Costly cat year will impact pricing in Asia-Pacific
2018 is set to be the most costly catastrophe year for Asia-Pacific since 2011, leading to potential rate hardening at renewals, but the impact is likely to be restricted to countries hit directly by losses, Michael Reynolds, global chief executive officer of JLT Re, told SIRC Today.
“It’s difficult to provide any granular commentary on rates at this point as it is early and a lot can still happen,” said Reynolds.
“As things stand, outcomes are likely to vary significantly by territory, particularly for property-catastrophe renewals.”
Reynolds suggested there could be some short-term rate hardening for wind and flood at the new year’s renewals, given the series of significant cat losses in Japan in Q3 from typhoons Jebi, Trami and Kong-rey.
Typhoon Mangkhut also grabbed headlines, with AIR Worldwide estimating insured losses in mainland China, Hong Kong and Macau to be between $1 billion and $2 billion.
“Losses in Indonesia, the Philippines, Thailand and China could likewise manifest themselves at January 1 by bringing about marginal pricing increases, or at least stemming rate reductions in China,” he said.
Reynolds suggested modest rate decreases are likely elsewhere in the region, although there could be some pressure on pro rata T&Cs.
“These events have once again highlighted substantial protection gaps that exist across Asia-Pacific and, given the abundance of capital in the reinsurance sector, governments should work with risk carriers to ensure losses are transferred away from taxpayers and into the private re/insurance market,” he said.
He also expects demand for reinsurance to grow elsewhere in the region, driven by strong economic growth, healthcare needs, and regulatory changes.
“On the healthcare front, governments are under increasing pressure to address coverage needs for large parts of their populations and reinsurance can play an important role here,” he said.
“Strong economic growth is another important factor. Even as it steadies in the single digits, China is likely to continue to see significant growth in 2019/20 as corporations and the growing middle class look to insure more of their exposures.”
In certain Asia-Pacific countries, Reynolds said, regulatory changes are encouraging greater diversification, for example away from motor insurance, which in turn has resulted in cedants purchasing more vertical catastrophe cover.
Conservative solvency regulations, a growing focus on risk management and capital efficiency are also contributing to demand for reinsurance.
“At a time of rising interest rates, more cedants are recognising that reinsurance remains a cheap and efficient source of capital, even after the most expensive catastrophe year in 2017 and the elevated activity of 2018,” said Reynolds, adding that the growth potential for ILS in a catastrophe-prone region like Asia-Pacific is clear.
There are obstacles that impede progress such as cheap traditional reinsurance, a lack of accepted parametric benchmarks, relatively lightly modelled catastrophe risks and inconsistent (or poor quality) exposure data.
“Working with governments and local authorities to set up microinsurance schemes would be a modest, but achievable, start. While retail policyholders may not be optimal risk bearers, this would be an improvement on no coverage at all,” he said.
“Affordability is the root cause of the protection gap problem in Asia, with up to 40 percent of the population in parts of the region unable to afford insurance cover,” explained Reynolds. “One crucial step in addressing this issue is improving the quality of data in the region so that parametric covers become viable.
“Governments and development banks have a significant role to play here in facilitating access to data that is required to structure such schemes.”
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