Entire risk transfer network needed to close protection gap: Swiss Re

Challenges in the global insurance and reinsurance industry have caused firms to adapt and search for returns in an intensely competitive environment, but an industry-wide effort to bridge the protection gap signals vast growth opportunities for risk transfer market participants, says Swiss Re.

Bridging the expanding protection gap, so the amount of insured losses in respect of total economic losses post-event, has been a hot topic of discussion within the global re/insurance industry over the last year, so it’s no surprise to hear reinsurance giant Swiss Re call for an industry-wide effort to narrow the gap at the 2015 meeting of the reinsurance industry in Monte Carlo.

“The potential for economic losses from natural disasters and other risks are growing each year while the share of insurance is not increasing. Our industry has the capability and unique knowledge to assess and quantify the risks across so many areas of our everyday lives.”

“Let’s use this potential and expand the current reach of insurance by working together,” said Swiss Re Group Chief Executive Officer (CEO), Michel M. Liès.

While the message from Swiss Re is certainly not new, it’s an area that has gained traction following a predicted rise in the severity and frequency of natural disasters, particularly in regions vulnerable to adverse weather events.

And since ongoing market pressures have caused re/insurers and insurance-linked securities (ILS) players to search for profit in new business lines and emerging markets, the majority of which have significantly low levels of insurance and reinsurance penetration, the potential for growth and development into new business lines is evident and plentiful.

In fact, a recent study predicts that over the next decade there is a huge $4.6 trillion potential loss in economic output for the world’s major cities from man-made and natural catastrophes.

An industry-wide effort to close the protection gap will in itself create a host of opportunities for insurers, reinsurers, ILS players, catastrophe bond market participants and so on, to gain access to new risks in regions of the world greatly in need of protection, says Swiss Re.

While this will add welcome geographical and product diversification to re/insurers’ or ILS manager portfolios, at a time when scale and relevance is regarded as important as ever before, importantly, it serves to build the resilience of emerging, underdeveloped economies and societies that often have little or nothing left when disaster strikes.

With the protection gap so vast, exacerbated by the flood of coastal migration in areas susceptible to water stress, migration to areas vulnerable to wildfires in the U.S. and elsewhere, rapid urbanisation coupled with growing asset values in emerging economies like Brazil, India, China and much of Asia-Pacific and so on, it will require more capacity and expertise than just the insurance and reinsurance industry.

Instead, it’s likely to need the capital, willingness and skillset of the greater capital markets and ILS family, including fully-collateralized reinsurance, sidecars, ILS joint ventures, catastrophe bonds and also public-private sector partnerships and collaborations to develop comprehensive risk financing pools that have been effective in other, vulnerable parts of the world.

This includes ventures like ARC, the CCRIF SPC and the TCIP to name a few, all of which have been successful catastrophe financing pools dedicated to protecting vulnerable regions against the world’s perils, often utilising parametric triggers to ensure rapid payouts, a necessity for the policy holders.

The capacity is certainly there to begin designing and implementing risk transfer products for emerging, underserved territories of the planet and gradually close the growing protection gap.

It’s not something that is going to happen overnight and it will also require the continued effort and dedication of risk modelling entities and technological advances in order to adequately asses the risks, and therefore produce a more comprehensive and affordable product set.

One of the industry’s concerns with the glut of alternative reinsurance capital in the sector is that it’s largely focused on existing, developed risks, such as U.S. property cat exposures that are far better modelled and understood than say flooding in Asia.

Highlighting the need for a continued and increased effort of catastrophe modelling and technological firms to focus on improving the industry’s knowledge of emerging underinsured global risks.

Christian Mumenthaler, CEO of Reinsurance at Swiss Re, said; “Technology will create new risk pools and at the same time it changes the way we assess existing ones. We’re already working today with our partners and clients to tackle these future challenges and opportunities.”

Technological advances will help bridge the protection gap and create opportunities for growth and access to new risks, says Swiss Re. And as the industry becomes more accepting and gains greater knowledge of the risks, so to will its willingness and preparedness to provide the capacity and expertise required to offer the relevant coverage.

As innovation collides with a need to raise insurance penetration levels and the desire of re/insurers and ILS players to navigate the challenging market environment and search for more profitable lines of business, it will be interesting to see just how significant of an impact the global risk transfer world can have on protecting the vulnerable and bridging the vast protection gap.

Read all of our Monte Carlo Rendez-vous 2015 coverage here.

Also read:

– Alternative reinsurance capital can narrow protection gap: Swiss Re.