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Original Risk: A Society for Change Agents

Convergence essential for insurance to reach the vulnerable: A.M. Best


The growth of the reinsurance and ILS convergence market has helped much-needed insurance protection reach vulnerable parts of the world, as public and private sector entities’ involvement in insurance-linked securities (ILS) gains momentum, reports A.M. Best.

The global risk landscape is changing at a rapid pace, driven by a gradual but apparent shift in economic power from the Western world to parts of Africa, Latin America and most notably parts of Asia.

Along side this, the predicted increase in the severity and frequency of natural catastrophes and the global rise of asset values, have put disaster resilience at the forefront of re/insurance industry and risk management discussions.

The volume of people now located in cities or coastal regions is higher than ever before, many of which are highly and increasingly susceptible to natural disasters, as urbanisation and migration in emerging corners of the globe spikes in line with rising asset values, growing populations and a burgeoning middle class.

These trends, which are happening at the same time, result in a higher concentration of potential economic losses as insurance and reinsurance penetration levels fail to increase in line with the rise in economic output and value of assets, including properties and businesses in the developing regions.

In response to this, international organisations including the United Nations, the Geneva Association, the World Bank and a host of global insurers, reinsurers, ILS players and risk management firms have stepped up their efforts in developing structures and risk capital pools aimed at protecting vulnerable territories against the world’s perils.

“The involvement by various international organizations in the ILS market through various mechanisms, including cat bond issuance, drought swap and disaster programs with capital market features continues to gain momentum,” said insurance and reinsurance ratings agency A.M. Best, in a recent report.

Concluding that the establishment and success of such ventures, which utilise the capacity, scope and expertise of the capital markets, “has provided needed insurance capacity to other regions of the world that have been under-represented in terms of traditional reinsurance and capital market participation.”

In its comprehensive reinsurance industry report, “It is Not Your Father’s Reinsurance Market Anymore” – The New Reality,’ A.M. Best signals that although the rise of catastrophe bonds, ILS, collateralized reinsurance, sidecars and other alternative risk transfer mechanisms has undoubtedly created challenges for traditional reinsurers and primary players, without it’s presence and expansion essential risk transfer schemes, such as the African Risk Capacity (ARC), the CCRIF SPC (formerly the Caribbean Catastrophe Risk Insurance Facility) and the Turkish Catastrophe Insurance Pool (TCIP) might cease to exist.

A.M. Best notes the rise of catastrophe bonds and cat bond lite transactions over the last 24 months, as well as collateralized reinsurance, as the section of the convergence market that is gaining the most traction and confidence from investors and sponsors.

And it’s with the catastrophe bond market that we see, particularly in recent times, how established funds or catastrophe risk pools are further protecting, diversifying and capitalising their platforms.

Take the CCRIF SPC for example, launched to provide Caribbean member countries with protection against specified adverse weather events for a premium, utilising a parametric insurance and catastrophe risk pooling facility to ensure funds are available to be deployed rapidly post-event, an essential element to its success.

However, as time passed and institutional investors became a more prominent part of the reinsurance landscape, seeking diversification and uncorrelated returns, the CCRIF SPC sought to capitalise on this and with the help of the World Bank issued its first cat bond, a $30 million World Bank – CCRIF 2014 transaction covering Caribbean hurricane and earthquake exposure.

And this isn’t the only catastrophe risk financing pool that uses capital markets features to then return to the capital markets to further diversify and bolster its capital base via a cat bond issuance.

The TCIP is another example. Having recently issued its second cat bond, the $100 million Bosphorus Ltd. (Series 2015-1) parametric Turkish earthquake transaction, TCIP expressed a desire to continue strengthening its relationship with the capital markets.

We now also see that Mexico is soon to launch a three-year renewal of its MultiCat catastrophe bond, as it seeks to continue its disaster risk financing relationship with the capital markets. Also the Philippines is making progress towards its World Bank facilitated cat bond issuance, with discussions having reached pricing expectations, according to reports.

The expansion of the ILS market into new regions through the World Bank supported MultiCat cat bond program is one of the key ways that the capital markets can expand their support for developing insurance markets of the world.

Furthermore, the success of innovative, essential structures like these have been recognised by leading organisations as sound and viable frameworks capable of replication and development to protect a vast range of geographies against an increasing set of risks.

Leading disaster resilience efforts and studies have frequently noted the development of ARC and how this should be used as a catalyst for ensuring insurance and reinsurance protection is available to the world’s most remote, poor and vulnerable people.

It’s also worth noting here that in no way are these kinds of catastrophe risk financing pools limited to the ones discussed in this article, there are a host of similar local and global initiatives operating or in the process of being launched.

In fact, Artemis reported recently how the City of New Orleans has launched Resilient New Orleans, and how part of this initiative will look at a parametric catastrophe risk transfer solution with the aid of reinsurance giant Swiss Re.

Evidenced by the success of the above-mentioned schemes, and the desire of organisations like the World Bank to develop future risk financing concepts for pandemic risks, it’s clear that the convergence markets play an important role in disaster resilience and economic sustainability efforts.

However, the reality is that in many parts of the world the protection gap is still far wider than is sustainable or acceptable, meaning there’s a huge opportunity for the capital markets to continue innovating and developing products and schemes that enable more and more vulnerable people to access much-needed insurance coverage.

If we are to really see the protection gap narrowed it will take more than just traditional insurance and reinsurance capital. The capital markets, ILS funds and their investors, can augment re/insurance capacity, provide disaster risk financing capacity and deliver the depth of market and liquidity that the world’s exposures need, in order for insurance penetration levels to truly be addressed.

Therefore the ongoing convergence of re/insurance and capital markets becomes an essential step as the world seeks to address under-insurance issues.

As schemes like the ARC, CCRIF SPC and the TCIP continue to receive praise and show just how effective they can be post-event, investor, sponsor and policy holder confidence will grow, eventually serving to narrow the global protection gap by making risk transfer and insurance more accessible.

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

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