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Emerging Insurance Markets in Asia

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EMERGING INSURANCE MARKETS IN ASIA

Nihal Senaratne
FCMI, ACII, AIII, Chairman, 
SENARATNE INSURANCE BROKERS (PVT) LTD. SRI LANKA

Southeast Asia, on which this presentation will largely focus, consists of countries south of China, east of India and north of Australia, and is broken up into two main regions i.e., Indo China and the Malay Archipelago, which refers to what could be described as Mainland Southeast Asia and Maritime Southeast Asia respectively. The former includes Cambodia, Laos, Burma, Thailand and Vietnam, whereas, the latter covers largely, Brunei, East Timor, Indonesia, Malaysia, Philippines and Singapore. This geographical area is generally subject to high seismic and volcanic activity, as it lies at the intersection of geological plates, with several volcanic Islands, particularly Indonesia and Philippines, which are prone to frequent earthquakes and volcanic eruptions, as they stand on what is generally described as the Pacific “Ring of Fire” – that encircle the basin of the Pacific Ocean.

Generally speaking, with reduced loss levels, reinsurance rates for Southeast Asia have displayed a reducing curve since 2003. The capacity for non-proportional business is generally available without much restriction, although the same cannot be said of proportional business as, by and large, Reinsurers are maintaining a tighter rein, with Natural Perils, being either excluded or, combined with event limits, typically varying between 7% and 20% of key zone aggregates. Minimum rates prevailing for Earthquake and Typhoon / Flood are 0.15% and 0.05% respectively, although some Treaties are known to carry a lower rate of 0.08% for a combination of both these perils. A country, where such natural hazards are a marked feature is Thailand, where, for instance, in the 10 years prior to 2010, there have been 33 recorded events of heavy flooding. These occurrences accounted for 55% of all natural disasters in Thailand resulting in damage, costing USD 4.5 Billion, as well as 2682 deaths, together with 30 Million people otherwise affected.

The city state of Singapore, maintains its momentum as a reinsurance hub for Asia, with many Lloyds syndicates actively participating. It could be said that, the major capacity by far of that available in Singapore is A-rated, and it is therefore not surprising that, Singapore provides most of the capacity in Southeast Asia.

In Indonesia and the Philippines, there is a marked reliance on national reinsurers that provide significant proportional treaty capacity to the majority of the smaller companies. Larger companies are inclined to rely on global capacity. It is of interest to add that, London and Bermuda continue to be small players in the region, due to the relatively small size of the non-proportional programs and their unwillingness to provide proportional capacity.

Nihal Senaratne

Nihal Senaratne

In Sri Lanka, it is compulsory for 30% of all proposed overseas reinsurance cessions to be offered, in the first instance, to the Government owned National Insurance Trust Fund. The issue of concern here is of course, the high risk exposure of this Fund, particularly to natural disasters. Apart from the widespread loss of life and extensive damages sustained, following the Tsunami experienced in December 2004, Sri Lanka has not generally been prone to natural catastrophes, but this is no reason for complacency particularly as, Sri Lanka is now known to be Earthquake prone, unlike the previous belief that, the country was outside the seismic zone.

It is generally believed that, natural catastrophe coverage has a high growth potential due to extensive underinsurance and/or non-insurance, in emerging markets, particularly so in Southeast Asia. The increased catastrophe losses in the Asia/Pacific region has understandably led more to reliance on catastrophe models. Such losses had led cedents and reinsurers to better define and control not only the perils but the types of policies being issued. Continued investment and attention to modeling is evident throughout the region. Early in 2010, Guy Carpenter released an Asian model, focusing on one of the main flood areas i.e., Thailand’s Chao Phraya region and, provides clients with the information necessary to improve flood exposure management. The flood model, which allows for analysis from five-year to 1,000-year return periods, provides an opportunity for clients to better estimate their PMLs at different return periods based on their commercial and industrial exposures.

Commerce and Industry in Asia is experiencing what could be best described as a rapid and continuing growth, which is naturally enhancing substantially global reinsurance cessions. However, it must be borne in mind that, the growth in General Insurance business is driven largely by lines such as Motor Insurance, which of course, is less intensive, when it comes to reinsurance. A classic example in this respect is Sri Lanka, where in 2014, over 50% of non-life GWP related to Motor Insurance.

