Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Asia the dominant source of insured natural catastrophe losses in recent years


It’s generally assumed that insured losses from natural catastrophes tend to be driven by the regions of the world with the highest insurance uptake and property catastrophe insurance exposure. Hence the long-term trend shows the United States as the dominant source of insured natural catastrophe losses, with more than three-quarters of losses historically coming from the U.S.

In recent years that trend seems to have changed, according to data from a recent report published by reinsurance broker Guy Carpenter. Specifically the last three years, 2009 to 2011 inclusive, changed the trend completely as events like the Japanese earthquake and tsunami, floods in Thailand and Australia and the earthquakes in New Zealand markedly changed the distribution of insured catastrophe losses away from the norm.

The chart below shows the distribution of natural catastrophe insured losses from the last three years:

Natural catastrophe insured losses by region 2009 - 2011

Natural catastrophe insured losses by region 2009 - 2011 - Source: Guy Carpenter, Swiss Re

As you can see, Asia jumps to the region with the highest natural catastrophe insured losses for the three-year period, with 35% of the total. The U.S. is second with 33%, much lower than the long-term average that Guy Carpenter says is nearer 75%. Australia and New Zealand also saw a marked increase in insured losses, with 19% of the total.

Guy Carpenter says that this growing trend for heavy catastrophe insured losses in non-peak markets is expected to have a considerable impact on property catastrophe lines, especially as many of these regions do not have robust modelling or sometimes no risk models at all. These ‘cold spot’ losses highlight the difficult insurers and reinsurers have understanding catastrophe risks in these regions and pricing the risks while keeping abreast of growing exposures as regions develop.

The report from Guy Carpenter says that monitoring exposure growth is key, something we strongly agree with as the value at risk and the value insured in emerging economies both increase rapidly. There is huge opportunity in these regions for insurers and reinsurers to do business, but also huge risk to be faced as the resolution of models sometimes leaves a lot to be desired.

Finally, the emerging economies of the world offer opportunities to capital market and investor backed sources of reinsurance as well. In some of these regions market participants such as collateralized reinsurers may choose to expand their activities, seeing an opportunity to secure higher premiums. In the future there will likely also be opportunities for capital market investors to provide capacity via catastrophe bonds as well, but the use of cat bonds in emerging economies will largely be driven by the development and availability of risk models, structurers and sponsors ability to minimise basis risk, or even investors appetite to take on more basis risk by accepting pure parametric cat bond deals.

Of course while we can be certain that insured losses from natural catastrophes will grow in the world’s emerging economies, it would only take one major hurricane or earthquake event in the U.S. for the distribution of losses during a given year to change back again.

You can access the full mid-year report on the global insurance and reinsurance sector from Guy Carpenter here (via their blog).

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