construction risks are becoming more attractive to insurers, and clients are therefore benefiting from a wider and more competitive marketplace for their risk .

OutlookContinued interest and growth in terms of market capacity is expected, as both macro data and proprietary research suggest that infrastructure spending within Asia will be considerably greater than what is being undertaken in other parts of the world .

However, any forecasts about construction activity will always be subject to certain regulatory, political and financial constraints .

Clients are benefiting from a wider and more competitive marketplace.


The energy sector has suffered a dramatic turnaround as oil prices dropped from more than US$100 a barrel in mid-2014 to an average of less than US$50 for 2015. Given the supply influences and continued demand limitations, the oil price is forecast to be lower than this level throughout 2016. This has led to fewer construction projects, lower drilling activity and therefore lower sums insured, with the drilling contractor portfolio most impacted. Upstream capital expenditure globally during 2015 was at least US$250 billion less than in 2014.

Energy


Insurance market capacity has not changed considerably, but the diminished premium pool has led to stiffer competition among underwriters in stark contrast to recent years, when premium volumes had been growing as a result of high levels of activity in the energy industry . The result is a shrinking sector that is no longer protected from a soft insurance market, with some sub-sectors such as offshore contractors now in significant distress .

Upstream rates were down by roughly 15-20% on average during the year, but some outlier deals, such as offshore constructions, were being written at a quarter of 2014 levels . Downstream rates were slightly more stable, with reductions of roughly 10% to 15% overall and no significant losses at all .

On the liability side, rates have not seen significant reductions though we continue to note that Asian national oil companies (NOCs) often remain under-insured in terms of the limits they buy compared to other NOCs and international oil companies of a similar size . Cost-savings made in other areas, such as property, are not being used to increase coverage levels even though liability is a relatively cheap product . While a US oil major might buy US$1 .5 billion of cover, the most advanced Asian NOCs, will buy one-third of that amount . In many countries it is significantly less .

Losses from natural catastrophes were significantly below the 10-year average as windstorm activity was suppressed by one of the strongest El Nino phases in decades . Reported losses include: in the Gulf of Mexico, the failure of the tendons on Chevron’s Big Foot platform created a US$1 .2 billion loss, while a fire on a Pemex oil-processing platform incurred an US$800 million loss . In Brazil, an explosion on a floating production, storage and offloading unit owned by BW Offshore led to a US$400 million loss .

OutlookThe premium pool will continue to shrink as oil companies’ hedges begin to unwind and they feel the full effect of the lower oil price . Several developments in late 2015 seem to ensure that low oil prices will persist throughout 2016 at least: Organisation of the Petroleum Exporting Countries (OPEC) had their chaotic meeting in December end with no agreement to reduce production quotas, the US voted to end its 40-year ban on oil exports and Iran’s deal on weapons inspections lifted sanctions that had limited its oil production since 2012 . In addition, there are at least 2 billion barrels of oil in storage .

The demand side of the equation is also gloomy, with few prospects of a pickup in the global economy that could soak up the amount of supply available . In this environment, clients will be looking for premium reductions and the market will provide them .

However, the sector could see a rise in M&A activity as buyers and sellers move towards agreement on the value of assets, assuming the price of oil at least remains stable . This would allow the region’s national oil companies to dispose of non-core assets to independent exploration and production companies backed by funding from private equity and capital markets . Early signs of this activity are evident, though deals may not come to fruition until 2017 .

15-20%on average during the year

Upstream rates were down by roughly

10 to 15%overall

Downstream rates were slightly more stable, with reductions of roughly


The market remained soft during 2015 fuelled by new capacity entering the Asian market, coupled with the continuation of a comparatively benign claims environment. One of the major 2015 losses with potential to impact the casualty lines market was the Tianjin port explosions albeit third party losses are still filtering into the market. Notwithstanding the comparatively benign claims environment, it is important to acknowledge that frequency and severity trends are clearly evolving across Asia.

Financial Lines & Casualty

Directors & Officers (D&O) regulatory actions have continued to increase whilst global product recalls are morphing into significantly more complex litigation events impacting both financial lines and casualty markets . 2015 saw some high profile severity fraud events in the financial institutions sector . Professional Indemnity claims beyond core professions have also been on the rise . Cyber events are common place but industry impact is muted by low product penetration levels . The frequency of these random claims events has increased notably, whether to a point of driving change in financial lines pricing models arguably not but nonetheless noteworthy for industry observers .

Directors & OfficersThe market continues to slide, with most renewals achieving reductions of 5% to 10% in 2015 . Some accounts with claims activity or adverse risk profiles have priced flat, but in general the saturation of capacity has depressed pricing . The de-listing of Chinese stocks from the US capital markets is causing a further shrinkage in the Chinese D&O market . The IPO market for Asian companies in general has also been in decline with the exception of Hong Kong experiencing some moderate growth .

The new carriers that have made some impact include Generali, Tokio Marine, Berkshire Hathaway as well as new Lloyd’s syndicates, all contributing to the additional capacity in Asia . Several other existing Lloyd’s syndicates have expanded their product offering in 2015 by adding financial lines . The ACE acquisition of Chubb is significant; mindful of the strong position held by both and the resulting impact on available capacity being offered by the new combined entity .

There is no one defined D&O claims trend but as already commented on, the collection of the random is the most interesting observation to be made . Regulatory actions are uniformly more common and not just limited to domestic regulators with numerous examples of cross border investigations highlighting the growing risk in doing business in new markets . Global product recalls across several sectors that have traditionally impacted the casualty market are increasingly developing into diverse D&O claims be it shareholder derivative claims or multi-jurisdictional regulatory claims . These developments are influencing client buying patterns with more focus on international D&O programmes and of course levels of insurance cover .

Financial InstitutionsIn general, the market has been renewing at anywhere from flat to 10% reductions during 2015 . Overall capacity for financial institutions has seen some improvements in Asia particularly on the excess of loss (XOL) layers .

Cyber risk transfer solutions for financial institutions have been gaining more traction, with more clients budgeting for stand-alone insurance . Cyber Insurance penetration in Asia still lags behind all other regions but growth trends are clear . The cyber insurance offerings in Asia are consistent with global standards and are often globally syndicated, so penetration is more a factor of buyer’s perception of the value of insurance . There remains some degree of pricing volatility in the cyber market and it will likely take years before pricing models become more stable .


Professional IndemnityDemand in the healthcare portfolio has developed commensurately with government and private investments into the industry . The development of medical malpractice insurance for these new healthcare facilities has been an area of new growth for the insurance market . There have also been some interesting developments on the type and cost of solutions being made available to healthcare practitioners particularly in Singapore, Hong Kong & Malaysia .

A construction slowdown that started in 2014 continued into 2015 which dampened demand for project professional indemnity insurance . There remains uncertainty for the economic and political outlook for the region and this will continue to impact the design professional indemnity market . There were however several new projects in the pipeline towards the end of 2015 which should create some uplift in construction policies for both single project professional indemnity and construction general liability .

The professional indemnity market for hybrid risks in the hi-tech, e-commerce, technology and manufacturing sectors continues to show positive signs of growth .

CasualtyThe general slowdown in corporate activity cascaded to insurance the market during 2015, affecting a lot of casualty business to some extent . Insureds have been seeking either a reduction in limits being purchased to reduce their premium spend or even cancellations of cover . As capacity remains strong, this has led to further downward pressure on rates .

