Understanding demand for specialty lines in Asia: the road ahead

The Asian insurance industry has shown strong resilience, despite the economic crisis brought about by the COVID-19 pandemic since the start of 2020. According to a recent Bank of Singapore article, China‘s GDP is expected to grow by 8.7% in 2021 whilst key Asian countries such as Singapore, South Korea, and Taiwan are expected to grow by an average 5%.

Asian countries, being the first to experience the pandemic and implement containment measures, are ahead of the curve in economic recovery. Governments rolled out unprecedented financial and stimulus packages to help the people and businesses weather the impact of the severe lockdown and border closure measures. Recovery has been uneven but as these Asian economies start to emerge from the effects of COVID-19 in 2021, the robust growth trend in GDP is set to accelerate in 2022 and beyond. This economic growth will further fuel growth in both life and non-life insurance markets and in particular for specialty lines across Asia.

A recent report by Allied Market Research estimated the global specialty insurance market size to be valued at USD73.8B in 2020 and it is projected to reach USD178.5B by 2030, growing at a Compound Annual Growth Rate (CAGR) of 9.3% from 2021 to 2030. Statistics collated by Lloyd’s Asia also indicated that specialty insurance in Asia grew at a CAGR in excess of 10% over the last 10 years.

As Asian emerging economies and China continue to invest in infrastructure and modernise their economies, coupled with increased awareness of the need for insurance protection, the demand for specialty insurance will surely grow in tandem. In addition, the changing nature of risks arising from global warming, cyber risk, and changing consumer behaviour will challenge insurers to recalibrate and evaluate new ways of assessing and measuring risk premiums, innovate, and offer new risk solutions. It is anticipated that the increased awareness of risks and rates hardening seen in non-life specialty insurance will push premiums volumes by at least 10% higher than pre-COVID-19 levels. 

COVID-19 and the specialty insurance market
When we look at the impact of the pandemic on the growing specialty insurance market, we can see some interesting trends. One key impact is the swift and significant shift to digital economy, with employees working from home, the increase in food deliveries, and consumers embracing online shopping. As working from home becomes a new normal and with distribution channels and consumer markets pivoting their offerings online due to changing consumer behaviour, we see increased complexity in cyber risks, rapidly changing cyber security threats and online scams. Whilst this presents huge opportunities for specialty insurers in offering cyber insurance protection, the increase in incidences of cyber ransomware attacks has prompted insurers to recalibrate their exposure assumptions, while working closely with clients to understand, review and enhance their data protection and cyber security practices to mitigate risks. 

Supply and distribution chain models, which relied on low-cost manufacturing hubs in China and Just-in-Time (JIT) models, were significantly impacted when countries closed their borders due to the pandemic. In order to manage the lasting impact and bolster for future business disruption, the manufacturing industry will need to review their distribution and supply chain models to increase their geographic spread of production facilities and warehouses, which will allow them to move away from relying on JIT. As a result, we are seeing manufacturers building new plants in other Asian countries outside of China and this will translate into demand for construction and project cargo insurance. Likewise, more goods stored at warehouses and terminals will also require freight forwarders and marine liability insurance protection.

The impact of our changing planet
The other significant change in the risk landscape in our world today is climate change. Climate change has resulted in higher frequency of flooding, severe weather conditions and other natural disasters. Climate change has driven an increased focus on ESG by large corporations to decarbonise, use clean energy and contribute to social good, as well as seeing governments enhancing their efforts in promoting sustainability and renewable energy. As a result, many players in the traditional energy industry are now diversifying into renewable energy.

We are also seeing an acceleration in energy industry convergence e.g., Mitsubishi is partnering with German utility company RWE to invest in a floating wind power project. Tesla, well known for its electric cars, is also highly invested in battery technology and solar power. The International Renewable Energy Agency (IRENA) projected that Asia will be the world’s top producer of solar power by 2050; with more than 60% of the world’s photovoltaic solar capacity installed, generating 4,837 GW of energy. In recent years, many countries in Asia have also started investing more in offshore wind energy due to its high economic efficiency. China, Taiwan, Vietnam, Japan and South Korea have a strong pipeline of offshore wind farm projects, with an estimated combined investment value exceeding USD150B over the next five years. 

As insurers in the renewable energy space, we recognise that each of these Asian territories are at different stages of development and each has its own challenges and risks. When underwriting and assessing the risks of each project, our thorough comprehension of the different regulatory environment, government policies, infrastructure, and geopolitical landscape, as well as the exposure to natural catastrophes in each of these territories is imperative

China, for example, has rolled out various incentives such as favourable loans and subsidies for construction of offshore wind farms. However, the government is also pushing innovation and reducing tariffs as it moves towards grid parity. China is also at risk of natural catastrophes, in particular, typhoons. These issues need to be well understood and considered in determining the impact on the construction and operational projects. 

As pointed out earlier, climate change has resulted in increasing natural catastrophe events in Asia. While natural catastrophes are not emerging risks, their consequences are becoming more multifaceted as a result of urbanisation and the interconnectivity of today’s globalised economy. This phenomenon is particularly pronounced in the APAC region, which boasts some of the highest catastrophe zones and is further complicated by the ongoing urbanisation trend. 

Insurers are now increasingly utilising big data and deploying parametric solutions to measure and project the frequency and severity of catastrophic events. The challenge for the specialty insurance industry is to obtain sufficient relevant, and reliable data to get clarity and insight on new and emerging risks. Combining this data with past experience, insurers are now equipped with the ability to be forward looking in identifying emerging risks and providing relevant solutions.

Climate change, the economic growth in Asia and China, modernisation and urbanisation of cities, as well as the swift adoption of a digital economy and technological innovation; are all evolutions that will continue to drive a dynamic demand for specialty insurance in Asia and China over the coming decades. For those within the specialty insurance industry, the message is clear: stay ahead of the curve and innovate your offerings to help clients thrive in the new “post-COVID” world – in whatever form that may take.