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Original Risk: A Society for Change Agents

Cedents, sovereigns could benefit from ILS growth in Asia: Guy Carpenter


Currently, the utilisation of alternative risk transfer solutions such as catastrophe bonds and collateralised reinsurance primarily focuses on mature Asian markets, but with the marketplace keen to expand its remit cedents in developing Asian markets could stand to benefit.

This is according to reinsurance broker Guy Carpenter, which explores the lack of insurance penetration in parts of Asia, which is home to a “confluence of people and perils.”

Citing figures from the United Nations (UN), Guy Carpenter states that 54% of the global population reside in Eastern, Southern, and Southeastern Asia, regions that also experience a range of severe catastrophe events, such as tsunamis, earthquakes, tropical cyclones, and so on.

Catastrophe risk insurance, reinsurance, and insurance-linked securities (ILS) penetration across many parts of Asia is dangerously low, with the exclusion of Japan, Australia and China, and Guy Carpenter notes that less mature Asian markets could benefit from increased ILS utilisation.

“Deployment of catastrophe bonds and collateralized reinsurance primarily occurs in more mature Asian markets such as Japan and Australia, but cedents throughout Asia may benefit – although indirectly – in the coming years as third party investors search for diversification through new lines of business and geographies,” says Guy Carpenter.

The reinsurance broker, citing data from reinsurance giant Munich Re, notes that during the last 25 years six of the ten most costly earthquakes, in terms of overall economic loss, have occurred in Asia. Combined these events incurred overall losses of more than $460 billion, of which just 4%, or $18.4 billion was insured.

This highlights a dangerous and growing protection gap (disparity between economic and insured losses post-event) across Asia, and the need for innovative risk transfer solutions to transfer public sector risk to the willing and able private markets, is evident.

Catastrophe bonds, one of the largest sub-sectors of the ILS space, continue to expand their reach and influence across the risk transfer landscape, but to date, Japan and Australia are almost exclusively the only Asian markets a cat bond has covered.

Apart from Panda Re Ltd. (Series 2015-1), launched by China Re in 2015, the first and only catastrophe bond issuance to focus on Chinese risk, being Chinese earthquake, the marketplace has failed to expand across Asia to those that could really benefit from its features and capacity.

When compared to more mature Asian markets and more advanced markets in parts of the U.S. and Europe, for example, catastrophe modelling capabilities in many parts of Asia has hindered re/insurance and ILS penetration.

However, Guy Carpenter highlights that this is now changing at an accelerated pace, and now, “independent vendors provide over 60 catastrophe models across the major perils and territories,” in Asia.

The broker notes the establishment of the Singapore domiciled Natural Catastrophe Data and Analytics Exchange Alliance (NatCatDAX), as an effort to improve the quality of loss data across the Asian markets.

Supporting increasingly robust risk analytics and modelling capabilities in Asia is the desire of the ILS investor, and sponsor base to broaden the markets remit and increase diversification in terms of perils and geographies.

Guy Carpenter highlights the establishment and development of a number of disaster risk financing schemes in Asia in more recent times, which includes the China Residential Earthquake Insurance Pool (CREIP), the use of a disaster-contingent credit product through the World Bank in the Philippines, and ongoing schemes that look to pool risks from a range of countries.

“In cooperation with the World Bank, the nations of Myanmar, Cambodia and Lao Peoples Democratic Republic are in the early phases of exploring sub-regional pooling of risk. While this initiative remains only a pilot program, a larger, region-wide facility for smaller Asian countries would reduce reliance on government budgets, provide costs savings through diversification and streamline assess to international (re)insurance markets,” explains Guy Carpenter.

The sophistication, maturity and willingness of the ILS investor base combined with improved catastrophe risk modelling and analytics in less developed Asia markets, and a real need for greater disaster risk transfer suggests all parties could stand to benefit from the use of ILS solutions in the areas mentioned.

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