Education is needed for ILS to thrive in Asia
A great deal of education needs to take place across Asia before the used of insurance-linked securities (ILS) truly gains traction in the region, Siew Wai Wan, senior director, insurance, Fitch Ratings, told SIRC Today.
An increase in the sophistication of cat models in many regions will also be necessary to boost this form of risk transfer, the development of which is further stymied at the moment by the availability of relatively cheap traditional reinsurance, Wan said.
“The reality is that ILS in Asia is still in its infancy,” he said. “There has been issuance out of Japan and China but it has been sporadic. A lot of education needs to take place for this to truly flourish.
“Long term, however, we do believe that it will become a good option for insurance companies in the region as an alternative to traditional reinsurance.”
In a report on the Asian reinsurance markets, called Playing Catch-up to Strengthen Asia’s Resilience to Catastrophes, the rating agency said it expects a gradual rise in catastrophe bond issuance as an alternative source of direct funding for insurers.
It notes that the only relatively mature market when it comes to cat bonds is Japan.
Four catastrophe bonds were issued in Japan in the past two years. In 2014, Zenkyoren, the largest Japanese cooperative, issued a $300 million bond covering Japanese earthquake risks; Sompo Japan Nippon Koa issued a $100 million bond for typhoon risks; and Tokio Marine completed a $245 million bond covering Japanese earthquake risks. In March 2015, Tokio Marine Nichido Fire issued a catastrophe bond worth of ¥35 billion ($290.5 million).
The market took a big step forward this year, however, when in early July, China Reinsurance issued a catastrophe bond to cover domestic earthquake risks in China. This was the first time a Chinese reinsurer had launched a catastrophe bond in the international capital market. The $50 million bond was issued by China Property & Casualty Reinsurance Company (a wholly owned subsidiary of China Re) through Panda Re, a special purpose vehicle in Bermuda.
Wan acknowledges that, although the evolution may be slow, markets such as China could ultimately become big users of catastrophe bonds.
“China could pave the way in terms of the growth of this market but we don’t anticipate any big growth in the short term. The concept is still pretty new and many players are still grappling with it.
“When you also take into account the cheap traditional reinsurance available, there is not an immediate need for cedants to use this form of risk transfer.”