There have been some claims activity, including a US$300 million insured pay-out to a Japanese pharmaceutical company that affected several insurers, but in general this has not led to premium increases across the board elsewhere . Product recall claims for the auto industry saw some very significant full-limit losses in Asia .

Transaction Liability – Warranty & Indemnity InsuranceAccording to a Wall Street Journal article, 2015 saw the most number of M&A deals transacted globally ever . This has translated into a phenomenal year for placements of Warranty & Indemnity Insurance (or Reps & Warranties Insurance) globally for Aon and similarly, we have seen huge uptick of interest in this in the Asian region . The number of insurers in this space has also grown with large movements of underwriters across different insurers in 2015 . With the relatively low penetration rate in Asia and continued Asian interest in expanding offshore, we believe there will be continued sustained interest in the use of this product to facilitate M&A transactions . We also expect to see niche capacity coming into the region that has been traditionally based out of London .

OutlookThere will be some new niche capacity coming into the region either in the form of managing general agents or new markets as insurers look to differentiate themselves into niche products . WR Berkley is beginning to hire across all lines of business and will also add new capacity during 2016 .

The increased interest in cyber will continue into 2016 and could mark a big year for the product .


Across Asia, healthcare costs continue to increase for a number of reasons, principal amongst which are:

•Increased prevalence of non-communicable diseases (NCDs);

•Continued emergence of middle class in several developing economies;

•Ageing population;

•Investment in leading edge medical technology; and

•Excessive utilisation of healthcare services.

Health & Benefits

Governments and public health entities have almost eliminated a host of communicable diseases including polio, measles, smallpox and malaria . They have been replaced by the spread of NCDs and chronic illnesses such as cardiovascular disease (CVD), hypertension, type 2 diabetes and various cancers . What these illnesses have in common is that they are largely driven by lifestyle behaviours . Across the region, and globally, their significant cost is measured in social dislocation, productivity loss, excessive healthcare costs and premature death .

These NCDs are more prevalent in middle class socio-economic groups than the poor, which is why the emerging middle classes of India, China, Indonesia and several other major Asian nations has public health officials and employers are concerned . With changing dietary patterns, increased alcohol consumption and sedentary lifestyles these NCDs or ‘diseases of affluence’ are robbing economies of productivity in highly competitive global markets .

In what is termed the Asian Century, there has been a tendency to view Asia’s population as being at the younger end of the demographic spectrum . Whilst this is true of emerging economies such as India, Vietnam and Indonesia, developed economies such as Japan, Korea, Singapore and Hong Kong are suffering the social costs of ageing populations, including higher public healthcare costs . China has finally acknowledged this problem through its relaxation of its one child policy in 2015 .

With a higher disposable income, middle class consumers are demanding access to advanced medical technology to address the growth in both acute and chronic illnesses . This coincides with governments encouraging the private sector to bear responsibility for an increasing share of national healthcare expenditure . Those countries to embark on this trend includes Thailand and Indonesia which are both committed to substantive public health programmes complemented by the private system .

Excessive healthcare utilisation has been fuelled by several factors, notably the battle for talent across key Asian economies which has inflated limits on medical plan programmes . Healthcare consumers in diverse markets such as Singapore, Hong Kong, Vietnam and Malaysia excessively utilise primary care (GP) facilities in the absence of education and other means of restricting such access .

The Aon Global Medical Trend Rate Survey for 2015 established that net medical inflation across the region was 6 .2% . In 2016, this has ticked up slightly to an estimated 6 .3% . There are several reasons behind this levelling off in medical inflation:

• With slowing growth in the global economy, there is less upward pressure on compensation and benefits costs;

• As insurance markets mature, insurers are exerting more control over healthcare utilisation and cost through provider networks; and

• The growth in generic medications for treatment of chronic illnesses as patents expires on more expensive alternatives .


We now examine several prominent markets across the region in brief:

ChinaDespite slowing economic growth, the number of expatriate private medical insurance consumers has remained buoyant . The loss ratio on medical insurance frequently exceeds 100% due to:

• Administration costs;

• High volume of low-value claims;

• Ageing population; and

• Increasing incidence of chronic disease .

Improvements in the efficiency of the healthcare system are likely to result from the development of tiered treatment, doctors practising at multiple sites and public hospital reform .

Hong KongDemand for private medical care remains high, supplementary to that provided by the public system . Voluntary top-up programmes are increasing in popularity, though it is unclear whether such schemes provide a good return on investment for employers .

IndiaMaternity is the largest claims cost driver, which is symptomatic of India’s young population . However, for such a young population India also has a relatively high level of NCDs, principally cardiovascular, which accounts for 26% of deaths, and cancer at 7% .

While loss ratios are frequently at or above 100%, competition between insurers is restraining premium escalation . A strong focus on cost management has resulted in proliferation of voluntary/supplementary medical benefits . Demand for employee wellness programmes continues to be strong .

SingaporeWith its ageing population, Singapore is experiencing a growing incidence of NCDs . Despite its low rate of consumer inflation, medical inflation is the highest in the region, driven by:

• Excessive utilisation of primary care facilities;

• High cost medical technology;

• Medical tourism; and

• Cost of pharmaceuticals .

OutlookConsistent with much of the developed world, the trends identified above are relative to the spread of NCDs and an ageing population will continue to trouble public healthcare officials, employers and consumers . The extent to which this will be problematic for this region is under-pinned by the estimate that by 2030 two-thirds of the world’s middle class will live in Asia .

It is hoped that as markets mature, the upward pressure on healthcare costs will be tempered by increased efficacy of medical technology, increased competition between healthcare providers and networks, improved healthcare consumerism that effectively rations resources and greater use of generic drugs .

*Most Important Elements of Medical Plan Cost in APACHospital 88% Clinics/Labs 59% Physician Services 53% Maternity 29% Other 18%

*Net medical inflation 2016

China 5 .5% Hong Kong 4 .1% India 6 .8% Singapore 13 .3%

*Source: Aon Hewitt 2016 Global Medical Trend Rates


The continued slowdown in global trade, combined with weaker commodity markets, has created a tough environment for the shipping industry, leading both ship and cargo owners to seek further cost savings from their insurers. The good news is that such savings are widely available thanks to benign losses and a significant oversupply of capacity across the board.

Marine

With premium already at very low levels, owners have also been able to negotiate broader coverage, lower deductibles or longer contracts . Aon has continued to stress that a recognised and capable claims leader is an essential consideration when contemplating the insurers involved in the placement .

CargoSimilar trends are also affecting cargo lines, with some owners seeing reductions of as much as 50%, but with 10% to 15% being the norm . A series of explosions at the port of Tianjin in China created the year’s biggest losses, with claims estimated at US$2 billion to US$3 billion or more . However, the majority of the Tianjin losses appear to have been absorbed within the domestic Chinese market, with the Korean and Japanese markets also identified as having had significant exposure . The London and Singapore markets did not avoid the Tianjin losses completely, with a few direct losses as well as expected losses through reinsurance treaties . The impact of the Tianjin explosions has not seemingly impacted the general cargo insurance market, and increased capacity continues to apply downward pressure on premium rates . Clients in the automotive sector have experienced a withdrawal of capacity for their risk with some major global insurers advising they will not be underwriting this sector for the foreseeable future .

