Asian countries continue to develop catastrophe re/insurance markets

by Artemis on November 28, 2014

Countries across Asia continue to develop, or pursue the development of, functioning catastrophe insurance and reinsurance markets, which is a positive sign for global reinsurers and the insurance-linked securities (ILS) market.

Countries across Asia are some of the most natural disaster exposed in the world, but at the same time have very low insurance penetration, meaning that development of catastrophe insurance and reinsurance markets has been slow. But there are now signs that things are accelerating in the region, helped by the increasing interest of the global reinsurance players and ILS and collateralized markets.

With catastrophe reinsurance rates at or near pricing lows across key markets such as the United States, Europe, Japan, Canada and Australia, the established reinsurers and the ILS market are all looking at new opportunities that are emerging in regions like Asia.

While initiatives to cultivate catastrophe insurance demand, catastrophe risk pooling and catastrophe reinsurance markets in Asia are often slow to develop and are often very small, compared to established markets, involvement is seen as important in order to demonstrate interest and willingness to back these initiatives with reinsurance and risk transfer capacity.

There is a constant flow of news coming from some Asia countries, as governments seek to provide catastrophe insurance to residents and businesses in order to remove themselves and their taxpayers from being the source of risk capital of last-resort. Countries like China, India, the Philippines, Indonesia and others across Asia and Asia-Pacific, are almost all engaged in some kind of catastrophe risk and insurance initiative right now.

One of the initiatives that is beginning to have an impact on countries desire to stimulate catastrophe insurance markets is the continued growth of microinsurance. As many of these schemes begin to reach greater levels of scale, thereby helping to increase insurance penetration among even the poorest of communities, education about insurance is growing making now a good time to address national issues regarding catastrophe insurance.

Indonesia is a great example. A survey last year found that only 12 out of every 100 Indonesians use insurance products and services, but there are now around 6 million people in microinsurance schemes in the country, many of which would not have had any access to insurance even five years ago.

While these are small policies and not commanding large premiums, often life related, or specific to agriculture or property fire, the result is an increasingly educated insurance buying population. Governments are aware of this and the greater understanding and appreciation of insurance products helps with initiatives such as pushing forward national catastrophe insurance programs.

China also has a growing microinsurance population in rural areas, but with a growing middle-class also has a growing general insurance buying public. Cultural issues with indemnity protection aside, which is often viewed like a loan by people in China and other Asian countries, again education of the benefits of insurance is growing here too.

The Chinese government is actively piloting a number of catastrophe insurance programs in provinces of China, working alongside global insurers and reinsurers like Swiss Re. These programs are often parametric in nature, seen as contingent sources of catastrophe risk financing, which perhaps fits the cultural needs of a country which does not have a deep and developed indemnity insurance marketplace.

The China example demonstrates the potentially huge opportunities for traditional reinsurers as well as ILS capital which will be seen in years to come. However, developing catastrophe insurance and reinsurance systems across a country as large, diverse and affected by natural disasters and extreme weather events as China is fraught with difficulty and challenges.

As a result the Chinese government and State Council are pursuing a number of different models all at once and it will be interesting to see which succeed and how the pull together a coherent catastrophe and weather insurance and reinsurance system for the country. In China, the opportunity for ILS capital and third-party investors is perhaps bigger than anywhere else, as the government clearly seeks to establish its risk transfer needs in the most efficient way possible and a clear liking for parametric triggers is seen, which could lead to catastrophe bonds and other instruments becoming feasible much more quickly than indemnity covers.

Development of functioning catastrophe insurance and reinsurance markets is also seen as crucial in southeast Asia. Recently at the ASEAN Insurance Summit, Deputy Chairman of the Monetary Authority of Singapore Mr. Lim, said that catastrophe insurance and reinsurance for the region needed to be prioritised.

Catastrophe insurance is required to strengthen the southeast Asia regions resilience to the increasing frequency and severity of natural disasters and extreme weather, said Lim. Reinsurance is also required as the diversification of risks across the region along with better use of the available capital can help to reduce premiums and make the system more affordable, he said.

India is another of the huge markets that the international reinsurance and insurance-linked securities (ILS) players would very much like to participate in when it is ready. The latest news to come out of India on catastrophe insurance, just in the last few days, was that national reinsurer GIC Re has proposed to launch a catastrophe insurance fund which it would manage.

Chairman of GIC Re AK Roy said that the reinsurer would look to set up some type of catastrophe insurance pool or fund, in order to improve India’s resilience to natural disasters. As a result the insurance industry would be able to sell standalone catastrophe insurance products, which to date have been bundled with fire and property insurance covers.

GIC Re has been managing a terrorism insurance pool in India and would expect to manage a catastrophe insurance pool in the same way. It suggests that a standard cover amount would come with a minimum premium level and would be underwritten by general insurers who would then transfer the risk to the pool.

AK Roy said that global reinsurers such as Swiss Re, Munich Re and SCOR have all expressed an interest in participating in the proposed catastrophe insurance pool.

Separately in India, IRDA the insurance industry regulator, has been talking with general insurers about how to create a standardised catastrophe insurance product and has been looking at how a separate product for catastrophe insurance could be established.

The successful creation of a catastrophe insurance pool would be a good first step for India, allowing for a catastrophe insurance product to be sold while the risk can be aggregated and then transferred to the global reinsurance market, or even to ILS capital in the future. This is a model that other Asian countries are expected to follow.

Finally, as we reported recently here, the World Bank continues to progress efforts towards greater use of its catastrophe bond issuance facilities. Countries such as the Philippines have been in talks with the World Bank in the past and market rumours suggest that progress is being made.

Other initiatives such as the Pacific Catastrophe Risk Insurance Pilot are also growing understanding of catastrophe risk insurance and reinsurance in new regions of the world, which ultimately will result in greater catastrophe premiums becoming available to the private insurance and reinsurance markets.

Developments in Asia and Asia-Pacific continue apace, as countries grapple with how best to provide post-disaster risk financing. From traditional insurance, to microinsurance, to risk pooling, to parametric triggers, all avenues are being explored and promise accelerated development of catastrophe insurance and reinsurance markets in these regions.

Data on catastrophe events and losses as well as the availability of robust and trusted risk models remain issues that hold back the growth of Asian catastrophe insurance and reinsurance markets. However advancements in technology promise to help to overcome some of these issues in years to come or, at the least, to help insurers and reinsurers become more comfortable with putting capacity down in regions with high natural catastrophe risk.

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