Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Public-private sector support to boost innovation & demand: Munich Re


To combat the pressure from challenges facing the global reinsurance industry, as competition, the low interest rate environment and headwinds limit growth & erode returns, participants should look to partnerships and innovation as a way to stimulate demand.

Innovation is one way firms can stimulate growth in emerging risks and regions, which can be helped via the support of regulatory and governmental organisations, according to Munich Re. Advice that is also relevant to the larger ILS fund players, who are increasingly gaining a profile in these circles as well.

During reinsurance firm Munich Re’s second-quarter earnings call executives were questioned on the innovative products for emerging and large-scale exposures, and whether growth via innovation was achievable in the current market without some kind of catalyst.

“Of course, there may be businesses where regulatory change may play a role. There are other businesses where it will certainly not. This is rather about technological changes,” said Nikolaus von Bomhard, Chairman of the Board of Management at Munich Re.

In recent months and in certain emerging markets around the globe regulatory advances have facilitated the expansion of reinsurance in the region. Over-time this should lead to product innovation for regional exposures that are currently underserved, and will also support the entry of insurance-linked securities (ILS) capacity and features, which brings its own innovative and efficiency qualities.

An example of this can be seen with India and recent regulatory changes from the Insurance Regulatory and Development Authority of India (IRDAI), which has issued revised guidelines and frameworks to enable greater participation in the region from foreign reinsurers.

While this creates a new avenue for global reinsurers to deploy capital and hopefully benefit from positive returns, it also promotes product innovation in relation to flooding and other catastrophe and weather-related risks that cause high levels of economic losses year after year.

But importantly, without work from local governments, local and international regulatory authorities and also domestic and foreign re/insurers, the Indian risk transfer market would likely remain limited and risks underserved, ultimately diminishing the potential for companies to innovate.

Catastrophe risk in China is another example of how support from public and private entities is needed to boost re/insurance demand and support innovation, explains Munich Re.

“If in China, for example, coverage for natural catastrophes really takes off, because this is a tremendous book of business of course, first of all, for the primary insurers. But a lot will have to be reinsured as well and I think we’re just at the starting point of that business to develop.

“So if that goes fast, you will certainly see the consequences in our book as well. But this is not in our hands. We try to do what we can, also together with the government to promote the development of that business, but this is for the sheer size of the market and the country,” said the Munich Re Chairman.

Of course, for parts of Asia and other regions across the globe risk modelling also needs to advance in order for catastrophe risks, for example, to be better understood and therefore more efficient and effective products to be developed.

But there are mechanisms that can reduce the need for very sophisticated modelling and enable solutions to be established while risk models continue to evolve. A parametric trigger structure, which is a common feature of the sophisticated ILS market, is a good example of such a tool.

A product structured utilising a parametric trigger enables rapid payout post-event as it triggers when a predetermined event, such as a hurricane, passes through a predetermined zone at a pre-set intensity. This enables funds to be dispersed without the need for actual damaged losses to be reported, which can take time.

Combining features like this with traditional elements of the global insurance and reinsurance industry, along with regulation changes and support from the public and private sector, can create innovative solutions for the vast volume of global risks.

The need for innovation is perhaps as strong as it’s ever been, as insurers, reinsurers, and ILS players continue to fight for a seemingly shrinking market share in order to remain relevant. As technology advances and risk models become more sophisticated for both mature and emerging exposures, the ability to create new and effective products will surely increase also.

But until then, the risk transfer landscape has a real opportunity to work with global regulatory and governmental bodies in order to innovate solutions that ultimately expand the capabilities of reinsurance and ILS, and improve disaster resilience by bridging the swelling protection gap.

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