Uneven underwriting expertise in Asia challenges re/insurers (and ILS)

by Artemis on November 17, 2015

The emerging insurance and reinsurance markets across Asia present a significant growth opportunity for insurance, reinsurance and insurance-linked securities (ILS) players, but uneven underwriting discipline is a challenge the region must overcome.

“What we see also as a challenge here (Asia) is actually the uneven underwriting expertise, which can lead to certain dislocations in the market. When there is very little experience or expertise people start looking at risks in a very different way, and that can definitely lead to dislocations in a market as well,” explained Vincent Vandendael, Lloyd’s of London Director of Global Markets.

The rapid rise of Asian economies, underlined by increased wealth and asset values, and migration leading to a higher concentration of exposures in vulnerable areas, has been a hot industry topic in recent months, as global organisations seek to bolster the continents disaster resilience and improve sustainability.

The majority of discussions, and perhaps rightly so, focus on and underline the growing and damaging insurance and reinsurance protection gap across Asia, as both a challenge and opportunity to risk transfer entities.

Penetration levels across Asia are some of the lowest in the world, at roughly 1.4% for non-life insurance, and in Indonesia for example, this is as low as 0.4%, a significantly low figure when you consider that mature markets average about 6.3%, says Vandendael.

Clearly, narrowing the protection gap will help to reduce the burden on governments following an event and will increase sustainability and resilience before and after disaster strikes, but a lack of adequate and informed underwriting expertise also mitigates the entry of capital and can cause disruptions in a market.

Joining Vandendael on the panel at an A.M. BestTV discussion at the 13th Singapore International Reinsurance Conference (SIRC) was Philippe Domart, Chief Underwriting Officer (CUO) for Asia at reinsurer PartnerRe, who also noted disparities with underwriting expertise in the region.

“I think it varies by country. Some countries are climbing very fast on the skills ladder, I must say. So I think it’s really uneven, and our approach to that, in helping societies build their skills, should also be different depending on the country,” said Domart.

Sound, skilled, and trusted underwriting expertise could help to facilitate the greater inflow of reinsurance and ILS capital into Asia, something that will be required if the industry is serious about bridging Asia’s burgeoning protection gap.

Furthermore, many of the perils and locations across Asian countries and cities lack adequate and comprehensive modelling capabilities, something discussed recently by Artemis as being essential alongside knowledgeable and disciplined underwriting practice.

Inadequate modelling alone seriously mitigates growth opportunities for insurers, reinsurers, ILS funds and other risk transfer entities in any market, but coupled with a lack of underwriting expertise and skills can create significant overexposure and deter the entry of new, much-needed capacity.

Despite highlighting the uneven nature of underwriting across the Asian insurance and reinsurance industry, Vandendael also said that progress has been made in recent years, and will likely continue to do so in the future.

He said; “I think it’s an evolution right. Take 20 years ago Singapore as a market was a very small market. You had a lot of expatriates. Today, if I take Lloyd’s as an example, today we employ more than 60% of our underwriting staff here at Singapore are locals.

“So yes there is a transfer of knowledge and expertise that is taking place, but it’s very uneven when you look at the different countries that we are rich of here in Asia.”

To tackle this issue and the rising protection gap, education is vital, along with international and public-private sector partnerships to support sustainability and resilience efforts.

Vandendael highlights this point; “One very important aspect is education, clearly we need to better educate and share the expertise we have built over the years, which for Lloyd’s in this case is 327 years.”

Leading Domart to add, “And on the same theme, I think we need to advocate that what we do as an industry is good for societies. So insurance and the reinsurance industry provide tried and tested tools to help build sustainable agricultural systems, to foster the needed investments in energy, in water supply management etc.”

Evolution and development are key elements of any emerging financial market, and as natural catastrophe and man-made exposures rise across Asia the need for highly sophisticated, reliable and expert underwriting and modelling will become ever more apparent.

But as global insurers, reinsurers and ILS funds increasingly look to access Asian markets, via the establishment of regional platforms or entry into reinsurance, or insurance-linked investments, the talent and expertise of the more developed markets should increasingly find its way to the newer, underserved regions of the globe.

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