Price competition, of course, remains a key factor influencing reinsurance rates in emerging markets, as clearly, the capacity available exceeds demand for reinsurance. As stated by Mr. T Prakash Rao, Chief Executive and Managing Director for Singapore based JB Boda, at a seminar titled “The Road Ahead on Reinsurance in Asia’s Emerging Markets “held in July 2010, “there is surplus capital in the market and it has resulted in capacity for almost all classes of business. Property facultative business is getting absorbed locally and a few risks are being shown to overseas reinsurers due to competitive pricing, Speciality classes such as terrorism, financial and liability risks look attractive in terms of demand in the short to medium term. Local capacities have grown, especially in the case of direct players, who are now better equipped and more keen to write inward reinsurance business. This is not really helping the pricing, especially the deductibles being offered. Markets are growing and reinsurance capacity is growing even faster and competition more than ever.”

Clarence Wong, Chief Economist at Swiss Re described emerging Asia’s Reinsurance markets as “highly competitive” with National Regional and International Reinsurance, as well as, Lloyds and some International and Regional direct Insurers seeking opportunities in these markets.

Since opening up the reinsurance market in 2003, China has attracted foreign reinsurers, six in all, i.e., in addition to China Re, which has two subsidiaries, China Property and Casualty Reinsurance Co. Ltd. and China Life Reinsurance Co. Ltd. The six foreign reinsurers include Beijing-based Swiss Re, Munich Re and Scor Re, and Shanghai-based General Re, Hannover Re and Lloyd’s Reinsurance Co. (China). It could be said that, most specialized risks in China are covered by foreign players.

“Although foreign insurers outnumbered domestic players, this has barely displaced China Re’s market share in China, particularly in the life sector,” said Sharon Khor, partner and head of insurance for Greater China at Accenture, an international consultant. China Re captures about 80% market share of life business.

“China has its lure for foreign players as the largest and fastest growing reinsurance market, but the challenge is to grow market share by leveraging their global experience and knowledge to raise sophistication and risk management discipline in China”, said Khor, who went on to say that, “overseas reinsurers should focus more on areas where local players have relatively less experience, such as Health, Engineering and Catastrophe lines”. Value-added services such as disaster management, product development, pricing and more importantly, risk management open windows of opportunity for overseas based players in China.

Reinsurance arrangements vary substantially among emerging markets. In Southeast Asia, lack of capacity or proper underwriting experience leads to high cessions in the non-life sector. Here again, a classic example is Sri Lanka, where a little under  80% of the Property GWP is ceded to Reinsurers largely overseas, thus acquiring profitability (if at all!) merely on reinsurance commissions in a comfort zone of a minimal risk environment. Of course, in the case of China and India, the retention rates are higher, but clearly, the absence of adequate diversification of high value risks, particularly, the natural catastrophe risks, should be properly addressed by these two countries, with a view to encouraging higher cessions to international markets.

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Taking control of compliance: how FS institutions can keep up with the ever-changing regulatory landscape

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Taking control of compliance: how FS institutions can keep up with the ever-changing regulatory landscape 1

By Charles Southwood, Regional VP – Northern Europe and MEA at Denodo

The wide-spread digital transformation that has swept the financial services (FS) sector in recent years has brought with it a world of possibilities. As traditional financial institutions compete with a fresh wave of challenger banks and fintech startups, innovation is increasing at an unprecedented pace.

Emerging technologies – alongside the ever-evolving concept of online banking – have provided a platform in which the majority of customer interactions now take place in a digital format. The result of this is a never-ending stream of data and digital information. If used correctly, this data can help drive customer experience initiatives and shape wider business strategies, giving organisations a competitive edge.

However, before FS organisations can utilise data-driven insights, they need to ensure that they can adequately protect and secure that data, whilst also complying with mandatory regulatory requirements and governance laws.

The regulation minefield

Regulatory compliance in the FS sector is a complex field to navigate. Whether its potential financial fraud or money laundering, risk comes in many different forms. Due to their very nature – and the type of data that they hold – FS businesses are usually placed under the heaviest of scrutiny when it comes to achieving compliance and data governance, arguably held to a higher standard than those operating in any other industry.

