Cat risk and protectionism

Various markets such as Indonesia and India have a level of insurance sector protectionism, and more needs to be done to remove barriers to entry in order to reduce the insurance gap in Asia, says Philip Chung of S&P Global Ratings.

What are the main cat risks across Asia that challenge re/insurers?

We can start by looking at economic losses from catastrophes and comparing them to insured losses. Only about 8 percent of losses from natural disasters and weather catastrophes in Asia are covered by insurance, compared to 40 percent in developed countries.

This difference in coverage is a challenge that the insurance industry is trying to solve. The low levels of insurance penetration in Asia can be attributed to low risk awareness and/or affordability of cover.

The soft pricing environment signifies the abundant capital in the industry chasing the same plain vanilla risk. While insurance companies have always tried to innovate, the use of technology (satellites, drones, sensors, etc) and big data should enable insurers better to quantify and price risk.

Parametric insurance covering government infrastructure and agriculture is an area that could bring about wider social benefits.

Are risk models becoming more sophisticated? What else needs to be done?

Risk modelling companies are constantly updating their models to reflect learnings from the latest losses and scientific advancements. Models are getting increasingly complex given the availability of computing power and technological advancement.

In south-east Asia, there are efforts to improve the availability and quality of data through the NatCatDAX Alliance. The availability of open source catastrophe modelling tools also gives risk managers more flexibility to model and understand their risk.

As margins are squeezed through competition for traditional business lines, re/insurers are stepping up efforts to develop products that take advantage of new datasets and new channels. Reinsurers are working with primary insurers to develop solutions that are simpler to implement and service.

Multilateral institutions are working with governments and risk carriers to ease the burden of catastrophes, via risk transfer solutions with parametric triggers.

As global reinsurers consider various solutions to suit the needs of different markets, they may be constrained by regulatory considerations that may limit the reinsurer’s ability to transfer risks.

Similarly, solution providers could spend considerable effort to convince public servants of the benefits of parametric insurance.

Is the landscape for cat business across Asia competitive?

While models can provide a technical premium level, supply and demand ultimately determine the transaction price. We see more instances where treaty business is written with sliding scale commissions, suggesting that reinsurers are at the lower bounds of their profit tolerance.

Are governments absorbing these risks? Is there an opportunity for the private sector to take on more?

For poorer economies, the financial impact of a catastrophe can be devastating and hold a community back by decades. The government ultimately absorbs these risks through lower economic development and slower GDP growth.

Is protectionism in the region a barrier to achieving the above?

While various markets such as Indonesia and India have a level of protectionism, a lot more will need to be done to reduce the insurance gap in Asia. The existing barriers will no doubt make the journey a lengthier one.

Reinsurers based in India have the first right to refusal on business before international players are considered. Indonesia maintains a local retention policy which reduces the attractiveness of a market which is already very competitive. China’s solvency regime encourages local retention of business through higher capital requirements for risk ceded to offshore carriers.

Is there a trend towards more protectionism in the region?

There is a mixed situation within Asia-Pacific. In Indonesia, we consider the regulators’ stance to be more protectionist by nature. This reflects significant local retention of risk exposures for some lines of business and tightened foreign ownership.

In India, the gradual reduction in compulsory cessions to local reinsurers hints at a reduced protectionist approach. However, the introduction of preferential treatment (benefiting domestic reinsurers through a first right of refusal) highlights a shift in direction.

We believe protectionist policies (ie, retaining more premiums among domestic insurance companies) will aid the development of the local economy as revenue stays onshore. Furthermore, the insurance industry will need to speed up its development in technical knowhow and talent development.

Clearly, there are flaws in this approach. The removal of a level playing field makes the market less attractive to foreign players, prompting reduced capital allocation and capacity to support longer-term growth ambitions.

Philip Chung is senior director and analytical manager for Financial Services Ratings, Sovereign and International Public Finance Ratings at S&P Global Ratings covering South and Southeast Asia. He can be contacted at:  philip.chung@spglobal.com