New capacity in the Asia region, includes Great American Insurance Company opening in Singapore, as well as additional supply from new Lloyd’s syndicates, Antares and Standard Syndicate, with Aspen opening too in early 2016 with a view to writing a Marine portfolio . This has helped to sustain an extremely competitive environment in which existing players are willing to be flexible to protect their core book, while newer entrants are offering attractive terms to grow market share . This will be further exacerbated by the consolidation seen with XL Catlin, Chubb (Ace), and Allied World, together with underwriters taking new roles at other insurers having to prove themselves and build or expand a marine account . The London market also witnessed similar movements and appetite .

HullAfter 15 years of softening, hull rates are at their most competitive levels ever, coverage is at its widest and deductibles are at their lowest . This trend shows few signs of reversing as capacity continues to increase, driven by a multitude of factors .

The commoditisation of the product itself means that owners are differentiating less between insurers, making it easier for new entrants to gain share . At the same time, returns remain reasonably attractive due to low interest rates at the macro level, while fewer major losses and low capital requirements for marine lines in Lloyd’s at the micro level .


Protection and Indemnity (P&I)The February 2015 renewal ranged from 0% to 7 .5% . Most clubs have enjoyed a trouble-free 2015 with strong technical underwriting results, but investment income has disappointed, with a number of clubs reporting negative investment returns . However, free reserves for the majority of clubs have climbed to another year of record high levels . The imminent 2016 P&I renewal is seeing a general increase range from 0% to 5% . As we write this article we expect a competitive renewal on many of the larger fleets with modest claims, and some of the more claims intensive accounts still to be penalised . The International Group reinsurance programme will see some savings, benefiting tanker owners most .

On the fixed premium P&I side, we have seen a continual flood of capacity from both the clubs and composite insurers and agencies, and this has fuelled a particularly competitive environment for vessels under the 10,000GT range .

Pricing and Capacity

Rate trend Rate range%

Capacity trendASIA

Cargo* â -10% to 15% á

Stock Throughput â -5% á

Blue Water Hull â -10% á

Blue Water P&I á Flat to +5% à

Brown Water Hull â -10% to -5% á

Brown Water P&I, Liability â -5% á

Other Marine Liability – Primary â -5% to Flat à

Other Marine Liability – Excess â -5% à

Ports & Terminals – Property â -5% à

Ports & Terminals – Liability â -5% á

Shipyards – Builders Risks â -10% á

OutlookCompetitive pricing is here to stay and will likely become even more aggressive during 2016 as overcapacity continues to weigh on all markets . We anticipate that as margins are squeezed that claims will be scrutinised even closer . We expect to see continuing movement of underwriters between insurers as well as from the broking sector .


With the collapse in commodity prices, premium rates softened for the third year in a row during 2015. Some mines have been shut down or seen production reduced, and assets have been consolidated. The challenging operating environment has also raised the threat of government interference through nationalisation or regulatory changes.

Faced with these risks, an increasing number of clients have sought to reduce premium costs by re-tendering policies out to the market, as well as attempting to claw back some premiums by reviewing business interruption policy cover . This concerted pressure has resulted in a 5% to 15% reduction of rates on typical renewals in 2015, while some clients that have developed long-term relationships with their insurers have benefited more .

Mining


While most insurers have chosen not to restrict coverage, many are paying greater attention to the scope of cover provided under business interruption and scrutinising claims more closely . With companies under pressure to reduce expenses, there is also a focus on clients’ approach to maintenance and risk management controls at renewals .

New entrants such as Allied World and Berkshire Hathaway, combined with a more aggressive approach from the London market in general, has added some capacity, but the specialised mining markets continue to lead most of the business being written .

ClaimsThere have been a significant number of claims for tailing storage facilities outside Asia . There has been limited impact on cover reductions for clients in Asia, but these incidents have highlighted certain risks and put increased focus on controls and mitigation measures for monitoring tailing storage facilities . Similarly, a number of large typhoons in the Philippines during 2015 did not produce any large claims, but helped bring flood risk to the fore and forced insurers to examine the coverage they are providing .

OutlookAlthough the outlook in the general insurance market points to another year of softening premium rates, further reductions are unlikely to be available from the specialist insurers in the mining market . Insurers will continue to focus on flood risk, maintenance and risk management in the face of clients’ desire to preserve cash and extend the life of assets .

The principal mining markets in the region are Indonesia and the Philippines, though Mongolia is set to expand production after Rio Tinto signed a US$4 .4 billion project financing for the second phase of its Oyu Tolgoi copper-gold mine in Mongolia during 2015 .

2015 saw a 5% to 15% reduction of rates on typical renewals, while some clients that have developed long-term relationships with their insurers have benefited more.


Operational power portfolios in Asia are performing poorly due to very low premiums and benign loss activity, though many Asian power generation clients continue to be able to extract further rate reductions due to a highly transactional approach to insurance purchases and the fragmentation of coverage among multiple brokers.

For some of the older assets that have been widely marketed, rates are getting to the point where they may no longer be sustainable in terms of the exposures, both from the perspective of operational risks and natural catastrophes . Markets outside of the region have shown little interest in taking a bigger share of the operational power book under these conditions . As such, these risks are typically covered by local markets .

Notwithstanding the global climate conference in Paris in 2015, Asia has a desperate need for investment in power infrastructure and coal remains the most practical solution given its low cost and ready availability . However, multilateral funding is increasingly dependent on newer, more efficient technologies that reduce emissions and this has proven more challenging for underwriters due to a lack of familiarity with the loss history of such technology .

OutlookGreater competition could be on the cards in 2016 as more risks start to emerge from construction into the operational phase, but the general expectation is for more of the same .

Similarly, the outlook for losses is stable . Power losses worldwide have been roughly US$2 .5 billion for the past four years and that trend is expected to hold true again during 2016 .

Power


Multilateral funding is increasingly dependent on newer, more efficient technologies that reduce emissions and this has proven more challenging for underwriters.


Rate trends declined further during 2015 as increased M&A within the industry contributed additional capacity, with XL Catlin in particular able to put down much bigger lines after its merger. Some new syndicates have also set up in the region — Antares is looking to write property, albeit with relatively small capacity, and Great American set up in mid-2015 with a plan to grow its wholesale property business in the region.

The tough environment has also led to increased competition as insurers are under pressure to grow both the top and bottom line . QBE has been very active and aggressive, while Allianz has also become less conservative in its underwriting guidelines . Samsung Re has expanded its Singapore presence with the creation of a new team focusing on non-Korean business .

However, not all markets have been moving in the same direction . AIG in particular has taken a different approach and has been much more stringent about the business it will write, especially in the high-tech space, and this has had a big impact . Asia Capital Re has also scaled back .

Some jurisdictions have sought to counter the difficult conditions with proactive regulations . In Indonesia, the local financial services regulator made further changes to its tariff system during 2015 aimed at boosting the local market and keeping as much business onshore as possible . In China, similarly, the introduction of C-ROSS has forced underwriters to move onshore to write local business .

These dynamics have led some markets to seek better returns outside of run-of-the-mill property business . Catastrophe standalone cover for earthquake or flooding is one such area . Japanese markets have scaled back in recent years after the Tohoku earthquake and the Thai floods, and this has created an opportunity for international markets to fill the void and make more profitable use of their capacity .

Property


LossesThere were no major losses during the year, except for the explosions at the port of Tianjin . This had little impact on markets outside China . However, the accident did highlight once again the importance of contingent business interruption cover in today’s increasingly complicated supply chains . Clients are increasingly interested in it, but markets are somewhat cautious given the risk of accumulation . Pricing depends very much on the account .