In fact, research undertaken last month discovered that the General Data Protection Regulation (GDPR) has had a greater impact on FS organisations than any other sector. Every respondent working in finance reported that the changes made to their organisation’s cyber security strategies in the last three years were, at least to some extent, as a result of the regulation.

To make matters even more confusing, the goalpost for 100% compliance is continually moving. In fact, between 2008 and 2016, there was a 500% increase in regulatory changes in developed markets. So even when organisations think they are on the right track, they cannot afford to become complacent. The Markets in Financial Instruments Directive (MiFID II), the requirements for central clearing and the second Payment Service Directive (PSD2), are just some examples of the regulations that have forced significant changes on the banking environment in recent years.

Keeping a handle on this legal minefield is only made more challenging by the fact that many FS organisations are juggling an unimaginable amount of data. This data is often complex and of poor quality. Structured, semi-structured and unstructured, it is stored in many different places – whether that’s in data lakes, on premise or in multi-cloud environments. FS organisations can find it extremely difficult just to find out exactly what information they are storing, let alone ensure that they are meeting the many requirements laid out by industry regulations.

A secret weapon

Modern technologies, such as data virtualisation, can help FS organisations to get a handle on their data – regardless of where it is stored or what format it is in. Through a single logical view of all data across an organisation, it boosts visibility and real-time availability of data. This means that governance, security and compliance can be centralised, vastly improving control and removing the need for repeatedly moving and copying the data around the enterprise. This can have an immediate impact in terms of enabling FS organisations to avoid data proliferation and ‘shadow’ IT.

In addition to this, when a new regulation is put in place, data virtualisation provides a way to easily find and access that data, so FS organisations can respond – without having to worry about alternative versions of that data – and ensures that they remain compliant from the offset. This level of control can be reflected even down to the finest details. For example, it is possible to set up access to governance rules through which operators can easily select who has access to what information across the organisation. They can alter settings for sharing, removing silos, masking and filtering through defined, role-based data access. In terms of governance, this feature is essential, ensuring that only those who have the correct permissions to access sensitive information are able to do so.

Compliance is a requirement that will be there forever. In fact, its role is only likely to increase as law catches up with technological advancement and the regulatory landscape continues to change. For FS organisations, failure to meet the latest legal requirements could be devastating. The monetary fines – although substantial – come second to the potential reputation damage associated with non-compliance. It could be the difference between an organisation surviving and failing in today’s climate.

No one knows what is around the corner. Whilst some companies may think they are ahead of the compliance game today, that could all change with the introduction of a new regulation tomorrow. The best way to ensure future compliance is to get a handle on your data. By providing total visibility, data virtualisation is helping organisations to gain back control and win the war for compliance.

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TCI: A time of critical importance

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TCI: A time of critical importance 2

By Fabrice Desnos, head of Northern Europe Region, Euler Hermes, the world’s leading trade credit insurer, outlines the importance of less publicised measures for the journey ahead.

After months of lockdown, Europe is shifting towards rebuilding economies and resuming trade. Amongst the multibillion-euro stimulus packages provided by governments to businesses to help them resume their engines of growth, the cooperation between the state and private sector trade credit insurance underwriters has perhaps missed the headlines. However, this cooperation will be vital when navigating the uncertain road ahead.

Covid-19 has created a global economic crisis of unprecedented scale and speed. Consequently, we’re experiencing unprecedented levels of support from national governments. Far-reaching fiscal intervention, job retention and business interruption loan schemes are providing a lifeline for businesses that have suffered reductions in turnovers to support national lockdowns.

However, it’s becoming clear the worst is still to come. The unintended consequence of government support measures is delaying the inevitable fallout in trade and commerce. Euler Hermes is already seeing increase in claims for late payments and expects this trend to accelerate as government support measures are progressively removed.

The Covid-19 crisis will have long lasting and sometimes irreversible effects on a number of sectors. It has accelerated transformations that were already underway and had radically changed the landscape for a number of businesses. This means we are seeing a growing number of “zombie” companies, currently under life support, but whose business models are no longer adapted for the post-crisis world. All factors which add up to what is best described as a corporate insolvency “time bomb”.

