ILS should be used to close the Asian protection gap, says Kenrick Law, head of Asia-Pacific at Allianz Re

Reinsurers should not fear so-called alternative capital. Instead, they should leverage it to lower the cost of capital and help narrow what remains a significant protection gap in many parts of Asia-Pacific.

That is the view of Kenrick Law, head of Asia-Pacific at Allianz Re, who believes that the risk-transfer industry in all its forms should do more “to shout about the many good things it does”, especially by helping economies recover in the aftermath of natural disasters.

“The use of insurance-linked securities (ILS) could be a long-term solution to help close the protection gap. Rather than being afraid of the influx of ILS capital, we should use it to help finance increasing insurance risks,” Law told SIRC Today.

“In Asia specifically, a solution of that nature is very much needed. But we do not showcase our solutions well enough as an industry.”

Law suggests that in 2018, only around 9 percent of total economic losses across Asia were insured one of the lowest percentages in the world although specific disasters in recent years have illustrated the value the risk transfer industry can offer.

For example, around 80 percent of the economic losses resulting from the 2011 Christchurch earthquake in New Zealand were insured, thanks to the country’s high penetration of earthquake insurance.

“We don’t advertise what we can offer well enough,” he said. “The response to a catastrophe such as the Christchurch earthquake is a great advertisement for the industry, yet there remains a lack of understanding about the value we can offer to countries prone to such disasters.”

Law explained that Allianz Group is working with a number of other reinsurers as well as The World Bank and governments globally with a view to developing products that could help close the protection gap, potentially tapping the ILS capital as a source of funding.

“We should look to add value and, instead of competing for business, try to increase the size of the pot while helping the wider population,” he added.

“Index-linked products or parametric triggers may be used to deliver some of these solutions. This would be a fantastic thing for the region.”

Other drivers
Some wider forces will drive the adoption of ILS in the region, Law said. Political instability in parts of Asia, exacerbated by the UK’s departure from the EU and a trade war between China and the US, has meant that interest rates have remained low.

With investors unable to achieve decent returns on most forms of investment, they are more open to investing in alternative capital, which is non-correlated with wider economic forces and delivers good returns.

While Law acknowledges that the severity and frequency of losses in recent years may have made some investors pause for thought, he believes their appetite is not diminished.

“Some of the big losses such as typhoons Jebi and Faxai will have made investors nervous and Faxai could hit some of these instruments. That will be another test for the sector, but we believe this capacity will stay,” he said.

The second driver of the ILS sector in the region has been the development of Singapore as an ILS domicile, which has included incentives from the regulator. This has resulted in a couple of deals being done so far, and Law believes more will be in the pipeline.

The main inhibitor for ILS investors in the region is a lack of credible risk models, he said.
“We do expect more activity from this sector but investors like reliable risk models and they do not exist for many perils in the region.”

Much of this, Law said, ties in with the main theme of the SIRC conference: ‘Winds of Change’. This can be interpreted in two different ways, he noted.

The first relates to climate change. “We must find ways of establishing how climate change may affect our exposure and how we build that into our business model,” he said.

“Allianz Group carefully manages environmental, social and governance (ESG) risks in our underwriting and incorporates ESG factors into our investment processes, with around $10 billion of its investments towards green energy and technology. This is a big part of our company ethos.”

Second, Law said, the ‘Winds of Change’ theme relates to the way technology and new regulatory standards will transform the sector.

“We are always looking at how we can embrace technology. Equally, some of the regulatory changes towards risk-based capital standards will change the way our clients want to buy coverage, moving the market in a much more sophisticated direction,” he concluded.