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PCS - Emerging Risks, New Opportunities

Prepare for Asian ‘Supercats’ Aon tells insurers


Aon Benfield is warning insurers in Asia that they need to prepare for future ‘Supercat’ events of the size and magnitude of those experienced in the U.S. A supercat is defined as an event which generates an insured market loss of at least $10b.

In Asia, a loss like that is most likely to occur in Japan, China and South Korea, says Aon Benfield. We’d also assume fairly hefty loss events could occur in Singapore, Malaysian cities, Indian cities and other more well developed regions of Asia.

The reason Asian countries are becoming more at risk of these large loss events is that development is increasing rapidly and insurance penetration is growing. In the past there wasn’t the volume of insurance cover to create a large insured market loss no matter how devastating a disaster was, that is changing rapidly.

Aon Benfield give us the following supercat loss scenarios:

  • Japanese typhoon is a major Supercat peril due to its severity and frequency. Repeats of typhoons Mireille (1991), Vera (1959) and Nancy (1961) could all produce Supercat insured losses, as could a direct hit of a strong (Saffir-Simpson Category 3) typhoon on Tokyo.
  • Continued strong economic growth, coupled with increasing insurance penetration, could result Supercat losses in mainland China in the next decade. A repeat of the 1976 Tangshan magnitude 7.6 earthquake could today cause insured losses ranging up to about USD3 billion. However with 10% growth in both underlying values and insurance penetration per annum this figure could reach USD10 billion if such an event occurred from 2016 onwards. Similar losses could result from a repeat of the 1679 Sanhe-Pinggu magnitude 8 event near Beijing or the 1668 magnitude 8.5 Tancheng event in Shandong.
  • Seoul in South Korea experienced damaging earthquakes in AD 89, 1385 and 1518 with magnitudes apparently ranging from 6.5 to 7.5 (Chiu & Kim, 2004). Any major earthquake around magnitude 7 affecting Seoul today would cause a major, perhaps Supercat-sized, insured loss.

Dr. Will Gardner, head of Aon Benfield Analytics Asia Pacific, said: “The first step is for insurers and regulators, particularly in China and South Korea, to recognise the possibility of Supercat-sized earthquake losses and take action to ensure adequate catastrophe reinsurance protection.”

Dr. Nigel Winspear, senior director at Aon Benfield Analytics, added: “Natural perils in Asia do not appear to be increasing in frequency or severity, however market conditions are changing with increasing insurance penetration and higher property values reflecting ongoing economic growth. Property insurance penetration in Asia is generally low and weakest in residential lines but often high in commercial and industrial lines. Some insurers opt to purchase as little catastrophe reinsurance protection as possible to maximise their retained premium.”

The alternative risk transfer market and insurance-linked securities market will certainly have a role to play by enabling insurers active within Asia to offset losses by hedging their risks with the capital markets.

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