The effects of the crisis are already visible. In the second quarter of 2020, 147 large companies (those with a turnover above €50 million) failed; up from 77 in the first quarter, and compared to 163 for the whole of the first half of 2019. Retail, services, energy and automotive were the most impacted sectors this year, with the hotspots in retail and services in Western Europe and North America, energy in North America, and automotive in Western Europe

We expect this trend to accelerate and predict a +35% rise in corporate insolvencies globally by the end of 2021. European economies will be among the hardest hit. For example, Spain (+41%) and Italy (+27%) will see the most significant increases – alongside the UK (+43%), which will also feel the impact of Brexit – compared to France (+25%) or Germany (+12%).

Companies are restarting trade, often providing open credit to their clients. However, there can be no credit if there is no confidence. It is increasingly difficult for companies to identify which of their clients will emerge from the crisis from those that won’t, and whether or when they will be paid. In the immediate post-lockdown period, without visibility and confidence, the risk was that inter-company credit could evaporate, placing an additional liquidity strain on the companies that depend on it. This, in turn, would significantly put at risk the speed and extent of the economic recovery.

In recent months, Euler Hermes has co-operated with government agencies, trade associations and private sector trade credit insurance underwriters to create state support for intercompany trade, notably in France, Germany, Belgium, Denmark, the Netherlands and the UK. All with the same goal: to allow companies to trade with each other in confidence.

By providing additional reinsurance capacity to the trade credit insurers, governments help them continue to provide cover to their clients at pre-crisis levels.

The beneficiaries are the thousands of businesses – clients of credit insurers and their buyers – that depend upon intercompany trade as a source of financing. Over 70% of Euler Hermes policyholders are SMEs, which are the lifeblood of our economies and major providers of jobs. These agreements are not without costs or constraints for the insurers, but the industry has chosen to place the interests of its clients and of the economy ahead of other considerations, mindful of the important role credit insurance and inter-company trade will play in the recovery.

Taking the UK as an example, trade credit insurers provide cover for more than £171billion of intercompany transactions, covering 13,000 suppliers and 650,000 buyers. The government has put in place a temporary scheme of £10billion to enable trade credit insurers, including Euler Hermes, to continue supporting businesses at risk due to the impact of coronavirus. This landmark agreement represents an important alliance between the public and private sectors to support trade and prevent the domino effect that payment defaults can create within critical supply chains.

But, as with all of the other government support measures, these schemes will not exist in the long term. It is already time for credit insurers and their clients to plan ahead, and prepare for a new normal in which the level and cost of credit risk will be heightened and where identifying the right counterparts, diversifying and insuring credit risk will be of paramount importance for businesses.

Trade credit insurance plays an understated role in the economy but is critical to its health. In normal circumstances, it tends to go unnoticed because it is doing its job. Government support schemes helped maintain confidence between companies and their customers in the immediate aftermath of the crisis.

However, as government support measures are progressively removed, this crisis will have a lasting impact. Accelerating transformations, leading to an increasing number of company restructurings and, in all likelihood, increasing the level of credit risk. To succeed in the post-crisis environment, bbusinesses have to move fast from resilience to adaptation. They have to adopt bold measures to protect their businesses against future crises (or another wave of this pandemic), minimize risk, and drive future growth. By maintaining trust to trade, with or without government support, credit insurance will have an increasing role to play in this.

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What Does the FinCEN File Leak Tell Us?

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What Does the FinCEN File Leak Tell Us? 3

By Ted Sausen, Subject Matter Expert, NICE Actimize

On September 20, 2020, just four days after the Financial Crimes Enforcement Network (FinCEN) issued a much-anticipated Advance Notice of Proposed Rulemaking, the financial industry was shaken and their stock prices saw significant declines when the markets opened on Monday. So what caused this? Buzzfeed News in cooperation with the International Consortium of Investigative Journalists (ICIJ) released what is now being tagged the FinCEN files. These files and summarized reports describe over 200,000 transactions with a total over $2 trillion USD that has been reported to FinCEN as being suspicious in nature from the time periods 1999 to 2017. Buzzfeed obtained over 2,100 Suspicious Activity Reports (SARs) and over 2,600 confidential documents financial institutions had filed with FinCEN over that span of time.

