Cost of pricing insurance risk to decline: S&P

Pricing of insurance risks is declining and the non-life insurance markets in the Asian Pacific region have passed the cyclical peak post September 2001.

Standard & Poor's credit analyst Ian Thompson, managing director of the Financial Services Ratings Group, also added that underwriting profitability across the region is expected to turn south in 2004. Emerging signs of a return to less disciplined practices in Asia's inherently overserviced insurance market has also cast uncertainty over the industry profitability beyond 2004.

Softening insurance cycle and volatile investment environment will be the two key challenges for the Asian insurance industry, stated Standard and Poor's Rating Services in its report "Asia-Pacific Insurance Outlook 2004-2005".

The global rating agency added that this would put pressure on insurance companies' profitability, though overall the outlook for insurance ratings across the Asia region is stable.

The risks associated with the sector in the Asian region are divergent, from low level to high level of risks, depending on market maturity, regulatory development and wider economic conditions.

Evidence of softening in the primary insurance markets' rates first emerged last year, as reinsurers started to offer better pricing and terms in several Asian markets.

Underwriting profits are still expected in the short term in most Asian markets. However, they are likely to be lower than 2003 level, cautioned S&P in its report.

The regions' life insurance sector has stabilized as a result of better recent profitability, attributable to improved investment performance and cost control in the past year.

However, it continues to remain plagued by pressures associated with the prevailing low interest rate environment and volatile equity market.

Operating performance for much of the industry is expected to improve in the near term, reflecting the benefit of efficiencies such as reduced crediting rates and improved expense structures, as well as strengthened economic conditions and solid growth dynamics.

There is an increasing polarisation between strong and weak players in the Asian markets. In markets like Australia and Japan, recent phase consolidation has helped eliminate some of the weaker players. However, for many Asian countries, an overabundance of insurance underwriters leaves a number of riskier companies, said Thompson.

Well-structured companies with demonstrable financial strength are benefiting from a flight to quality throughout the region. This has further added pressures on weaker companies.

Companies lacking viable market positions will continue to weaken at varying paces; in countries with high private ownership or fragmented markets, consolidation could take some years, said Thompson.