Opportunity in emerging markets, access to reinsurance key: JLT Re

Analysis from reinsurance broker JLT Re highlights the potential for growth in emerging markets across the globe, underlining the need for access to reinsurance capital, which suggests an opportunity for the ILS space.

With rates in the global reinsurance market remaining under significant pressure, emerging markets are seen as a potential, and significant growth avenue for insurers, reinsurers, and also insurance-linked securities (ILS) players.

Competition in the international reinsurance industry remains high, and in areas such as U.S. property catastrophe risks, which has experienced the steepest rate declines and most substantial inflow of alternative reinsurance capital, market players are increasingly struggling to meet their cost-of-capital requirements.

JLT Re, in a new report, explores the potential for emerging market growth, underlining the necessity of being able to access reinsurance capital and having local market knowledge.

“Of course, carriers looking to expand into emerging territories in search of new and profitable revenue streams must carefully plan entry strategies designed for the unique characteristics of each market. Insights into competition levels, risk exposures and future growth potential can provide early-mover advantages.

“Competing successfully in emerging markets therefore calls for expert, local knowledge. Risk selection, portfolio management and access to reinsurance capital are crucial,” said JLT Re.

JLT Re identifies seven countries that are likely to play an important role in premium growth over the next five years, being China, India, Thailand, Brazil, Mexico, Kenya, and South Africa.

Urbanization, increased asset values and a greater concentration of wealth and assets/properties in vulnerable parts of the world, such as the regions outlined above, is driving a change to the risk landscape, and re/insurers and ILS players need to adapt in order to take advantage of the situation.

The global protection gap (difference between economic and insured losses post-event) is viewed as a real challenge and opportunity for the risk transfer world, and innovation and a willingness to expand into new peril regions is required to boost insurance penetration in all corners of the world.

In emerging economies and regions the risks are there, but in order to have a meaningful and mutually beneficial influence on any emerging region an understanding of the local market and exposures is key, explains JLT Re.

At the same time, with the potential risks being so vast across many emerging markets, having access to sophisticated, willing, and able capital from both the traditional and alternative reinsurance capital space will be key for the sector to make a real difference in emerging markets.

David Flandro, Global Head of Analytics at JLT Re, said; “Whilst it is true that some emerging markets have suffered downturns since 2014, projected economic forecasts over the next five years remain encouraging and overall, emerging market economies are expected to expand by more than 4% in 2016, which would represent the first acceleration in growth since 2010.

“Of course, not every emerging economy will flourish, but emerging markets, in aggregate, will be growing at between two and three times the pace of developed markets in this time.”

Insurance penetration across emerging markets is expected to rise in the coming months and years, especially when compared with more mature markets. As a result of increased insurance penetration there will likely be an increased demand for reinsurance protection, which typically results in opportunities for the ILS sector to play a role, in some form or another.

“At JLT Re we see this ‘new world order’ as a huge opportunity, the seven emerging markets in our study are set to see significant non-life premium growth over the next five years and outpace advanced markets’ growth. Perhaps even more crucially, they are also expected to gain an increasing share of the global non-life insurance market as insurance penetration and insurance density levels rise.

“The catch-up potential associated with insurance penetration and density rates in emerging markets emphasises the genuine growth opportunities that exist. But let’s not forget that competing successfully in emerging markets calls for expert, local knowledge which we can offer at JLT Re,” continued Flandro.

Product innovation, discipline and the utilization of advanced technology and modeling capabilities will likely prove vital for companies that look to access emerging markets to increase revenue and also provide coverage to those in need.

With returns in the more mature markets of the world remaining challenging and showing little sign of turning anytime soon, those that figure out how to effectively and efficiently access emerging markets and provide the reinsurance and ILS capital to support increased insurance penetration, could find themselves in a much more positive position than the softening landscape currently offers.

Join Artemis in New York on February 3rd 2017 for ILS NYC