China’s slowdown in economic growth, after years of soft pricing, is starting to bite what has been a weak commercial property market beset by inadequate pricing for years, according to Mike Mitchell, Swiss Re’s head of property underwriting and property and casualty facultative business for Asia.
The tail of losses has started to build in Chinese corporate property, while premium growth is weakening, he told Reactions, at this week's Singapore International Reinsurance Conference (SIRC) event.
Reinsurance losses from August's Tianjin Port explosion are just the most evident indicators of the broader pricing problem in that market, he suggests.
Swiss Re itself announced a pre-tax net loss of $250m from Tianjin claims, revealed in the its third quarter filings, leading several reinsurers taking hits from the explosion.
“The tail is starting to show through, exposing challenges for the Chinese market. The underlying business is not high quality enough to withstand those kinds of losses,” said Mitchell.”
“The Tianjin event underlined the challenges facing the corporate property market in China, which is very significantly underpriced, by any standards. It’s been running on a negative underwriting result for at least three years,” he said.
As China’s rate of economic growth slows down, so premium growth rates are also slowing, suggested Mitchell.
“It’s already hitting
He noted that Chinese business has been managed on an accounting year basis within the portfolio.
“There had been a low frequency of large property losses, below normal, but that has begun to change dramatically over the past 24 months, building to become a more normal loss rate picture,” said Mitchell.
He compares this situation to Korea, which like China is not a catastrophe-driven market, and has seen a number of large losses over 3-5 years continuing to put strain on underwriting results in that country, including 2013‘s Hynix semiconductor plant loss event.
“It’s increasingly difficult to find business that meets pricing needs to have confidence in the outcome,” said Mitchell.
A source for some optimism comes from the C-Ross, China’s new risk orientated solvency system, with tougher capital standards being introduced by Chinese regulators, “putting stronger focus on underwriting quality
Abundance of cheap reinsurance capital was one reason why insurance linked securities (ILS) and other collateralised alternative reinsurance business has not made much progress into Asian markets beyond Japan (other reasons cited being data and risk model inadequacies), although this year did see Panda Re, he first Chinese catastrophe bond.
Even Australia and New Zealand, which faced severe catastrophe activity in 2011, have since seen reinsurance pricing eroded “to round about what it was before those events”, added Mitchell.