Alternative capital boosts Asia Pacific catastrophe reinsurance capacity

As reinsurance industry executives meet in Singapore this week for the 12th International Reinsurance Conference, a report published by reinsurance broker Guy Carpenter shows that both supply and demand for catastrophe reinsurance in the Asia Pacific region are at a high.

Total catastrophe reinsurance limits for Asia Pacific in 2013 have increased for the tenth year in succession, bringing total Asia Pacific catastrophe limits at risk to a record high. But while the market sees strong growth year after year the amount of catastrophe reinsurance in place across the region is still failing to keep with growth of regional GDP.

With demand growing consistently for catastrophe reinsurance in Asia Pacific, 2013 also saw record levels of capital available to be put into reinsurance business in the region. 2013 saw excess capacity returning to the market, with Asia Pacific reinsurance buyers able to secure greater value at renewals, although recent losses remain front of mind meaning that price reductions have been limited.

According to Guy Carpenters data, total catastrophe reinsurance limits purchased in Asia Pacific have grown by 60% over the last ten years. While this growth is impressive the data shows that GDP growth far outstrips the uptake of reinsurance limits in the region, which naturally leaves economic losses making up the bulk of any catastrophe event claims.

Asia Pacific reinsurance limit index versus regional GDP growth - Source: Guy Carpenter

Guy Carpenter says that a challenge for the reinsurance market going forwards will be how it can maintain the strong growth in limit purchased, while at the same time seeking to close the gap between GDP growth and reinsurance limit growth.

This challenge has also attracted additional capacity to the Asia Pacific regions catastrophe reinsurance market, which has lifted traditional reinsurance sector capital for the region to a record high. Guy Carpenter says that alternative reinsurance capital is also playing a role in lifting capacity here, with alternative and ILS capital seeking out peak catastrophe zone opportunities in Australia and Japan.

Guy Carpenter predicts that with growing capacity from both traditional and alternative reinsurance capital focused on Asia Pacific, the time is right for the reinsurance sector to respond with innovative and customised solutions to take advantage of the growth opportunity in the region.

James Nash, CEO of the Asia Pacific Region at Guy Carpenter & Company, commented; “As evidenced by Guy Carpenter’s Asia Pacific Limit and Rate On Line Index, our region has demonstrated strong, solid growth in catastrophe reinsurance over the past ten years. Growth in total catastrophe limit purchased, however, has failed to keep pace with the stellar economic performance of the Asia Pacific region.  We remain committed, therefore, to helping our clients achieve profitable and sustainable growth with customized products and solutions that stimulate (re)insurance buying.”

The Asia Pacific opportunity is receiving a lot of focus in the insurance-linked securities and alternative reinsurance capital market at the moment, as capital and investment managers seek new opportunities to deploy capital, which will in turn allow them to accept more of the investor funds which sit on the sideline of the sector at the moment.

Asia Pacific, with its large gap between economic and insured losses, its continued urbanisation and growth of urban populations, its strong GDP growth and its high exposure to many of the world’s peak catastrophe perils, makes it a prime attraction for the ILS space and alternative capital.

How to tap into this opportunity in the most enduring and long-term way is the challenge that the sector now faces. Asia Pacific also provides a unique opportunity for primary insurers, traditional reinsurers and alternative or ILS capital to work together to build new markets (top down or bottom up) providing new capacity at all levels of the risk transfer market and supporting efforts of the others.

That is how growth and the opening up of the Asia Pacific market will eventually be cracked. Not through the efforts of reinsurers alone, or insurers, or the ILS market, but a concerted and realistic approach to better understand and model catastrophe risks in the Asia Pacific region, with the aim to grow insurance uptake, with reinsurance and peak risk transfer from ILS and alternative capital in support.