Similar such leaks have occurred previously, such as the Panama Papers in 2016 where over 11 million documents containing personal financial information on over 200,000 entities that belonged to a Panamanian law firm. This was followed up a year and a half later by the Paradise Papers in 2017. This leak contained even more documents and contained the names of more than 120,000 persons and entities. There are three factors that make the FinCEN Files leak significantly different than those mentioned. First, they are highly confidential documents leaked from a government agency. Secondly, they weren’t leaked from a single source. The leaked documents came from nearly 90 financial institutions facilitating financial transactions in more than 150 countries. Lastly, some high-profile names were released in this leak; however, the focus of this leak centered more around the transactions themselves and the financial institutions involved, not necessarily the names of individuals involved.

FinCEN Files and the Impact

What does this mean for the financial institutions? As mentioned above, many experienced a negative impact to their stocks. The next biggest impact is their reputation. Leaders of the highlighted institutions do not enjoy having potential shortcomings in their operations be exposed, nor do customers of those institutions appreciate seeing the institution managing their funds being published adversely in the media.

Where did the financial institutions go wrong? Based on the information, it is actually hard to say where they went wrong, or even ‘if’ they went wrong. Financial institutions are obligated to monitor transactional activity, both inbound and outbound, for suspicious or unusual behavior, especially those that could appear to be illicit activities related to money laundering. If such behavior is identified, the financial institution is required to complete a Suspicious Activity Report, or a SAR, and file it with FinCEN. The SAR contains all relevant information such as the parties involved, transaction(s), account(s), and details describing why the activity is deemed to be suspicious. In some cases, financial institutions will file a SAR if there is no direct suspicion; however, there also was not a logical explanation found either.

So what deems certain activities to be suspicious and how do financial institutions detect them? Most financial institutions have sophisticated solutions in place that monitor transactions over a period of time, and determine typical behavioral patterns for that client, and that client compared to their peers. If any activity falls disproportionately beyond those norms, the financial institution is notified, and an investigation is conducted. Because of the nature of this detection, incorporating multiple transactions, and comparing it to historical “norms”, it is very difficult to stop a transaction related to money laundering real-time. It is not uncommon for a transaction or series of transactions to occur and later be identified as suspicious, and a SAR is filed after the transaction has been completed.

FinCEN Files: Who’s at Fault?

Going back to my original question, was there any wrong doing? In this case, they were doing exactly what they were required to do. When suspicion was identified, SARs were filed. There are two things that are important to note. Suspicion does not equate to guilt, and individual financial institutions have a very limited view as to the overall flow of funds. They have visibility of where funds are coming from, or where they are going to; however, they don’t have an overall picture of the original source, or the final destination. The area where financial institutions may have fault is if multiple suspicions or probable guilt is found, but they fail to take appropriate action. According to Buzzfeed News, instances of transactions to or from sanctioned parties occurred, and known suspicious activity was allowed to continue after it was discovered.

Moving Forward

How do we do better? First and foremost, FinCEN needs to identify the source of the leak and fix it immediately. This is very sensitive data. Even within a financial institution, this information is only exposed to individuals with a high-level clearance on a need-to-know basis. This leak may result in relationship strains with some of the banks’ customers. Some people already have a fear of being watched or tracked, and releasing publicly that all these reports are being filed from financial institutions to the federal government won’t make that any better – especially if their financial institution was highlighted as one of those filing the most reports. Next, there has been more discussion around real-time AML. Many experts are still working on defining what that truly means, especially when some activities deal with multiple transactions over a period of time; however, there is definitely a place for certain money laundering transactions to be held in real time.

Lastly, the ability to share information between financial institutions more easily will go a long way in fighting financial crime overall. For those of you who are AML professionals, you may be thinking we already have such a mechanism in place with 314b. However, the feedback I have received is that it does not do an adequate job. It’s voluntary and getting responses to requests can be a challenge. Financial institutions need a consortium to effectively communicate with each other, while being able to exchange critical data needed for financial institutions to see the complete picture of financial transactions and all associated activities. That, combined with some type of feedback loop from law enforcement indicating which SARs are “useful” versus which are either “inadequate” or “unnecessary” will allow institutions to focus on those where criminal activity is really occurring.

We will continue to post updates as we learn more.

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