APEC needs disaster risk financing, ILS should play a role

by Artemis on February 22, 2017

The 21 member economies of the Asia-Pacific Economic Cooperation (APEC) are once again meeting this week and disaster risk financing, insurance and reinsurance are hot on the agenda, as leaders in the region recognise the importance of increasing protection.

Mind the Gap sign (Source: Autoprotect)In 2017, APEC countries agreed to put greater emphasis on accelerating solutions to mitigate the impact of natural disasters, including ways to soften economic and financial volatility, as well as a new focus on pandemic risks as well.

Over 100 delegates from the member economies are meeting in Nha-Trang, Vietnam this week, focusing on an agenda which features disaster risk financing as a key discussion topic, and includes a specific seminar on the importance of disaster insurance.

Existing disaster risk financing and insurance initiatives were discussed, as well as expansion of index insurance schemes, and ways to acquire greater reinsurance support for these programs, an area where catastrophe bonds are seen as a potential contributor in future.

As we wrote earlier this week, ASEAN member countries are exploring a regional risk pool, in order to combine risk exposures so they can benefit from efficiencies of scale, diversification and cheaper access to risk capital. These initiatives can provide a suitable pool of risk for capital markets risk transfer, gaining the scale that would make securitisation and catastrophe bonds perhaps more feasible.

APEC members are already working with numerous outside parties, from the World Bank to recognised global reinsurance firms, on a growing number of initiatives to increase insurance penetration, or to provide disaster recovery financial support through insurance-like mechanisms at the sovereign level.

Catastrophe bonds and access to the capital markets as a source of sovereign or city level insurance capacity, or reinsurance to back broader roll-out of index insurance and other schemes, need to play a greater role in these plans.

APEC members have an opportunity to work with ILS fund specialists and investors to define ways to access insurance capital more efficiently, which could add important diversification to the regions disaster risk financing sources, as well as provide lower-cost capital on a multi-year and securitised basis.

Catastrophe bonds have been found to have economic benefits beyond the provision of risk capital right after a disaster strikes, if structured with a parametric trigger.

Research shows that having cat bond coverage in place can help a sovereign government to enhance its profile on the capital markets, useful when it comes to issuing debt and borrowing, and also offer direct welfare benefits on an economic basis, so clearly beneficial to the population.

These benefits are tangible enough on their own, without the security of a cat bond that offers insurance payouts based on disaster parameters, so with the ability to get capital into a country after catastrophes occur even quicker than foreign aid typically manages.

APEC members discussed the need to get disaster data in place, in a shareable format, to make acquiring protection simpler and to provide the historical loss information that the insurance, reinsurance and ILS market requires for more complex covers.

However, there is a lot to be said for simple parametric and index-linked insurance products being rolled out across the region more rapidly, perhaps with regional catastrophe bonds providing the reinsurance protection.

If these APEC region cat bonds were offered as a disaster risk financing solution to global investment markets, perhaps with the World Bank’s assistance to issue through the treasury to keep costs down, or even on-shored and issued through APEC members own securities markets, the capital markets may be attracted as a responsible investment opportunity.

The region remains underprotected, with insurance penetration low and little in the way of sovereign disaster risk financing or risk transfer in place.

It’s not just countries, sovereigns and their populations who need coverage either. Corporations in the region often lack insurance coverage for major disaster events, or carry significant deductibles, which means interruption to corporations after major natural catastrophes and severe weather incidences can be high and detrimental to the people and communities in their employ.

It seems like a long time ago that the catastrophe bond market saw its first corporate sponsored catastrophe bond, the venerable Concentric Ltd. from way back in 1999.

That cat bond protected the owner of Tokyo Disneyland against major earthquakes on a parametric basis, offering a rapidly paying source of insurance capacity backed by capital market investors.

The same year we also saw Kelvin Ltd., the first weather linked catastrophe bond covering temperature risks. Another example of a cat bond that could be applicable right now to protect APEC economies and entities against the effects of variable and severe weather.

Major corporations in the APEC region will be carrying significant exposure to disaster events such as earthquakes, often with significant gaps and deductibles on insurance coverage. That means when major disasters strike, not only does the corporation suffer, but also the immediate community where employment is lost and the region as trade suffers.

We talk about protection gaps a lot, and Asia is one region where the support of efficient capacity from the capital markets could help re/insurers to narrow it considerably.

Given the exposures in this region, there are clear opportunities for the ILS market to begin to build their own relationships with key players in Asia-Pacific to educate the area on what is possible in sovereign insurance and risk transfer, with the backing of the capital markets.

Join us in Singapore in July 2017, for our second conference in the region ILS Asia 2017, where you can meet ILS market participants and hear about solutions that could be appropriate for APEC member economies, regional insurers and even regional corporations looking for new sources of risk transfer capacity.

Registration for the conference opens soon, but visit the website and you can arrange to be notified once tickets are available.

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