OutlookThe downward trend in rates is expected to continue into 2016 as an increasing amount of capacity is focused on a limited premium pool .

Chinese, Korean and Japanese insurers continue to take part in non-Asia risk coming through London to be placed in Singapore and that is expected to continue in 2016, partly to take advantage of the competitive Asian market but also driven by global clients looking to diversify their programmes .

Rate movement in 2015

Catastrophe-5% to -10%

Non-catastrophe -10% to -20%


Reinsurance

In a year without any major catastrophe losses in the region; several big mergers and the effect of the regulatory changes in China, represented the most significant activity for the reinsurance market. With the newly merged entities fighting to maintain their combined line size, the larger established players trying to preserve market share and with the establishment of a considerable volume of new syndicates on the Lloyd’s China platform, this has led to an inevitable heightening of price competition and broadening of terms and conditions in most markets.

The alternative capital that has been especially attracted to US reinsurance portfolios has less of a foothold in Asia . Outside of Japan, Insurance-linked securities funds are mostly limited to writing retrocessional business in the region, owing to a combination of modelling factors and the aggressive stance of the traditional reinsurance market .

Even so, there remains an abundance of capital looking to Asia for growth and that continues to fuel the competitive environment . Despite considerable discussion around innovation and new products, such as cyber, reinsurers have been taking a cautious attitude to such risks, due to difficulties in quantifying exposures . Greater penetration in the personal lines space, through increased coverage for catastrophe perils and the need to buy more catastrophe limit, is seen as a more achievable opportunity for the reinsurance industry, in the short term .

Another aspect of the increased competition is a shortage of skilled reinsurance underwriters, in the

region . With the arrival of a significant number of new syndicates on the Lloyds China Platform, during 2015, and the emergence of several new Chinese reinsurance companies, there has been a race for talent . A similar dynamic is also evident in Singapore, with the continued expansion of Lloyd’s and Company platforms .

LossesOverall, it was a benign year for insured losses from catastrophes . In terms of economic losses, Nepal was devastated by a magnitude-7 .8 earthquake and subsequent aftershocks in April and May, with total damage and reconstruction costs estimated to be as high as US$10 billion and the overall economic effects poised to equal more than one-third of the country’s entire GDP . However, insured losses were small .

The Tianjin explosion was the most significant loss in China . The impact was mostly on the property portfolios of domestic insurers . Considerable uncertainty remains around claims, and despite losses to several treaties,

so far, there has been little impact on pricing on both proportional and non-proportional placements .

Flooding in India caused considerable impact, with the market insured loss for the Chennai Food now standing at approximately US$750m, which is circa 50% of the market Fire and Engineering insurance premium . Therefore, whilst not a significant loss by international market standards, it is for India, as well as being the 4th cataphoric loss in three years to affect the Indian Market .

As with most of the events in 2015, the Typhoon (Goni) in Japan also had little impact on reinsurance .

OutlookThe trends seen during 2015 are expected to extend into 2016, assuming that capacity remains at or above current levels and losses continue to be below their historical norm .


Regulators across the region continue to implement rules around risk-based capital, in line with international standards, but are also focusing on maximising in-country reinsurance cessions . Two countries where this will have the most impact will be China, with the implementation of C-ROSS, and Indonesia with the OJK’s

implementation of minimum cessions to local reinsurers and the awaited creation of a consolidated national reinsurer, Indonesia Re .

In India, the increase of the foreign ownership cap to 49% has fuelled renewed interest in the market . Reinsurers will be watching carefully

to assess how liberalisation proceeds during 2016, but the IRDAI has announced that Indian reinsurers will receive the first right of refusal on treaties, despite negative feedback from foreign reinsurers looking to establish a branch in the region .

Reinsurance Supply

Economic and Insured Natural Catastrophe Losses

2015 Global Insured Natural Catastrophe Losses by Peril

17 22 19 22 24 28 44 50 64 69

368 388 321

378 447 428

461 490

511 496

6%

-17% 18%

18%

-3% 11%

7%

6% -2%

385 410

340

400

470 455

505 540

575 565

0

100

200

300

400

500

600

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 9M 2015

USD

(bill

ions

) Traditional Capital Alternative Capital Global Reinsurer Capital

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 10-Yr Avg*

USD billions

(2015 prices) Other

Drought

EU Windstorm

Wildfire

Winter Weather

Earthquake

Flooding

Severe Weather

Tropical Cyclone

Traditional Capital

Alternative Capital Global Reinsurer Capital

17 22 19 22 24 28 44 50 64 69

368 388 321

378 447 428

461 490

511 496

6%

-17% 18%

18%

-3% 11%

7%

6% -2%

385 410

340

400

470 455 505

540 575 565

0

100

200

300

400

500

600

USD

(b

illio

ns)

0

20

40

60

80

100

140

USD

bill

ion

s (2

01

5 p

rice

s)SLIDE 5

120

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 10-Yr Avg*

Other

Drought

EU Windstorm

Wildfire

Winter Weather

Earthquake

Flooding

Severe Weather

Tropical Cyclone

SLIDE 13

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014

9M2015

17 22 19 22 24 28 44 50 64 69

368 388 321

378 447 428

461 490

511 496

6%

-17% 18%

18%

-3% 11%

7%

6% -2%

385 410

340

400

470 455

505 540

575 565

0

100

200

300

400

500

600

FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 9M 2015

USD

(bill

ions

) Traditional Capital Alternative Capital Global Reinsurer Capital

0

20

40

60

80

100

120

140

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 10-Yr Avg*

USD billions

(2015 prices) Other

Drought

EU Windstorm

Wildfire

Winter Weather

Earthquake

Flooding

Severe Weather

Tropical Cyclone

Traditional Capital

Alternative Capital Global Reinsurer Capital

17 22 19 22 24 28 44 50 64 69

368 388 321

378 447 428

461 490

511 496

6%

-17% 18%

18%

-3% 11%

7%

6% -2%

385 410

340

400

470 455 505

540 575 565

0

100

200

300

400

500

600

USD

(b

illio

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0

20

40

60

80

100

140

USD

bill

ion

s (2

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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 10-Yr Avg*

Other

Drought

EU Windstorm

Wildfire

Winter Weather

Earthquake

Flooding

Severe Weather

Tropical Cyclone

SLIDE 13

FY2006

FY2007

FY2008

FY2009

FY2010

FY2011

FY2012

FY2013

FY2014

9M2015

Uninsured losses Insured losses

0

100

200

300

400

500

USD

bill

ion

s (2

01

5 p

rice

s)

SLIDE 13

1980 1985 1990 1995 2000 2005 2010 2015

0

50

100

150

200

250

300

350

400

450

500

1980 1985 1990 1995 2000 2005 2010 2015

USD billions (2015 prices)

Uninsured losses Insured losses

50

150

250

350

450


Slowing growth in China, falling commodity prices and uncertainty over the timing of increases in the US dollar interest rate continued to weigh heavily on transaction flows in the market during 2015, in terms of transaction volumes, government decisions on major infrastructure investments, and delays in reaching financial close.

Structured Credit & Political Risk

ClaimsThere are two separate and distinct credit insurance markets:

1 . The short-term Trade Credit Insurance (TCI) dominated by the monoline credit insurers such as Euler Hermes, Atradius, and Coface, which covers short-term accounts receivables from multiple buyers; and

2 . The special risks market or structured credit and political risk market (SCPR) comprised of the Lloyd’s Market and international commercial insurance companies, which has an emerging markets focus and covers structured trade in emerging markets, i .e . specialist medium and long-term credit and political risks on single buyers/obligors .

