Vast capacity for Asia reinsurance market to grow: Fitch

Asia’s reinsurance markets have the potential and scope for strong growth as risk-awareness and demand for reinsurance coverage spikes in the region, coupled with a significant protection gap and the region’s high exposure to losses from natural catastrophes, according to Fitch Ratings.

Asia has fast become one of the most rapidly developing economies in the world, with a rising middle class and burgeoning population driving intense urbanisation and a rise in asset values.

However, Asia is also home to some of the lowest insurance and reinsurance penetration levels globally ensuring that when catastrophe strikes, which it often does and is predicted to occur increasingly in coming years, those impacted by the event are at risk of losing their livelihoods and the growth of its economy can be halted, or drastically taken back.

After which local, and the wider Asian economy can take a significant time to recover and possibly struggle to sufficiently recover before being confronted by the next catastrophe event.

As a result of this insurance and reinsurance ratings agency, Fitch “believes there is vast capacity for the reinsurance market in Asia to grow further.”

“Reinsurance coverage in Asia is low compared with global reinsurance coverage; and Asia and Australia contribute below 20% of global reinsurance premiums, according to industry estimates,” notes Fitch.

The potential for vast growth in the Asian markets, highlighted by its broad economic to insured loss protection gap, signals one thing for the insurance, reinsurance and insurance-linked securities (ILS) sector, a huge opportunity.

Underlining just how immense Asia’s protection is Fitch compares the difference in percentage of insured to economic losses as a result of natural catastrophes by region, with some alarming results.

Using data from Swiss Re’s Sigma unit, Fitch reports that Asia experienced economic losses of roughly $51.7 billion during 2014, 47% of the global total and followed by North America, which experienced $28.6 billion of economic losses from natural catastrophes last year, representing 26% of the global total.

However, just $5.2 billion (roughly 10% of Asia’s 2014 economic losses) of the $51.7 billion of total losses in Asia were insured, compared to $17.5 billion (roughly 61% of North America’s 2014 economic losses) of insured losses in North America.

Here lays the issue and opportunity for the global risk transfer landscape, as clearly the re/insurance and ILS market are failing to supply sufficient coverage, as the region with the highest 2014 economic losses has a significantly lower percentage of insured losses than regions with a lower total loss volume.

“Fitch believes that the wide discrepancy between the insured and economic losses in Asia indicates that the region has been severely under-protected in terms of catastrophe insurance,” said Fitch.

For Fitch, the potential for rapid growth in Asian reinsurance markets points to a changing operating landscape, which includes the inception of new firms by established global reinsurers searching for diversification and other opportunities in a new market.

Growth will also drive existing insurers in the Asian markets to expand and, a flurry of merger and acquisition (M&A) activity is expected within selected Asian reinsurance markets, notes Fitch.

Expanding on the second point here, it’s worth noting that existing operations could explore setting up a dedicated reinsurance-linked or insurance-linked securities (ILS) subsidiary, focused on utilising the glut of alternative reinsurance capital to further diversify their Asia risk exposures and serve to build the region’s resilience to catastrophe exposures.

These types of vehicles include reinsurance sidecars, fully-collateralized risk transfer mechanism, and catastrophe bonds, something Fitch, and Artemis discussed recently relating to the Asian markets.

Furthermore, as the region is expected to experience a greater threat from windstorm-related and other weather events in the future, exacerbated by coastal migration to areas susceptible to flooding and storm surge, this will also drive demand for reinsurance, and forms of alternative risk transfer as mentioned earlier, to further bolster, diversify and support firms’ Asia risk exposures.

Another successful component of risk transfer that could be utilised effectively in the Asian markets is the establishment of catastrophe funds or pools explain Fitch, similar to that of the CCRIF and ARC.

These types of funds typically use a parametric trigger that enables rapid payouts after an event, something the poorer, vulnerable Asian citizens would really benefit from. Also, funds like this are often public-private partnership oriented; meaning re/insurance industry participants are less likely to be financially crippled following a large catastrophe event.

One thing that’s clear from the recent articles, analysis and discussions surrounding the Asian reinsurance markets is that it’s poised for vast growth, and now it’s the turn of the skilled, specialised re/insurers and ILS players to innovate and develop meaningful, and adequate risk transfer products to protect a rapidly growing, and developing part of the world from the perils of natural disasters.

Also read:

– Catastrophe bond issuance in Asia Pacific to increase: Fitch.