The regulatory landscape in the Asia-Pacific region is rapidly evolving, influencing insurers’ risk management and capital adequacy. Australia and Malaysia are two examples of markets where recent regulatory developments are likely to influence the use of reinsurance, in particular.
Regulators in both nations are proposing adjustments to their capital frameworks to tackle evolving challenges, such as increased catastrophe risks and the need for robust financial resilience.
Australia’s Reinsurance Reforms
The Australian Prudential Regulation Authority (APRA) has proposed changes to reinsurance-related capital requirements to improve access to reinsurance protection. APRA’s reforms include mandating all-perils reinsurance coverage, reducing reinstatement requirements and removing the need to hold reinstatement premiums as part of the insurance concentration risk charge (ICRC).
These initiatives are designed to encourage the use of alternative reinsurance arrangements, such as catastrophe bonds and insurance-linked securities (ILS). Take-up for such alternative reinsurance arrangements has so far been limited in Australia, despite a burgeoning global market. This may partly reflect the current regulations around reinstatement requirements for catastrophe reinsurance. Alternative reinsurance structures typically do not have such reinstatements, so APRA’s proposed lowering of reinstatement requirements could be favorable for this part of the sector.
Notably, QBE Insurance Group Ltd. issued a catastrophe bond in January 2025 that highlighted the growing interest in alternative reinsurance solutions amid rising catastrophe risks. The issuance – its first under the Bridge Street catastrophe bond program – provided QBE with US$250 million of collateralized reinsurance protection for named storm and earthquake covered events occurring in the U.S. This move supports APRA’s proposed reforms, which encourage the use of catastrophe bonds and ILS.
APRA is consulting with the industry on the proposed changes, with any new standards unlikely to come into effect until June 2026.
Extreme Weather Drives Up Reinsurance Costs
Rising extreme weather events have significantly driven up catastrophe reinsurance costs for ceding companies in recent years. The increased frequency and severity of these events have contributed to higher overall reinsurance expenses, increased retentions and eroded the affordability of property insurance premiums. Higher property insurance premiums expose parts of Australia to a wider insurance protection gap – which is the difference between total economic losses and the amount covered by private insurance.
Australia’s Suncorp Group Ltd. and Insurance Australia Group Ltd. (IAG) have both continually raised their natural hazard allowances in recent years. Insurers typically set such allowances by combining their view of risk through modeled catastrophe losses with reinsurance programs. Lately, these insurers have placed more weight on recent events to reflect the changing weather patterns.
Aggregate reinsurance covers, which help reduce earnings volatility, have become more costly while their terms have also tightened. Such covers no longer feature in IAG’s and Suncorp’s reinsurance programs, despite being a key part for many years. IAG began a new five-year natural perils reinsurance agreement in July 2024 with Berkshire Hathaway Inc.’s subsidiary, National Indemnity Co. This long-term agreement aims to provide greater certainty over natural perils cost in the face of more frequent and severe extreme weather events.
Regulatory Influences on Reinsurance Purchasing
APRA’s proposals may have a limited impact if internal risk appetites and external factors such as rating agency capital considerations continue to drive reinsurance decisions. Even so, more reinsurance options could help insurers manage their net exposure without significantly increasing probable maximum loss values. The removal of reinstatement premiums from the ICRC could also moderately benefit insurers’ regulatory capital positions.
APRA currently requires insurers to hold capital against a one-in-200-year loss, on a whole portfolio basis, with reinsurance protection up to this loss receiving capital credit. In New Zealand, a market dominated by subsidiaries of Australian insurers, reinsurance purchasing is driven by the Reserve Bank of New Zealand’s requirement to hold capital against a one-in-1,000-year earthquake event, a regulation introduced following the 2010-2011 Canterbury earthquakes.
Providing insurers with greater scope to manage their net exposure without greatly increasing net retentions and probable maximum loss values should support their earnings and capital profiles. This approach will help them maintain net catastrophe exposure within manageable levels.
Malaysia’s Risk-Based Capital Proposals
Malaysia is refining its regulatory landscape with the introduction of the Risk-Based Capital 2 (RBC2) framework, aimed at strengthening the financial resilience of insurers and takaful operators. This framework significantly influences reinsurance, a crucial component in risk management and capital adequacy strategies. (Editor’s note: Takaful and retakaful operators are Shariah-compliant alternatives to traditional insurance and reinsurance, respectively.)
Reinsurance remains vital for Malaysian insurers, allowing risk transfer to reinsurers or retakaful operators, thus mitigating exposure to large or catastrophic losses. This stabilizes financial positions and reduces capital requirements against potential claims.
RBC2 introduces specific charge requirements for catastrophe risks, mandating calculations for perils such as floods, earthquakes and windstorms. Reinsurance plays a crucial role here, as recoveries are deducted from gross losses to calculate net losses, emphasizing its importance in catastrophe risk mitigation.
The RBC2 framework is set to take effect on Jan. 1, 2027, with transitional arrangements potentially starting as early as 2026, depending on the outcomes of the second quantitative impact study.
Industry Concerns
The Insurance Europe Reinsurance Advisory Board has expressed concerns about certain provisions in Malaysia’s RBC2 framework, particularly those that may disadvantage cross-border reinsurers not regulated domestically. The advisory board argues that credit for reinsurance should consider the reinsurer’s financial strength and the robustness of its supervisory framework, rather than geographic location. The board highlights the importance of international reinsurance capacity for risk diversification and cautions against potential adverse effects on the solvency ratios of the Malaysian insurance industry as well as potential pressure on affordability and availability of coverage in flood prone areas of the country.
Some markets allow insurers to receive capital credit for reinsurance without requiring the reinsurer to be locally registered, provided the reinsurer meets specific financial strength criteria. For instance, they might be required to hold collateral or offer exemptions for reinsurers from countries considered to have equivalent jurisdictions under international agreements.
Limited Retakaful Capacity
Fitch believes recent guidance from Malaysia’s regulator, Bank Negara Malaysia, should help takaful operators navigate challenges posed from the reinsurance requirements under the new capital framework amid limited capacity in the country’s retakaful sector. The central bank issued a policy document on hajah (need) and darurah (dire necessity) for Islamic financial institutions, including takaful operators. Effective from January 2025, the policy clarifies parameters for takaful operators to use conventional reinsurance on the basis of difficulty, such as when retakaful capacity or expertise is insufficient, or when risks could undermine takaful fund stability.
Strategic Adjustments and Future Directions
Australia and Malaysia are experiencing adjustments in reinsurance practices due to regulatory changes. APRA’s focus on all-perils coverage and alternative arrangements reflects a trend towards comprehensive risk management, while Malaysia’s RBC2 framework underscores reinsurance’s strategic importance in capital adequacy and risk mitigation.
As insurers adapt to these changes, industry dialogue will help refine frameworks and ensure market resilience. By aligning with global standards and incorporating diverse reinsurance options, both nations aim to enhance the capacity of their insurance sectors to withstand future challenges. Regulatory developments in Australia and Malaysia are shaping reinsurance strategies, underscoring the need for comprehensive risk management and capital efficiency. These efforts will support reducing the insurance protection gap, a strategic goal of regulators.
Topics
Legislation
Reinsurance
Australia