In 2015, there were no notable SCPR losses in the Asian market . Claims were confined to the TCI market, such as losses suffered from the insolvency of OW Bunkering in Singapore . However, at the time of going to print there are currently a number of late-payment notifications relating to SCPR policies covering Chinese-domiciled obligors in the market and a number of significant claims are expected this year .

Central bank data shows that the value of trade loans provided by banks in Singapore and Hong Kong has fallen 35% from a mid-2014 peak of US$145 billion . Intra-Asian syndicated loans fell 20% year on year, as India, Indonesia and Taiwan posted double-digit declines in exports, with commodity exporters such as Indonesia and Malaysia particularly exposed to falling commodity prices putting pressure on their respective currencies . There was also lower demand for trade finance loans to China .

Nevertheless, overall enquiry volumes increased, as did client demand for higher levels of indemnity . Insurers also came under pressure to offer ever-longer policy tenors to support longer bank loan tenors .

In terms of capacity, sovereign and sub-sovereign non-payment risk capacity rose to a notional US$2 .1 billion per risk — and longer policy tenors became available, while total credit risk capacity rose to US$1 .8 billion per risk .

There was only one new Asian market entrant in 2015: Nexus, an independent managing general agent that received its Hong Kong licence in November 2015 . Nexus writes on behalf of Liberty 4472 (45%), Amlin 2001 (35%) and Barbican 1952 (20%) .


OutlookThe trends seen in 2015 are expected to continue in 2016 . Regional banks are having to hunt harder for business and for more attractive margins . As Asian flows of trade and investment decline, there is a growing trend among Asian banks looking outside Asia to originate transactions in Central Asia, the Middle East and sub-Saharan Africa to augment their income levels . One observation is that the overall quality of many of the transactions now being presented to the insurance market from corporate and banking clients is generally lower than in 2013 and 2014, and in some cases this is leading to a misalignment between client demand, bank market capability and insurance market risk appetite .

As a result of the uptick in claim notifications from China on structured credit policies, insurer appetite for taking on new Chinese credit exposure has reduced and underwriters are becoming much more selective . Know Your Client (KYC) and its business is paramount for insurers in 2016 .

As this recalibration of Asian market growth continues, the currencies of several emerging market countries in the region continue to come under pressure, and we expect to see increasing demand from both Financial Institutions and corporate clients for cover for sovereign non-payment risk and exchange transfer risk (cover against currency controls being implemented by certain governments to prevent capital flight) .


The market for terrorism and political violence cover continued to soften during 2015, with clients generally able to achieve reductions of 10%, and in some cases up to 20% or 30%. This high level of competitiveness has affected the profitability of underwriters, but is also widening the potential customer base given the increased affordability of the product.

At the same time, high-profile incidents such as the attacks in Paris have brought increased attention to the threat posed by groups such as Islamic State, although this incident also demonstrated a shift away from terrorist acts involving high-explosives towards kinetic attacks involving active gunmen . In such cases, insurable losses are limited due to the lack of physical damage .

Indeed, claims remain low . An attack at a popular tourist shrine in Bangkok, close to a large international hotel, caused an explosion that killed 20 people . There was some business interruption, but minimal physical damage that could lead to claims .

Terrorism


Key buyers of cover in Asia are Chinese, Korean and Japanese companies involved in infrastructure and construction projects in the Middle East and Africa, as well as Afghanistan and Pakistan, as lenders to such projects typically require insurance coverage under standard terms and conditions . As a result, demand is closely correlated to the level of investment in such projects, which continued to fall during 2015 as global economic growth slowed .

Recent developments in this part of the market include greater interest in kidnap and ransom cover, which also includes extortion, illegal detention and disappearance . In particular, the staff of Chinese companies are increasingly seen as high-value targets in Africa and other troubled regions, with limits for ransom typically written at US$5 million, US$10 million or US$15 million, plus unlimited cover for response consultants .

OutlookThreats of terrorism and political violence are on the rise in some parts of the region, with increased levels of radicalisation in Indonesia, highlighted by the arrest of several plotters at the end of 2015 and an attack in Jakarta in early 2016 . The proximity to Singapore has also led to a heightened state of readiness there .

Presidential elections in the Philippines in 2016 are a potential flashpoint, with both communist and jihadist militants traditionally active during such periods, using both high explosives and active gunmen, as well as kidnap and extortion . Also, the failure of a bill to create an autonomous Muslim region in the south of the country has raised the threat of increased violence from involved groups during 2016 .

The growing intensity of disputes over the South China Sea is also adding to the risk of political violence as well as illegal detention .

3 billionof capacity for a single risk

US$

1.7 billioncapacity available in the Singapore market

US$


A combination of plentiful capacity, increasing claims and a generally soft market for premium rates made 2015 very difficult for trade credit insurers.

South-East Asia could be a bright spot . Countries such as Indonesia, Malaysia, the Philippines and Vietnam have been growing markets for a number of years and the continued poor performance in China will encourage a shift of capacity towards these markets . International insurers have been in the region long enough to understand these countries well and, combined with maturing banking markets, this should help fuel growth .

India could also strike a positive note during 2016 . The regulator is starting to liberalise the market by allowing local banks to issue credit insurance policies, which will allow more secured funding via credit insurance . New guidelines are expected to be confirmed during the first quarter .

Another theme for 2016 will be a move away from whole turnover policies towards excess-of-loss structures, particularly among more sophisticated clients with strong balance sheets who are looking at how to get better value from the product . For these clients, price may not be the primary consideration so much as how to generate more cover and therefore sell more products . Ultimately, that means taking a larger share of the risk .

Trade Credit

Capacity started to dry up towards the end of the year, but for most of 2015 there was more than sufficient supply, thanks in part to additional capacity from new entrants . The merger of XL and Catlin also brought new capacity to the marketplace, as did some innovative new solutions, such as the collaboration between export credit agencies and the insurance market .

Given the difficult conditions, insurers focused on trying to get a “fair premium” for the capacity they have available .

In terms of losses, the construction and steel sectors in China have been most affected . Demand for construction fell significantly during the year and a lot of companies in that sector are struggling . More generally, the slowdown in China has affected companies across the entire region that are exporting into the mainland, particularly in Hong Kong, Taiwan and even Singapore .

OutlookWith commodities producers facing falling prices and tight margins, all the indicators are pointing to another difficult year for global trade .

However, Asia is still seen by global insurers as an area of growth and that will continue to feed capacity into the region during 2016, but the uncertainty in China and stock market volatility will also lead to some caution . Insurers will therefore be placing more emphasis on managing capacity . Instead of writing large credit limits above and beyond actual requirements, insurers will be looking at clients’ needs more closely to maximise the use of their capacity and expand the quotas they have out in the market .


Atradius, Euler Hermes and Coface comprise 80% of trade credit insurance market.


China

Hong Kong

Changes to the tariff structure of China’s auto sector, which contributes 75% of premiums, caused some disruption . The move to a non-tariff system started in 2013 and was widened to include more cities during 2015 . However, a significant oversupply of capacity has led to intense

competition among insurers and further dropping of premium rates .

