Alternative reinsurance capital, in the form of catastrophe bonds and other collateralized reinsurance instruments, now makes up close to 6% of Asia’s catastrophe reinsurance limit, according to an estimate from reinsurance broker Guy Carpenter.
Alternative capital has been making inroads into the Asian property catastrophe reinsurance market for years, largely in the form of cat bonds to begin with but increasingly collateralized underwriters and insurance-linked securities (ILS) fund managers are participating in renewals with collateralized coverage.
That is growing the amount of capital market-backed reinsurance protection being utilised in the Asian region, a trend which is unlikely to be reversed. However, the overall Asian reinsurance market has shrunk recently, in terms of premium spend, as a confluence of factors including weaker currencies hits the market.
In its Asia Pacific Catastrophe Report 2014, broker Guy Carpenter notes that there has been a continued increase in total Asia Pacific catastrophe reinsurance limit purchased. But as mentioned above the premium spend has declined significantly at the same time.
The report details how benign loss activity, program consolidation and restructuring, increasing retentions by global insurance carriers, pressure from increasing supply of capacity and the weakening of key zone rates of exchange has created the unique trading environment for reinsurance buyers in Asia Pacific.
The report estimates that over the past twelve months the weakening of key zone currencies against the U.S. dollar alone has extracted as much as $315 million of regional reinsurance premium spend from the market on a like-for-like basis.
That’s a significant decrease in a region where catastrophe reinsurance is so vital and traditional reinsurers will have been looking to exert their dominance in the currently challenging market. Asia is a region under target by global reinsurance players, as they seek to offset the impacts to pricing across U.S. catastrophe zones. The reduction in premium spend and declining pricing in Asia will not provide the offset they had perhaps been seeking.
Alternative capital activity in Asia Pacific remains subdued compared to other regions of the world, Guy Carpenter said. However, despite this Guy Carpenter records that outstanding catastrophe bond limit in the region has more than doubled in the last year to $1.625 billion, helped by the $300m Nakama Re Ltd. (Series 2014-1), the $100m Aozora Re Ltd. (Series 2014-1) and the $245m Kizuna Re II Ltd.
When this cat bond limit is combined with the collateralized reinsurance capacity that has entered and been deployed in the Asia Pacific region, Guy Carpenter estimates that alternative capital now makes up close to 6% of regional catastrophe reinsurance limit.
The alternative capital that has penetrated the Asia Pacific region is largely concentrated in Japan and Australia, the two countries with the best developed risk models and most mature reinsurance markets. The figure Guy Carpenter gives, of almost 6%, excludes supporting aggregate excess of loss and retrocession products where the broker says the percentage would be significantly higher.
“As evidenced in our report a variety of factors drove market dynamics during 2014. With a reduction in the cost of capital supporting the industry and enhanced innovation we see an environment where insurance companies can find ways to optimize their businesses through expanding and enhancing the reinsurance products that protect earnings and capital,” commented James Nash, CEO of Asia Pacific Region.
The growth of catastrophe reinsurance limits in Asia Pacific continues to trail behind overall economic growth, resulting in a widening catastrophe gap. This deficiency in capacity is even more stark in some of the emerging markets where insurance penetration remains modest.
The need to narrow this gap remains but how to reduce it continues to be unsolved, notes Guy Carpenter. The broker says that the onus is now on the industry to find new and pioneering ways to deploy its capital to meet this clear need for catastrophe re/insurance protection. Supporting economic growth in Asia Pacific through catastrophe management and with a product range that stimulates re/insurance buying is the challenge that the market needs to find a solution for, said Guy Carpenter.
Tapping the Asia Pacific market is increasingly a target of ILS managers looking to deploy capital into catastrophe reinsurance renewals. However, some of the key growth markets remain largely out of reach, for the moment, due to lack of models and dominance of some traditional players. That will change however and it is expected that the percentage of the Asia Pacific catastrophe reinsurance market that is ceded to alternative and ILS sources of capital will continue to grow.