Opportunities for ILS in Asia outside of peak catastrophe risks: Experts

The Asian ILS market remains in its infancy but there’s a clear opportunity for its structures and capital to play a major role in protecting against natural catastrophes globally. However, industry experts recently discussed the potential for ILS to have an influence outside of peak catastrophe lines.

During the Artemis ILS Asia 2016 conference held in Singapore in July, regional and global industry leaders gathered to discuss the potential of insurance or reinsurance-linked securities (ILS) such as catastrophe bonds across Asia, noting both challenges and opportunities for expansion.

Asia seriously lacks insurance penetration for the majority of its exposures, and with the region being so vulnerable to natural catastrophe events the scope for greater use of ILS solutions, such as catastrophe bonds and collateralised reinsurance, is clear.

However, speaking at the Artemis ILS Asia event, industry leaders explained that there’s also an opportunity for ILS to play a role outside of the peak property catastrophe risks.

“The weather product does lend itself very nicely to ILS investors. Often it’s a seasonal product, so a short period where the collateral is deployed. And I would tie that in with agriculture and crop and we’re seeing more products and more offerings to the ILS world, both retro and directly,” said Nick Griffiths, Director, Reinsurance Division at RFIB Group Limited.

Agriculture in India and China is on the rise and as a result a greater need for insurance protection against drought conditions and heavy rainfall will be required, which, will likely lead to greater reinsurance demand and also provides an opportunity for ILS to innovate solutions and have an influence on the market.

Emphasising this point, James Nash, Chief Executive Officer (CEO) of Guy Carpenter’s (GC) Asia Pacific region said, “We talked a little bit in the previous session and I agree with the speakers that there are opportunities outside of cat.

“The world and this region are increasing its consumption of food. Agriculture is increasingly important. The crop market is growing exponentially, particularly in China and in India. Within a few years the Chinese agriculture market will be the same size as in the US. India has expanded dramatically during the past year with the Modi Government. Agriculture as we know it is an opportunity.

“Also crop pandemics. Not just human pandemic that is clearly a very significant opportunity, particularly in the Asia Pacific region, but also crop pandemics is an opportunity. As an industry and our own organisation we need to double down the efforts in innovation,” said Nash.

Owing to the region’s susceptibility to natural disaster events it’s not surprising that the majority of discussions surrounding risk transfer in the region focus on peak catastrophe exposures.

After all, the limited insurance penetration, low-incomes and lack of awareness/education about catastrophe events across the region, means that it’s vital insurance take-up for these types of exposures is improved, ultimately improving Asia’s resilience against such damaging events.

But as noted by speakers at the Artemis ILS Asia conference, the evolution of the Asian agricultural sector and rising wages and asset classes, means that the need to protect a more diverse range of exposures will be needed, which presents an opportunity for the ILS sector, along with the more traditional insurance and reinsurance segments.

Agricultural insurance protection for poorer and more vulnerable parts of the world exists in places like Africa, with the African Risk Capacity (ARC). Utilising a parametric trigger, a common feature of the ILS space that ensures rapid payout post-event – something vital for poorer regions – ARC reimburses member states when pre-determined drought conditions trigger a payout.

The benefits of such features of the ILS space was noted by Dr. Mili Eppler, Senior Underwriter, Credit Suisse Insurance Linked Strategies Ltd., addressing an audience at the event.

“One way we could really enable greater access to alternative capital would be to create products with, for example, parametric triggers, where you remove a lot of the uncertainty about the underlying exposures. I definitely see these types of products as making it easier for us to invest in Asia,” said Eppler.

A similar approach to ARC could be adopted for the expanding Asia agriculture sector, as while a lack of modelling capabilities limits the expansion of ILS into certain coverages, risk pooling from a number of countries and efficient/enabling ILS features can create adequate solutions to be developed for risks outside of the peak catastrophe risks in Asia.

But as noted by Nash, it will take innovation from the public and private sector to develop such products for both the peak and non-peak catastrophe exposures across the evolving Asian landscape.

Artemis ILS Asia will be back in Singapore in July 2017. We hope to see you there!

Download the ILS Asia 2016 post-event report here.