The most significant loss of the year was caused by the Tianjin port explosions . Aon clients alone suffered losses in excess of US$1 billion, and the accident has had certain impact on the market . Underwriters have been somewhat more conservative writing business in specific industries, such as those handling hazardous materials and warehouse risks, but generally speaking the losses have been absorbed without much significant effect on pricing or available capacity . However, the accident highlighted issues around risk management and general underwriting standards that the industry is taking seriously .

China’s new solvency rules, known as C-ROSS, have encouraged international reinsurers to move onshore due to lower capital requirements for onshore businesses versus offshore . This has led to a significant influx of reinsurers setting up onshore during 2015, with Lloyd’s forecasting an increase of up to 400% in onshore business . The implement of C-ROSS is also bringing the awareness of risk management to local insurers, which would have positive impact to the market .

The Hong Kong market has been soft across all lines of business . In terms of rate reductions, most lines have seen at least 5% . Gross written premiums for all classes of insurance grew by 4 .5% .

Global M&A deals such as ACE-Chubb had some effect on the local market and international insurers in general have shown more interest in growing their portfolios in Hong Kong despite the softness . Locally, Zurich bought Kono, a Hong Kong insurer focused on employees’ compensation . Rates are very low across property, commercial general liability, marine and most other lines, but the favourable loss history and continued benign claims environment continues to generate high profits and attract capacity .

While clients continue to look for premium rate reductions, there is an increasingly sophisticated section of the market that is willing to consider retaining a larger share of risk, particularly in employees’ compensation, to help achieve their targeted savings . Clients are also taking a more mature, long-term outlook with a greater emphasis on solutions rather than exclusively seeking premium reductions, as well as differentiating between insurers in terms of claims services .

OutlookThe proposed expansion of the open tariff system in the auto sector to first-tier cities in 2016 is causing significant concern among insurers, given that the sector contributes such a large proportion of business for most underwriters in China . If the auto business becomes unprofitable, insurers may seek to deploy capacity in the commercial market and become more cautious in writing business, ultimately causing premiums to rise .

Agriculture insurance has been a growth driver for insurers during the past few years, but in 2015 the government proposed the creation of an insurance pool to reduce costs for the agriculture industry . As one of the few profitable areas for insurers, this development could cause further turmoil in the industry and significantly reduce the amount of risk being passed on to the reinsurance industry .

ClaimsIn terms of claims, while there have not been any significantly large items, the bigger losses have been seen in the construction sector, driven by the growth of infrastructure projects in the city . Another driver of claims in Hong Kong is in the financial lines business, in relation to increasing vigilance on the part of securities regulators in both Hong Kong and the US, and has affected particularly Chinese clients subject to class-action lawsuits, regulatory investigations and notifications in the US .

With regard to employees’ compensation claims, a major healthcare manager in Hong Kong has flagged that the current Hong Kong compensation focused approach to workplace injuries has not been effective in improving matters and that a better approach for employers would be to shift the focus to injury management and rehabilitation for back-to-work employees .

OutlookCompetition is expected to be even more aggressive as insurers continue to grow their books . ACE is a typical example, having expanded into employee compensation in 2014, SMEs in 2015 and in 2016 it is adding motor .


Taking the country as a whole, renewals on the property side were flat . Clients in some areas were able to achieve reductions of up to 10%, but in typhoon affected parts of the country, such as Kyushu, rates rose by as much as 20% in some cases as Japanese insurers started to raise premiums in view of potential increases in insured losses from weather related disasters . However, such

losses did not materialise during 2015, resulting in a good year for insurers on the claims side .

After several years of consolidation, Japan’s domestic market is dominated by three main players — MS&AD, Tokio Marine and Sompo Japan Nipponkoa — which account for roughly 88% of the local market . However, the local market is shrinking due to the ageing of Japan’s population and the low birth rate, which has forced Japanese insurers (and their customers) to look overseas for growth opportunities . This led to some significant M&A activity during 2015: Tokio Marine paid US$7 .5 billion for HCC Insurance in the US, while MS&AD paid US$5 .3 billion for Amlin in the UK . Sompo had previously bought the UK’s Canopius in 2014 .

The major international insurers are estimated to have less than a 5% share of Japan’s domestic market and face significant challenges in expanding that share given the dominant position of the big three after their consolidation .

IndonesiaThe local regulator, OJK, implemented measures in 2015 to protect the domestic insurance industry in response to unexpected softening

market conditions, driven by the continued deterioration of commodity markets and weakening of the regional and global economy .

These actions have had a significant effect . In particular, OJK introduced a rule that requires all reinsurance business written in Indonesia to be placed with a local reinsurer first, until all domestic capacity has been exhausted certain threshold limit . This has led to an 80% increase in gross written premiums within the local industry .

To further ease the stress on local insurers the OJK also eased minimum risk-based capital insolvency ratio of 50% minimally to 120% maximally .

The gross written premium was increased by about 10% last year . On the claims side, there was a general increase in activity of about 30%, mostly driven by aviation hull and property claims . A landslide that damaged a steam pipeline at the power plant led to one of the year’s biggest claims after it caused a significant delay in operations and a US$30 million loss .

Australian insurer IAG entered the market through the acquisition of Asuransi Parolamas, a local insurer, though it has yet to build out a significant presence . The regulator also liquidated one insurer, MAA .

OutlookThe market will continue to be soft in 2016, though the overall economy could benefit from government initiatives to invest in infrastructure projects, some of which are entering the construction phase in 2016 .

A national reinsurer, called Indonesia Reinsurance, was launched on January 1 and will further increase local retention of reinsurance business once it is injected with a proposed capital base of US$200 million .

Japan OutlookWhilst no big changes are expected on rates, a revised business insurance law will impose some additional costs on brokers .

The effects of the overseas M&A may start to be felt during 2016 . Foreign insurers have previously enjoyed relative success in specialist lines of business that domestic insurers were unable to offer, but they may now seek to import this expertise through their overseas acquisitions . This could lead to some new niche products, such as extended warranties .

In terms of new lines, product recall insurance is expected to generate increased demand due to the high-profile losses incurred by a Japanese auto-parts manufacturer . Directors and officers cover is also expected to gain some traction . Contingent business interruption is one area where there is client interest but not much capacity . This is due to the way Japanese manufacturers tend to concentrate their supply chain to a small geographic area to satisfy just-in-time production demands .


Malaysia

Korea

The implementation of the national Goods and Services Tax (GST) during 2015 had an operational impact on the insurance industry in terms of

uncertainties surrounding policy documentation and its application . The situation was still not stable by the end of the year .

The Prime Minister has announced budget recalibration in the beginning of 2016 with certain immediate measures in view of the nation’s economic situation and particularly with regard to the welfare of the people .

The weakening of the local currency is also affecting the insurance market due to the unfavourable foreign exchange environment for offshore reinsurance capacity, which is priced in US dollars . In some cases, clients have seen premium increases of as much as 30% for specialist risks subject to overseas placement . In particular, this has affected the petrochemical and energy industries . Across the whole market, the growth in gross written premiums was slower than expected at about 3% to 4%, partly as a result of the weaker currency .

However, the promise of market liberalisation has attracted new entrants and brought additional capacity through a series of joint ventures between foreign and local insurers in 2015 .

Regulators continue to pursue liberalisation of the local insurance market, announcing in 2015 that insurers will be given freedom to innovate new products and set prices without prior approval or specific guidelines .

