'General risk segment to put up better show than life this year'

Q&A: Clarence Wong, Chief Economist, Swiss Re

Global reinsurer Swiss Re does not see any competition from regional players, such as General Insurance Corporation of India (GIC), which have been expanding their footprints in the recent past. In an interview with Sidhartha and Shilpy Sinha, Swiss Re’s Chief Economist Clarence Wong says that the insurance industry will grow keeping pace with the economic growth in Asia. Excerpts from the interview:

What is your expectation from the reinsurance industry in the current year since their ability to insure risk has come down and major players such as Swiss Re and AIG have been bailed out last year?
There has been a total reduction in the capacity of the reinsurance industry because of the economic crisis. Most large global companies have been affected by this. We are expecting this problem will be solved by higher prices. Prices may not have gone up uniformly across all markets and all business lines in the last renewal, but we are seeing firming up of prices in some liability classes.

We are expecting the prices to continue going up in the next renewal. There has been some addition to the total capacity. For example, there are new formation of insurance companies in Bermuda. The new capacity that has been brought into the market has not been too selective and has been able to use the capacity of the global reinsurance market. There is still a lack reduction in capacity not only in the reinsurance market but also in the primary insurance sector.

Does it open the doors for companies in emerging markets?
Regional reinsurance companies -- GIC, Korean Re, China Re, Asia Re -- have ambitious plans to expand in overseas markets. Sometimes, the constraint is not capacity but other factors such as capability and whether they have the required skills to manage risks in a particular market.

What is your assessment of the market in terms of growth for the next year? What would be the contribution from American and European markets given the fact that their economies are contracting?
We expect Asia to be the first to recover from the global economic crisis. Even in this difficult economic situation, small and medium enterprises (SMEs) in the continent have reported growth.

In China, SMEs are pouring in money. This is an early indicator of an economic recovery in Asia. There is a 100 per cent correlation between economic growth and insurance growth. In Asia, excluding Japan, we expect to grow by 8-10 per cent in the near term. In some markets, such as India and China, we expect a double-digit growth.

During this year, the growth in the general insurance industry will be better compared to life as people are not buying unit-linked products any more. In other markets, they are not buying investment-linked and universal life policies. People have become more conservative and they are buying traditional protection products such as endowment and term life.

In the near term, we expect the general insurance industry to do better, but once the economy recovers, we would see the life industry growing at a faster pace. If we look at the last Asian crisis, the insurance business contracted significantly but when the economy recovered, it witnessed a huge growth.

In general insurance, the pattern is smoother because of the non-discretionary spending such as motor and health insurance.

Will reinsurance rates for the Indian insurance industry harden on the higher discounts that are being offered?
Reinsurance rates are not necessarily correlated with what insurance companies are charging from the policyholders. It really depends upon the insurance structure, whether it is a proportionate structure or an excess of loss structure.

But the key thing is that with detariffing, insurance companies can try to price risks accurately. Once they start pricing the risks properly, they will have to walk away from some risks that are not economically viable.

Is India a better market for you to do business in?
Certainly. We are also hoping that India will liberalise the investment regulation and increase the cap from the present 26 per cent to 49 per cent.

Will that open up the possibility of Swiss Re looking at other sorts of presence?
We are interested in upgrading our services company in India to a branch. We already have branches in China, Malaysia, Japan and Singapore.