Reinsurance & ILS focus to shift alongside insured windstorm exposure

by Artemis on August 20, 2015

Cities in the Asia-Pacific region will become the dominant source of global insured windstorm exposure by the year 2070, as rising asset values, growing insurance and reinsurance penetration and rising populations in tropical storm hot spots change the risk landscape.

Windstorm activity accounts for roughly 40% of global natural hazard losses by number of claims and 26% of the total amount by value, with U.S. losses making up roughly 49% of international windstorm claims over the last five years.

However, several influential economical and social factors and trends signal a change in the risk landscape, bringing the Asia-Pacific region to the forefront of windstorm-related exposures.

Given the central position that U.S. wind insured exposure has played in the development of the reinsurance, catastrophe bond and insurance-linked securities (ILS) market, as insured exposures rise in Asia we can expect to see these risk transfer markets shift their focus.

A report by Allianz Global Corporate & Specialty (AGCS) explains that ten years ago the top ten global cities exposed to windstorms, coastal flooding due to storm surge and damages from high winds were all in the U.S., Japan or the Netherlands.

But research by AGCS predicts that by the year 2070 the Asia-Pacific region will dominate the top ten cities exposed to windstorm-related losses, accounting for 80% of the top ten most exposed cities, worldwide.

Top 10 cities ranked by assets exposed to coastal flooding in the 2070's

Top 10 cities ranked by assets exposed to coastal flooding in the 2070's, demonstrating the shift in insured exposures to Asia

There are several reasons for the significant shift in proportion of windstorm-related exposure from the U.S. to the Asia-Pacific over the next 55 years, notes AGCS, with population growth, socio-economic growth and urbanisation being “the most important drivers of the overall increase in exposure.”

Typically, developing, or emerging economies experience the most intense rises in exposures to natural hazards due to rapid migration and development across coastal regions. These areas are susceptible to flooding from storm surge and windstorms in any city, but more notably in parts of Asia where catastrophe events are more common.

An example of just how much of an impact large-scale migration to coastal areas can have on potential economic and insured losses is provided by AGCS in the report.

“A study by the Texas A&M and Yale Universities found that by 2030 the amount of developed low-elevation coastal land in China will have increased by over 60,000 sqkm since 2000,” claims the report.

Transfer this level of rapid migration to coastal areas of Asia that are home to some of the world’s poorest and most vulnerable people, and it’s easy to see just how devastating a significant windstorm, or storm surge event could be.

“The situation is exacerbated by the fact that growth of exposures is far outpacing take-up of insurance coverage, resulting in a growing gap in natural catastrophe, including windstorm, preparedness and response,” says the report.

It’s a very important and valid point, as one of the planet’s fastest developing regions is home to some of the lowest insurance and reinsurance penetration levels globally, signalling an opportunity for insurers, reinsurers, insurance-linked securities (ILS), catastrophe bond players and so on to innovate and provide needed solutions to the world’s most in need people.

But this certainly isn’t anything new, Asia’s growing protection gap has been documented and discussed by numerous industry experts and analysts before, Artemis included.

But the fact that the growth of windstorm exposure in Asia-Pacific will rapidly outpace and outgrow the exposure in the U.S. means insurers, reinsurers and ILS players are going to have to provide new, affordable and efficient solutions capable of protecting some of the world’s poorest people against the perils of windstorms, flooding and storm surge, if they want to access the benefits of protecting the risk.

Should the AGCS study prove to be true, the property catastrophe reinsurance landscape is going to change dramatically in future years, as re/insurers, cat bond sponsors and ILS players’ exposures follow the risk away from the U.S. and increasingly into the Asia-Pacific.

The shift in exposure will likely trigger a shift in the catastrophe bond market as well. With the outstanding cat bond market currently around 60% exposed to U.S. named storm and hurricane risks, while Asian typhoon makes up just 0.9% (Japan only), those numbers will change dramatically in years to come.

The additional diversification opportunities that this exposure shift could bring to catastrophe bond and ILS investors would be welcomed and as a result we could see the mix of perils looking dramatically difference in both traditional and alternative reinsurance circles over time.

Of course the whole landscape will look dramatically different in years to come anyway, as the market continues to adapt to new forms of risk transfer and sources of capacity.

The study reports that a huge $35,000 billion of global asset exposure will exist by the year 2070, with a larger portion of this moving to Asia as the middle class continues to rise, asset values increase and coastal migration and population growth intensifies.

The extent of the exposure to windstorm, typhoon and storm surge in Asia in 50 years time could see the region becoming the driver of the global property catastrophe reinsurance market, as we look at the Florida market today.

The role that first property catastrophe reinsurance and later Florida wind cat bonds and collateralized reinsurance have played in helping insurers in the state to become better protected, ultimately shifting the risk from taxpayers and government into the private market, could be repeated across Asia as the exposure shifts east.

Catastrophe bonds can play a vital role in providing protection to cover these exposures as they grow, with parametric triggers a suitable way to protect major cities or coastal urban areas against the threat of storms and surges.

If the market can be innovative enough to get initiatives such as Re:bound (cat bonds for resilient infrastructure development) off the ground, such efforts could play a key role in ensuring that as the exposure shifts eastwards towards Asia, the risks is managed and financed correctly.

The sums involved are huge and underline the opportunity and challenges that lay ahead for the insurance, reinsurance, ILS and cat bond markets, to bridge Asia’s burgeoning protection gap, so that when disaster strikes, at the very least people’s livelihoods can be restored through the financial support risk transfer solutions provide.

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