There were no major losses from natural catastrophes during 2015 . The biggest domestic loss was caused by a fire at a warehouse in Gyeonggi province owned

by Cheil Industries, which is a part of the Samsung group, resulting in a US$250 million total loss that was absorbed entirely by the domestic market . The other significant loss affecting Korean clients was the explosions at Tianjin port in China, where Hyundai lost 4,000 cars for an estimated loss of US$190 million .

The outbreak of Middle East Respiratory Syndrome (MERS) in Korea affected the domestic economy during 2015, while the slowdown in China and the collapse in oil prices hurt the country’s exporters, causing growth to disappoint at 2 .7% .

Joint ventures in 2015• LibertyMutualJVwithlocalinsurer,

Uni Asia;

• GeneraliJVwithlocalinsurer, Multi Purpose;

• Fairfax(partnertolocalinsurer,Pacific) JVwithanotherlocalinsurer, MCISGeneral;and

• SantamJVwithlocalinsurer, Pacific & Orient .

OutlookThe government’s budget in 2015 promised a large amount of infrastructure investment in eastern Malaysia, which could generate potential growth in construction activities for 2016 and onwards .

Motor and fire tariffs slated to be removed in 2016 may be deferred, pending further directive from the regulatory body .

A further effect of the weaker currency is a talent drain from Malaysia’s insurance industry to Singapore, which has successfully established itself as a regional insurance hub . Looking forward, the Malaysian industry will be seeking to retain talent domestically .

OutlookEconomic growth is forecast at 3 .1% for 2016, but the worsening slowdown in China could act as a brake on the economy . Exporters will continue to suffer as global demand for both industrial products and consumer electronics remains subdued .

The market for export credit insurance will be opened during 2016 . This product was previously a monopoly of the Korean exportcreditagency(KoreaTradeInsuranceCorporationorK-sure)andtheSeoulGuarantyInsuranceCompany,butisnowopen to the private market .

Starting on July 1, all companies handling hazardous or toxic materials in Korea will be required to buy environmental impairment liability insurance .


The government’s tendering of public-private partnership (PPP) financing initiatives aimed at building infrastructure projects has fuelled growth for property and engineering insurance . At the same time, property development in general has also been growing and local conglomerates have been funding investment in the much-needed expansion of the domestic power supply, while the associated construction activity has also boosted the demand for liability cover .

This activity, combined with low losses on their natural catastrophe portfolios, meant that insurers enjoyed a profitable year in 2015, with the industry posting double-digit growth . For clients, rates remain extremely competitive due to the benign losses .

For capacity within the domestic market, pricing was stable to soft . Even for larger or more complex risks that require international capacity, pricing was generally soft and kept pace with local requirements .

Several years of consistent growth in the Philippines economy have also contributed to buoyant demand on the retail side, with auto sales expected to post record growth during 2015, which is being translated into healthy premium growth for insurers .

PakistanThe principal development during 2015 was in the takaful (or Islamic insurance) market, whereby conventional insurance companies started to open their own takaful windows following the entering into force of Pakistan’s 2012 Takaful Rules . Previously just three companies were permitted to write takaful business, but after the enforcement of Takaful Rules some of the conventional insurers got

licences and started operation in mid and late 2015, while another round of companies opened their takaful windows on January 1, 2016 .

In the general insurance market, strong growth continues . Full-year results are not yet available, but the first three quarters of 2015 show that written premiums in the non-life sector grew to US$477 million from US$420 million during the same period in 2014, an increase of 14% . The life market saw written premiums of US$496 million, up from US$315 million, representing growth of more than 57% . These numbers are only for the private insurance market and do not include the state-owned insurers, which are also significant players .

Premium rates remain flat to soft, across the general insurance market as a result of abundant capacity .

Outlook China’s high-profile One Belt-One Road policy is expected to lead to investment and industrial growth . The China-Pakistan Economic Corridor is a US$46 billion infrastructure project that is planned to connectthePakistaniportofGwadartoChina’s Xinjiang region via a network of highways and railways, as well as power plants . This activity should yield additional growth in the insurance market .

The Securities and Exchange Commission ofPakistan(SECP),whichisresponsiblefor regulating the insurance industry, has formulated draft Insurance Rules, 2015 which will replace the previously issued two different sets of Insurance rules after the due approval process and accommodating the stakeholders consultations . In addition, SECPhasdrafted(ReinsuranceBrokers)Regulation 2015 and is currently seeking feedback from the industry on its proposals . Both the rules are expected to be finalised during 2016 .

Securities and Exchange Commission of Pakistan has also issued the Underwriters Rules 2015 which covers the issues relating to registration of underwriters as well as their duties and responsibilities .

Philippines OutlookSeveral companies are increasing their local engineering capacity in 2016 to keep up with demand . On the property side, while capacity was not exhausted during 2015, further increases are also expected .

Asean integration will continue to affect the insurance industry . Risk-based capital rules are being developed as part of an effort to improve the industry’s competitiveness and are due to be implemented in December 2016 . Once the rules are finalised, domestic insurers will be subject to a rising net-worth requirement until 2020, when the target will be US$20 million, which will encourage continuous consolidation .

There are some industry-related issues that are expected to be on hold until the presidential election in May, including; a draft bill for the creation of a natural catastrophe pool designed to enforce mandatory insurance for residential properties, and a move to reduce taxes on the non-life insurance sector to 5% from 26%, in a bid to align with regional counterparts .


Singapore

Taiwan

The market continues to be relatively soft . The size of rate reductions varies across lines, but bread-and-butter businesses such as property and casualty have seen falls of between 5% and 10%, with prices softening towards the end of the year . However,

industry results from the Monetary Authority of Singapore show that insurers are turning a profit even in traditionally weak lines such as workers’ injury compensation and motor .

An increase in capacity has been one of the drivers of falling rates, as Singapore increasingly markets itself as a regional hub for insurers . Recent new entrants such as Great American and Berkshire Hathaway, which are staffed by experienced local industry participants, have strategically targeted profitable accounts with aggressive rate cuts . A number of Lloyd’s syndicates also moved into Singapore . As of the third quarter of 2015, offshore insurance premiums into Singapore grew by 18% and reinsurance premiums were up by 24% .

More generally, the downward pressure on rates has been a function of cost-cutting by clients facing more difficult operating conditions . The lack of significant claims activity has also helped insurers to accommodate these requests .

In general, premium rates grew at about 3% during 2015 with only minor losses . Property rates fell by 5% or more and overall liability was very competitive, with marine lines seeing a 5% to 10% reduction .

The biggest loss of the year was caused by an explosion that happened during a party at a water

park in New Taipei, in which 15 people died and almost 500 were injured . The incident caused liability limits to be reviewed and led to a slight increase in rates . Another significant loss was the TransAsia Airways Flight 235 which crashed into the Keelung River causing 43 fatalities . It was confirmed that after the failure of one engine the pilot incorrectly shut down the other working engine . As a result, the Civil Aeronautics Administration (CAA) has announced it would closely monitor TransAsia’s training and operations .

AIG Taiwan sold part of its non-life business to Nan Shang Life Insurance due to the restructure of its Taiwanese operation . The unit, which focuses on personal insurance and small and medium-sized enterprise insurance, is expected to start operations under Nan Shan in June 2016 .

The Taiwanese market continues to be dominated by direct sales, with the broker share of the industry being around 20% .

OutlookClients’ focus on driving costs down will continue in 2016, driven by a slump in trade, the slowdown in China and a weaker currency as a result of the US interest-rate hike . Aon estimates that pricing is the principal concern in 80% to 90% of insurance buying decisions and that rates will be reduced across all businesses other than financial lines . Insurers are expected to be a bit firmer on pricing financial lines as the difficult market conditions may spur M&A activity and greater claims through the directors and officers liability part of the business .

