Alternative capital can help re/insurers better serve society: Loh

In order to better serve the needs of societies in emerging markets insurers and reinsurers require the structures and capacity of alternative reinsurance and ILS, according to the Deputy Managing Director of the Monetary Authority of Singapore (MAS), Jacqueline Loh.

At the 13^th Singapore International Reinsurance Conference held in early November 2015, speakers discussed the challenges and opportunities for insurers, reinsurers, and insurance-linked securities (ILS) players in the emerging, underserved Asia-Pacific.

During her keynote speech at the event, Jacqueline Loh highlighted the very real, and vast opportunity to increase insurance and reinsurance penetration levels across the region, and strengthen disaster resilience through the increased use of alternative sources of reinsurance capital.

“Alternative capital, when deployed to markets in need of risk capital for protection against losses, will allow insurers and reinsurers to underwrite more risks and better serve society’s needs,” said Loh.

Furthermore, in recent times global public and private sector entities have expressed a desire, and in some case a commitment, to building disaster resilience efforts and post-event financial and economical sustainability for the Asia-Pacific, which is home to some of the lowest re/insurance take-up levels in the world, coupled with a high vulnerability to extreme weather events.

“As countries in Asia look to strengthen resilience to potentially debilitating events like catastrophes, it is not unexpected that alternative risk transfer mechanisms, such as catastrophe bonds and government pools, will increasingly feature as regional insurers leverage alternative sources of risk capital to complement traditional reinsurance,” explains Loh.

When a natural catastrophe event strikes Asia the financial burden on governments is significant owing to the serious lack of insurance penetration.

And while it’s been widely noted that the growth of third-party capital in the global reinsurance market has resulted in excess capacity, contributing to a supply demand imbalance, softening rates and thinner profit margins, its structures, as noted earlier by Loh, and capacity are highly suited and capable at addressing emerging risks, in emerging markets.

John Seo, Co-Founder and Managing Principal at cat bond and ILS specialist investment manager, Fermat Capital Management LLC, highlighted this point recently, stressing that the protection gap presents the biggest opportunity for alternative capital to play a role.

Underlining just how important improved management of catastrophe risk in the Asia-Pacific is, Loh notes that research by the Lloyd’s of London market claims that a 1% rise in insurance penetration, results in a 22% reduction in taxpayers’ contribution following an event.

During the first-half of 2015 industry estimates put the volume of alternative reinsurance capital at roughly $68 billion, while traditional market capacity reportedly declined by 3%, to $497 billion.

Currently, however, the glut of alternative reinsurance capital and sources of traditional coverage are struggling to find solutions for new and emerging risks, resulting in “too much capital finding too little risks,” says Loh.

What’s more, it’s expected that the entire risk transfer landscape, from primary players to ILS funds, will be required to bridge the protection gap and establish solutions and structures that protect the vulnerable against the rising threat of natural catastrophe events.

But in order for that to happen, industry-wide innovation is needed and new technology must be developed and embraced, explains Loh.

“Technology and innovation will be a differentiator for the insurance industry, and a key enabler for insurers to access previously untapped risks and businesses,” advised Loh.

Utilising the flood of alternative reinsurance capital and its beneficial structures and efficient capital to cover the growing threat of natural catastrophe exposures across Asia-Pacific, will help re/insurers to better serve society by building resilience and strengthen sustainability.

As the risk landscape continues to change globally, and notably in Asia with the rising middle class and urbanisation to coastal regions, coupled with the threat of more severe and frequent extreme weather events, the ILS market will likely prove essential in the fight to mitigate exposure, build resilience, and ultimately lower the protection gap.

To conclude, Loh said; “Insurance will continue to increase its relevance in an uncertain world. In these times of new risks, capital and technology, it is not sufficient to rely on a red ocean strategy. We need to open new horizons, and open them together.”

Read our series of articles focused on the insurance protection gap – under-insurance in emerging and developing economies, the gap between economic and insurance losses, and transferring risk from public sector to private – the opportunity that is on every reinsurance CEO’s lips and which presents the largest opportunity to put excess risk transfer capital to use, requiring both traditional and capital markets support.