ILS & re/insurer capital can close Asia Pacific protection gap: Guy Carpenter

The depth of the capital markets, the structural innovation of insurance-linked securities (ILS), alongside traditional capacity from insurance and reinsurance markets, should all be combined to help efforts to close the protection gap in Asia Pacific, according to Michael Schwarz of Guy Carpenter.

Schwarz is Head of Public Sector, Asia Pacific at reinsurance broker Guy Carpenter and he discussed the issues of low catastrophe insurance penetration in the rapidly growing economies of Asia Pacific around the 15th Singapore International Reinsurance Conference this week.

Schwarz noted that the protection gap poses a critical barrier to regional economic stability, given the tendency for losses to fall to governments and the public sector.

At the same time, it is key for both insurers’ and reinsurers’ relevance that they are seen to be addressing these gaps in coverage, as it is evidence of the societal benefits that risk capital can bring.

It’s also an opportunity for the industry to demonstrate how advanced analytics alongside traditional and alternative reinsurance capital are can stimulate greater uptake of insurance on the ground and protection to corporates and government entities.

Schwarz said that the re/insurance industry as a whole needs to provide a catalyst to stimulate greater uptake of insurance.

He highlighted the use of public-private risk transfer partnerships as one way to address the protection gap, but importantly noted that “one size does not fit all” and understanding the client is essential to success for these schemes.

“Our industry should be a critical contributor to increasing community resilience against volatility and shocks to their environments caused by catastrophic events and disruptions brought to economic development,” explained Schwarz. “Given the pace of growth across the Asia Pacific region, the (re)insurance industry should become more dynamic to keep up with urbanization and growth rates.”

He highlighted where the assistance is urgently needed to narrow protection gaps, while measures are needed at the sovereign level as well to ensure losses do not just hurt taxpayers and erode GDP.

Explaining that, “Property damage and business interruption losses to corporates are only part of the wider picture – the protection gap needs to be tackled on various levels. In addition to losses to residential homeowners and rural communities, the impacts of catastrophic events are manifold, ranging from destroyed infrastructure and damaged physical state assets, to costs related to immediate disaster response and relief measures.

“Moreover, in many instances the bill for taxpayers will be further increased as governments tend to provide financial assistance to affected population groups.”

It’s not just that these protection gaps suggest a lack of financial protection against disaster at all levels within Asia Pacific countries, but also that their very existence is undermining the value proposition of the insurance industry as a whole.

Schwarz explained, “The industry jeopardizes its relevance if it does not make progress on the issues of insurance penetration and narrowing the public sector risk financing gap. The industry in the Asia Pacific region must understand buyer needs and recognize the barriers that have to be overcome in positioning risk transfer solutions.”

Here a holistic effort across all insurance, risk and capital sources is required to make the greatest progress in closing protection gaps, with the use of insurance-linked securities (ILS) alongside traditional insurance and reinsurance capital likely to have the greatest effect.

“Insurance-linked securities (ILS) coupled with (re)insurer capacity can provide abundant risk capital to benefit communities,” the broker explained.

“Some governments in the region, for instance the Philippines or in the Pacific Islands have already started to transfer natural catastrophe risk to the (re)insurance and capital markets,” Schwarz noted.

The protection gap is both an opportunity for the market and a failing of its traditional product offerings, but now progress is being made with new products, public-private risk sharing and the use of the alternative capital markets as an efficiency source of capacity to help narrow these gaps.

It is only through the application of all of the advancements that insurance, reinsurance and risk management have made in recent years, and will make in those to come, that meaningful steps can be taken to close the gap. The capital markets and ILS will play a central role as this issue continues to increase in priority across Asia Pacific and beyond.