Taking a sophisticated approach to capital optimisation and management

Aon’s Asia Pacific Capital Advisory leader Yen Chu Choo analyses how (re)insurers in the region are approaching capital markets and optimisation and identifies areas of improvement.

While emerging markets are driving growth in the Asia Pacific (APAC) reinsurance market, regulatory changes and capital requirements pose challenges. Nonetheless, reinsurers and clients are becoming more sophisticated, and more aware of capital management and the impact of macroeconomic factors.

If the trend continues, this will lead to a strengthening and improvement in the region, according to Aon’s APAC Capital Advisory leader Yen Chu Choo, who we spoke to ahead of this year’s Singapore International Reinsurance Conference.

Tell us about your role and the wider capabilities of the APAC Capital Advisory function.

I lead Capital Advisory in APAC – a dedicated team that comprises a range of capabilities including actuaries and ratings experts. Our core objective is to help our clients maximise their use of their capital, and we look at each individual client situation from various perspectives including ratings, regulatory or economic capital. We provide solutions across the capital spectrum, addressing a range of client challenges from capital constraints to excess capital. Generally, we optimise our clients’ capital through structured reinsurance, through solutions such as solvency relief covers and legacy run-off transactions. Beyond reinsurance, we have our ratings advisory function to help clients apply for new ratings and maintain or improve their current ratings.

Are there any client challenges regarding capital management and optimisation specific to APAC?

It’s very much driven by regulations, and Asia is a mixed basket in this regard. There’s ‘developed Asia’, which includes South Korea and Singapore, and ‘emerging Asia’, where risk and capital requirements are still evolving. In emerging Asia, in countries such as the Philippines and Indonesia, we are seeing increased minimum capital requirements, and the adoption of risk-based capital regimes (RBC) in India and Vietnam.

In general, risk management and capital modelling techniques are probably less mature compared to developed markets including the US or UK, where there's an abundance of data and technology tools, but APAC is making significant progress.

Where does Aon’s Capital Advisory function provide the most assistance?

Strengthening regulations will lead to increased capital requirements, which in the short term will cause stresses on some of the smaller players. Asia is a growth market, and the markets are quite fragmented. We are seeing more requests for capital solutions in the structured reinsurance space, such as solvency quota shares and loss portfolio transfers, which are very much targeted at improving the overall solvency position.

Our job is to ensure that each solution addresses our clients’ specific capital concerns – sometimes regulatory, sometimes ratings. We receive regular requests to support our clients with their credit ratings and expect more new applications as more clients see the value of having a credit rating to support their growth ambitions.

Are APAC regulatory regimes helping to drive profitable growth for clients?

In Asia, most countries are already on RBC regimes, or they're moving towards them, for example in India and Vietnam. The RBC regime is geared to help drive sustainable growth because it forces the insurers to hold capital in line with the riskiness of their business. It may not be a ‘one-size-fits-all', as RBC regimes are still largely prescriptive and calibrated at the industry level. But while APAC is still maturing as a market, these prescriptive RBC frameworks are good for ensuring greater resilience.

Is the macroeconomic environment in APAC supporting clients’ growth ambitions?

Yes, because Asian economies remain a key driver of global GDP growth. The rise of the middle class in emerging Asian countries will lead to improved insurance penetration, so there is still a massive opportunity for our clients to grow. The underinsured population in APAC is significant compared to the rest of the world, with larger protection gaps. While strengthening regulations may pose some challenges for insurers, on balance such moves will ensure the stability and resilience of the industry, and in the long term will encourage greater insurance market penetration.

Do you see frequent errors in how (re)insurers approach capital optimisation and management in APAC?

Not an error per se, but in APAC the general approach to capital management is still relatively passive, in that it’s viewed more as a compliance task to achieve a satisfactory regulatory or ratings position, when it could be used as a holistic tool to ensure the company’s resilience. The focus still tends to be on top-line growth, so capital optimisation doesn't always rank as highly in terms of priority.

There is room for improvement in the way companies perform their capital assessments, from the collection of data to how they share information and insights across the organisation. M ore importantly, insurers should adopt a more forward-looking view; too often we have seen companies rely on historical events and data for their risk and capital management. But with new technologies and risks emerging all the time, this needs to change.

While it takes time for companies to start improving on their legacy data processes and collection, we are seeing increasing sophistication in how our clients approach capital optimisation.