Awareness of political violence cover is rising, given the heightened risks to operations in neighbouring countries, as evidenced by terrorist attacks in Indonesia and Thailand, and growing unrest elsewhere in the region .

OutlookPremium growth is expected to be quite stable, although there is increasing uncertainty about where new business will come from . Taiwanese clients represent one of the most promising opportunities after an amendment to the International Financial Business Act during 2015 that allows the creation of offshore insurance units to conduct offshore business . Fubon Insurance and South China Insurance have already acquired licences, and others are expected to follow during 2016 .

The growing compliance burden on insurers in Taiwan may have an effect on the market going forward . Traditionally, Taiwanese insurers have enjoyed a relatively light-touch regulatory environment that encouraged flexibility in the pursuit of market share, but there are some signs that compliance issues are restricting the ability to be flexible in response to client requests .

In addition, amendments to Regulations GoverningInsuranceBrokers(June18,2015)andamendmentstoImplementationRules for Insurance Broker Company Internal Control Audit system and solicitationprocedures(July13,2015);hadincreased brokers’ operational challenge of compliance working cost in local market .


Thailand

Vietnam

The Thai market experienced an uneventful year during 2015 . The general market softening continued and property rates declined further, but insurers’ appetite is still strong .

There were no major weather-related claims, no new market entrants and no major regulation changes . Market growth continues to be affected by both local political and economic issues and the global economic slowdown . In particular as they affect the

major tourism and export sectors . Economic growth for 2015 is forecast at 2 .9% and a similar rate is expected for 2016 .

The market grew by about 15% on the back of strong economic growth and increased foreign investment . After widespread anti-China riots during 2014, a return to calm in 2015 marked a year of benign losses and good returns for insurers . Loss ratios remain below 50% generally, which has continued to attract competition into the market and kept rates low .

Greater enforcement of existing insurance regulations by the government has also contributed to the growing premium pool . In particular, the regulator has cracked down on insurers writing business without

an onshore presence in Vietnam, except for reinsurance cessions . Enforcement of tariffs on fire and perils for risks under US$30 million has also led to an upswing in premiums .

State-owned enterprises have been pushed by the government to divest non-core assets, which has created opportunities for some overseas insurers to invest in Vietnamese capacity . This has led to some activity from Korean and Japanese players, and most recently an investment by Canada’s Fairfax in BIC .

Despite such investment, there remains a lack of capacity that is capable of meeting the increasing demand from foreign investors for a high-quality product offering and, in particular, claims service .

OutlookThe Thai insurance industry regulator, the Office of Insurance Commission, is forecasting growth of 4 .5% in the property and casualty sector and 5 .5% in life, though such optimistic forecasts must rely on assumptions of no more political unrest and that the military government will release significant economic stimulus measures, including a revival of the transport infrastructure mega-projects delayed from 2014 and 2015 . Absent of these measures and the market can expect a year of flat to negative growth .

Even so, there are still some international insurers that would like to access the Thai market and potential M&A deals remain a possibility during 2016 . The Insurance Commission is considered to be unlikely to grant new licences, which leaves acquisition as the only route into the market .

OutlookEconomic growth is once again tipped at about 6 .5%, bucking the trend for Asia as a whole and focusing the attention of foreign direct investors . The government is expected to continue its efforts to improve enforcement . Construction is one area it is focusing on, having drafted a new law that will make it mandatory for projects to carry all-risks insurance, including liability and employer’s liability, though implementation may not happen in 2016 .

Other areas that have been generating interest include pensions, after the government mandated in 2014 that employers must provide pensions, though implementation has been slow to take effect . It remains to be seen if 2016 will bring greater action .

Furtherdowntheline,Vietnamstands to benefit from trade deals such as the Trans-Pacific Partnership and further Asean integration .


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Aon Inpoint also works directly with Aon’s broking and account executive teams to help them to identify and deliver business opportunities and deliver innovation and solutions to their clients by applying data, analytical and consulting capabilities; providing, for example, performance dashboards, benchmarking, market reports and bespoke data and analytics support .

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Contributors

Specialty Broking, Asia

Geoff Lambrou +65 .6512 .0279geoffrey .lambrou@aon .com

Nick Gillett+65 .6231 .6402nick .gillett@aon .com

Aviation

Gary Moran +65 .6239 .7645gary .moran@aon .com

Peter Hulyer+65 .6239 .7698peter .hulyer@aon .com

Captives

Vic Pannuzzo+65 .6239 .8817vic .pannuzzo@aon .com

Construction

Nicki Tilney+65 .6239 .8735nicki .tilney@aon .com

James Maguire+852 .2862 .4293james .maguire@aon .com

Energy

Paul O’Keefe+65 .6239 .7654paul .o’keefe@aon .com

Paul Young+852 .2862 .4249paul .young@aon .com

Financial Lines & Casualty

Niloy Majmudar+65 .6512 .7362Niloy .majmudar@aon .com

Murray Wood+65 .6645 .0116murray .wood@aon .com

Global Risk Insight Platform

Ralph Butterworth+61 .2 .9253 .7473 ralph .butterworth@aon .com

Health & Benefits

Terry Stephens+65 .6239 .8876terry .stephens@aon .com

Geoff Grace+852 .2917 .7985geoffrey .grace@aon .com

Marine

Peter Hulyer +65 .6239 .7698peter .hulyer@aon .com


Mining

Melissa Hill+65 .6231 .6309melissa .hill@aon .com

Paul Young+852 .2862 .4249paul .young@aon .com

Power

Nicki Tilney+65 .6239 .8735nicki .tilney@aon .com

Property

Lee Jiunn Woei+65 .6231 .6397Jiunnwoei .lee@aon .com

Nick Gillett+65 .6231 .6402nick .gillett@aon .com

Reinsurance

Jeremy Fox +65 .6239 .7600jeremy .fox@aon .com

Structured Credit & Political Risks

Miles Johnstone+65 .6512 .0226miles .johnstone@aon .com


Trade Credit

Hugh Burke +852 .2862 .4246hugh .burke@aon .com


Crisis Management

Julian Taylor+852 .2862 .4151Julian .taylor@aon .com

China

Ernest Leung +86 .10 .5632 .8633ernest_leung@aon-cofco .com .cn

Hong Kong

Dilys Chan+852 .2862 .4156 dilys .chan@aon .com

Indonesia

Bagus Darma+62 .21 .2985 .8500bagus .darma@aon .com

Japan

Shinichi Kandatsu+813 .4589 .4168 shinichi .kandatsu@aon .com

Korea

Paul Choi+82 .2226 .02706paul .choi@aon .com

Malaysia

Joanne Cheah +603 .2773 .7120joanne .cheah@aon .com

Pakistan

Abdul Basit Thaplawala +92 .211 .1126 .6266basit .thaplawala@aon .com

Philippines

Gary Dolina +63 .2908 .1202 gary .dolina@aon .com

Singapore

Leng Leng Ng+65 .6239 .7547leng .leng .ng@aon .com

Taiwan

Kate Chang +886 .2663 .90212 kate .chang@aon .com

Thailand

Paul Frankland+662 .305 .4577 paul .frankland@aon .com

Vietnam

David W Carter+84 .4 .38260832david .w .carter@aon .com

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