Emerging market and ‘cold spot’ catastrophe losses set to grow: Guy Carpenter

One of the big talking points over the last two years in the reinsurance market has been, so called, ‘cold spot’ catastrophe losses and growing re/insurance exposures in emerging markets of the world. At this weeks Monte Carlo Rendez-vous this topic has received a lot of attention as re/insurers struggle to understand their own exposures in potential cold spot zones, and also how best to take advantage of the growing opportunity in emerging markets.

Reinsurance broker Guy Carpenter has published a new report titled ‘Cold Spots Heating Up: The Impact of Insured Catastrophe Losses in New Growth Markets‘ which looks at catastrophe risks in developing economies and emerging markets, and suggests that the growth opportunities that these regions present to re/insurers pose a unique set of challenges as well. The recent clusters of natural catastrophe events around the globe have revealed increasing risks, in what were once thought to be non-peak risk zones, at a time of growing insurance penetration. The result of these catastrophes in emerging regions of the world has been ‘cold spot’ catastrophe losses which have proven these areas are much riskier and can suffer much more expensive catastrophes than was commonly thought.

The growing concentration of exposures in the developing and emerging economies of the world, and the increasing insurance penetration, means that catastrophe event zones which were not of concern to re/insurers should now be treated with caution. As re/insurers target the business opportunities in these regions, they need to be particularly aware of the catastrophe exposures and risks a region is exposed to. Guy Carpenter urges discipline when underwriting in these emerging economies.

David Flandro, Managing Director and Global Head of Business Intelligence at Guy Carpenter, said; “As rapid economic growth continues to center around emerging markets and insurance penetration rises in these economies, (re)insurers will need to be prepared to handle the expensive cold spot losses that are occurring in non-peak zones. As (re)insurers look for opportunities on the frontiers of developing markets, we see an immediate need to plan and manage risk exposures in order to ensure profitable growth in these regions.”

The report looks at issues and developments within the re/insurance market related to natural catastrophes and emerging markets which are experiencing rapid economic growth.

There is a change in perceptions of risk in these emerging economies since the clustering of catastrophe losses in 2010 and 2011. This has led re/insurers to re-assess certain portfolios and accumulation of risks in non-peak zones. The losses attributable to catastrophes in non-peak zones have been rising rapidly;  from 2009 to 2011 natural catastrophes in Asia, Australia and New Zealand and Latin America accounted for 60% of total insured losses, compared to just 11% between 2002 and 2008. There is an increasing acknowledgement that these regions of the world are exposed to major catastrophe risks and re/insurers need to ensure they have a better understanding of the risks as they target these economies when looking for growth opportunities.

Emerging economies place unique demands and pressures on the re/insurance markets. There is increasing demand for insurance coverage, as a result penetration of insurance grows rapidly and it is up to re/insurers to ensure they have sufficient risk transfer and reinsurance coverage in place, and for the right risks. Carriers need to place a special focus on ensuring their book of business is diversified and they do not become over exposed in any particular region or to any particular risk. Guy Carpenter said; “A lack of quality data and modeling tools in emerging markets highlights the risk of adding inadequately priced business to a company’s portfolio when pursuing aggressive geographic diversification strategies.”

Catastrophe model limitations are a concern, although the available models have improved there are still gaps in coverage and understanding. It is also hard for catastrophe models to keep up with the actual exposures at risk when insurance penetration can be increasing so rapidly. Guy Carpenter said; “(Re)insurers are currently struggling to monitor and measure exposures in non-modeled countries and are calling for improved model coverage for these territories. Flooding in particular is a major concern, as flood risk is prevalent and increasing in almost every emerging market and modeling solutions for this peril are virtually non-existent.”

Reinsurance protection is key to enabling insurance penetration to continue to increase rapidly. However due to the many unknowns in these emerging regions of the world, both in terms of exposures and the frequency and severity of catastrophe risks, many insurers are revisiting or seeking out aggregate protection as a good way to combat this.

The report notes that catastrophe insurance pools are likely to spring up in emerging economies as one way to deal with growing insured property value-at-risk. We’ve already seen evidence of this in Thailand where an insurance pool was formed after the flooding and there are efforts underway to establish others in southeast Asia and the Pacific islands.

Guy Carpenter also notes that demand for non-traditional reinsurance cover is likely to increase in developing countries as insurers grow their presence in these markets. Modelling solutions need to be substantially improved to support the full range of non-traditional reinsurance products. If that happens Guy Carpenter says that instruments such as catastrophe bonds and industry loss warranties will offer viable alternatives to traditional reinsurance protection. Guy Carpenter said; “Solutions such as these are likely to play an important role in protecting insurers from large catastrophe payouts as they pursue growth opportunities in new markets.”

You can access the full report in PDF format here.