China catastrophe re/insurance demand rising: Munich Re

by Artemis on January 20, 2015

Asia is home to some of the most vulnerable regions on the globe for natural catastrophes, and the lowest levels of insurance penetration, but according to Munich Re the demand for insurance products in China is on the rise.

Munich Re, one of the world’s largest reinsurance firms has been discussing the growth potential in natural catastrophe insurance within the Chinese market; “I would expect we would probably have three to five times the premium that we have written now [in natural catastrophe insurance] over the next three to five years’ time,” noted Munich Re Board Member, Ludger Arnoldussen, in a recent interview with the South China Morning Post.

Historically, insurance penetration in China, as with most of Asia, has been relatively low, a mixture of unaffordability, minimal product offerings, and a lack of product education has for some time seen an area ripe for growth remain largely untouched.

Last year, Artemis covered the launch of China’s first catastrophe insurance pilot, a Government-backed scheme aimed at raising catastrophe insurance penetration throughout the nation, Munich Re also participated in the pilot.

As well as this, the German-based reinsurer is also investing in the development of a comprehensive modelling system for China, Arnoldussen commented on this; “Many heavily built-up areas and areas of big industrial investments are highly exposed to flood typhoon and earthquake. There is a lot of value that would make it worthwhile to invest in it [the modelling system].”

The article concludes that Munich Re sees potential for further reinsurance growth in China, citing that some of its major Chinese clients achieved growth of up to 30% in 2013.

In the past, the Chinese economy has greatly suffered following a major natural disaster event, as low insurance penetration means the gap between economic and insured losses remains broad, and the Government often foots the recovery bill.

Greater premium penetration would help to narrow this gap, which in turn would see local and the wider Chinese economy recover in a more efficient way, while alleviating some of the financial pressures from the Government.

But it’s not just general insurance that can help to bridge the gap between economic and insured losses, as noted by Artemis some time ago; catastrophe bonds are an excellent risk management alternative.

So as the Chinese population becomes more aware of the benefits insurance protection offers against the world’s perils, and the market develops further, the demand for catastrophe reinsurance, catastrophe bonds and insurance-linked securities (ILS) could also increase.

In a challenging market, reinsurance, cat bond and ILS players are increasingly looking to emerging markets like China, for new opportunities.

Here at Artemis we recently discussed that investing in emerging and developing market opportunities is a viable use of the abundance of reinsurance capital, which is currently struggling to be put to work within the existing catastrophe reinsurance and ILS markets.

A region like China that boasts many high value buildings coupled with high exposure to natural disasters and low penetration levels, would hugely benefit from increased catastrophe reinsurance, ILS and the use of catastrophe bonds or other risk transfer structures.

Lastly, and again as noted by Artemis in a previous article on the Chinese re/insurance market, the use of parametric trigger insurance, reinsurance and cat bonds would perhaps be more suited to a market like China, which is still developing fast.

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