FRANZ-JOSEF HAHN, PEAK RE
2023 is fast becoming another big nat cat year
There is a potential solution for emerging Asia’s conundrum of rising insurance penetration and widening protection gap.
The insurance industry in emerging Asia has experienced impressive growth but faces the persistent problem of widening protection gaps, particularly for natural catastrophes. Insurance-linked securities (ILS) offers a promising solution, but challenges need to be overcome for its effective implementation.
Collaboration among stakeholders and the smart use of technology and innovation are critical to closing Asia’s significant protection gaps. In addition, efforts should go beyond risk transfer and financing to include risk reduction, climate adaptation and resilience building in the region.
A major nat cat year
Emerging Asia has experienced strong insurance growth over the past decade. Total insurance premiums have grown by an average of 9.5 percent per annum in nominal terms over this period, well above the global average of 4 percent. Non-life, or P&C, insurance premiums grew 11.3 percent over the past decade in emerging Asia, against a global average of 7.3 percent. As a result, rapid premium growth has catapulted many emerging Asian insurance markets into the ranks of the largest in the world.
Insurance penetration in emerging Asia, as measured by total premiums as a percentage of gross domestic product (GDP), has also improved significantly, rising from 3 percent in 2012 to 3.6 percent in 2022, according to Swiss Re.
However, a bias towards investment-type life insurance products and a fast pace of asset accumulation on the back of unrelenting economic expansion resulted in further widening insurance protection gaps.
This is particularly true for natural catastrophe protection. Globally, cat losses have been rising over the past decade, partly driven by increasing losses from secondary perils due to climate change. After a series of cat years, 2023 will likely be another costly year for the global re/insurance industry.
Preliminary estimates of cat losses for the first six months of 2023 show an increasing trend. Total economic losses are estimated to have reached $194 billion (trend average since 2000: $128 billion), of which $53 billion (trend average since 2000: $36 billion) were covered by insurance claims, according to Aon.
In other words, only about a quarter of economic losses globally from natural disasters is covered by insurance, leaving a protection gap of around 73 percent (for H1 2023 and close to the trend average of 72 percent).
“There are strong tailwinds that spell favourable opportunities ahead.”
Franz-Josef Hahn, Peak Re
The February 2023 earthquakes in Turkey and Syria are major contributors to cat losses so far this year. There were other costly events, mostly from severe convective storm activities in the US, but also from the La Plata Basin drought in Latin America, floods in Italy, drought in Spain and Cyclone Gabriele that hit New Zealand in February (separated from the Auckland Floods in January to February). Inflation and other societal factors are adding to losses. If the trend continues, 2023 will be another cat year with losses exceeding $100 billion.
EMEA and the Americas were heavily hit. Asia fared relatively better, with economic losses trending below average in H1 2023. However, as the recent series of typhoons (STS Talim and VST Doksuri and Khanun) that hit the Philippines, Taiwan, Japan and China in July and August indicates, extreme weather continues to inflict a heavy burden on regional markets.
The role of ILS
In a recent speech, Lim Cheng Khai from the Monetary Authority of Singapore (MAS) pointed to the opportunity of leveraging ILS to help manage peak perils more effectively in Asia. According to Artemis.bm, the global ILS market got off to a good start in 2023, raising over $10 billion so far this year.
Currently, the ILS market in Asia is still relatively small but there are strong tailwinds that spell favourable opportunities ahead.
The protection gap in Asia remains large. According to Aon, only 13 percent of cat losses between 2013 and 2022 were covered by insurance. The need for sufficient capital financing is one of the many reasons behind the large protection gap.
Singapore and Hong Kong have both taken steps to strengthen their regulatory frameworks, infrastructure and incentive schemes to promote the development of ILS in recent years. As more ILS investors look for diversification and the inclusion of more Asian risks in their portfolios, this is expected to generate strong demand for ILS originating from the region.
Recent issuances of ILS in Asia are pointing to increasing acceptance by institutional investors. The size of issuances has increased, and diverse risks are included. ILS issuances in the region have started with indemnity-based products, but now parametric bonds are issued. In March 2023, Hong Kong welcomed the first listing of a cat bond in the city, according to the World Bank.
With the infrastructure and commercial development in emerging Asia, the need and demand for financial indemnity and risk prevention can only increase. Furthermore, alongside Asia’s strong economic growth, more people are moving into the middle-class rank. They are particularly vulnerable to catastrophic losses and feature large and widening protection gaps.
“Recent issuances of ILS in Asia are pointing to increasing acceptance by institutional investors.”
The advantage of parametric-triggered ILS is that these instruments provide a clear, transparent, and efficient mechanism for determining payouts without requiring a claims assessment before paying the indemnity. For those who are unfortunately affected by natural disasters, cat bonds can offer fast payment to limit their financial exposure and speed up recovery and rebuilding.
There are still challenges to scaling up the use of ILS in Asia. To begin with, there are significant data gaps, particularly in modelling secondary perils and the impact of climate change for some of the emerging Asian markets. Investor education is needed to cultivate a deeper and broader investor base. At the same time, a more extensive network of professional service providers is required to support ILS issuance.
In the near term, the need for re/insurers to adjust to the market landscape, improve modelling capability and secure sufficient financing will continue to dictate higher premiums rates and tighter terms and conditions. However, this is not necessarily a step backwards in covering the protection gaps. The natural progress of our industry is to continuously push outward the insurability frontier to accommodate new and emerging risks.
Closing Asia’s large protection gaps will require multi-stakeholder collaborations and smart deployment of technologies and innovations. Beyond risk transfer and risk financing, considerations should also be given to risk mitigation, climate adaptation and building resilience.
ABOUT PEAK RE
Peak Reinsurance Company Limited (Peak Re) is a Hong Kong-based global reinsurance company. Since commencing operations in 2012, the company has grown steadily to rank 27th among international reinsurance groups in terms of net reinsurance premiums written by S&P in 2022. Peak Re is rated ‘A-’ by AM Best and offers both property & casualty and life & health reinsurance.
Our mission is to modernise reinsurance while supporting the protection needs of the emerging middle classes of emerging Asia and beyond. Our vision is to “be the most valued reinsurer of our clients”. On average, we pay 88 percent of claims within five days. The speed and accuracy of claims payments are critical to safeguarding households and businesses from severe financial strain.
Our strategy for the coming years is to strengthen our footprint in emerging Asia, our home, and selectively expand into other emerging regions, to support the rising middle-income class. Since inception, we have developed a balanced and diversified portfolio by line of business and geography, providing clients with innovative and tailored reinsurance, risk management and capital management solutions.
Franz-Josef Hahn is the chief executive officer of Peak Re. He can be contacted at: comms@peak-re.com
Main image: Shutterstock / baybars can
