Industry-loss based reinsurance contracts, catastrophe bonds and industry-loss warranties (ILW’s) could be coming to the South Korean reinsurance market if Property Claim Services (PCS) has its way, having reached an agreement in principle to work with the KFPA to bring its catastrophe loss index to South Korea.
As we wrote recently, PCS has been actively looking at expanding its range of catastrophe data services into new territories in recent months, it now transpires that South Korea was one of those new locations it has been seeking to move into.
PCS also wants to broaden the use of its services to new lines of business and outside of its core catastrophe risk services. It has been looking at the possibility of bringing its services to the marine and energy market as well as encouraging the use of its catastrophe loss data for transferring U.S. wildfire risks to the capital markets.
PCS told us that it has been in talks with the Korean Fire protection Association (KFPA), a disaster prevention institution in South Korea, originally established to focus on fire risks but now seemingly interested in broadening its remit as well.
The discussions have centered around the possibility of PCS bringing its catastrophe loss data reporting services and indices to South Korea, to serve the needs of insurers and reinsurers looking to transfer risks in the country on an industry loss basis. The service would cover all natural perils in South Korea and PCS are working on identifying what the appropriate threshold for catastrophe designation might be.
Agreement has been reached in principle, according to PCS, and now the work begins to identify the practicalities of how to launch a South Korean catastrophe loss index as well as getting local insurers in the country onboard.
Joe Louwagie, assistant vice president at PCS (read our interview with Louwagie from June here), told us that among the next steps is determining the correct level at which to designate an event as a PCS covered catastrophe. In the U.S. this is $25m but analysis is required to identify an appropriate figure for the South Korean market. Beyond that PCS want to follow the U.S. model as closely as possible.
In terms of the market share that PCS is aiming to have report catastrophe loss figures to them, Louwagie said that clearly as large a share as possible would be desirable, but they haven’t identified an exact figure to aim for.
Louwagie said that the aim in South Korea is to be as true to the U.S. domestic PCS process as possible, keeping the process and procedures as aligned. Some issues clearly will need to be overcome, such as language and cultural differences within insurance in South Korea, but Louwagie is positive that these will not prove an issue to the initiative. The biggest hurdle to overcome was getting the agreement in principle, which is already resolved, Louwagie said.
With South Korea exposed to a number of natural catastrophe perils, such as typhoons, extreme rainfall events, extreme snowfall, earthquakes and tsunamis, its insurance market will surely welcome the introduction of a service which will help to facilitate transfer of its risks.
If successful, the capital markets and third-party investors in reinsurance will likely welcome a new territory in which it can deploy capital into industry loss triggered instruments. With PCS, a trusted source of catastrophe loss data for the U.S. and Canada, behind the industry loss reports a new territory could come online rapidly once local insurers are onboard.
Louwagie said that he and the PCS team working on the initiative would be travelling to South Korea in October to present the PCS process to the insurance industry and to meet with multiple stakeholders in the South Korean insurance market, including brokers, insurers and reinsurers.
Louwagie commented; “It has been clear since our first discussions that the KFPA is focused on serving the Korean insurance industry – which aligns with our focus on serving the global insurance industry and ILS community. It’s within this context that we are exploring ways to serve both the Korean and global insurance communities with a new property-catastrophe index service.”
The South Korean catastrophe reinsurance landscape could change dramatically with the introduction of a PCS catastrophe loss service and index. We could see catastrophe bonds and industry-loss warranties (ILW’s) issued and collateralized reinsurance contracts use the catastrophe loss data as a trigger.
It’s a positive step for the alternative reinsurance, catastrophe bond and insurance-linked securities market, both on the risk transfer and investor side, and demonstrates that PCS is really serious about expansion, which the market should welcome.