Increase in weather-related events highlights importance of reinsurance: S&P Global

The Asia-Pacific region’s insurance and reinsurance sector has experienced its fair share of weather-induced woes over the past two years. And now, the pandemic. After seeing significant catastrophe losses, insurance and reinsurance price hikes seem inevitable.

That’s according to an S&P Global Ratings’ commentary published in its report “APAC’s Costly Catastrophes: Reinsurance And More Required”, which was published in October.

“We believe the need for reinsurance protection strengthened amid the successive catastrophes,” said Eunice Tan, S&P Global Ratings analyst in Hong Kong.

“This need has become more urgent with the unfolding of the COVID-19 pandemic.”

“The appetite for domestic catastrophe risk will be limited and demand for reinsurance will persist.” Koshiro Emura, S&P Global Ratings

At the same time, numerous disasters across the Asia-Pacific region highlighted important considerations for the broader reinsurance industry.

“Global reinsurers will continue to view the region as one of growth and diversification, despite increasing catastrophe losses,” Tan added.

“For the rated Asia-Pacific reinsurers with less reliance on catastrophe exposure than the global players, we believe there is scope for deepening insurance uptake of reinsurance in Asia-Pacific.

One good example is Japan. Costly typhoons over 2018–2019 and recent COVID-19 losses will reduce Japanese insurers’ profits in fiscal 2020. Despite higher reinsurance costs, major Japanese non-life insurance groups have maintained or enhanced their protection against catastrophes.

“Based on the tendency for Japanese insurers to try to keep a lid on earnings volatility related to natural catastrophes, we believe the appetite for domestic catastrophe risk will be limited and demand for reinsurance will persist,” said Koshiro Emura, S&P Global Ratings analyst in Tokyo.

“Global reinsurers will continue to view the region as one of growth.” Eunice Tan, S&P Global Ratings

Better understanding
For the region’s reinsurers, rapid urbanisation and an evolving risk landscape make deepening an understanding of changing operating conditions an urgent matter. The need to manage catastrophes that are more frequent and severe than the historical average, an acute combination of catastrophe events, and mounting concerns around concentration risk and risk accumulations are central for reinsurers operating in the Asia-Pacific region, the report said.

The report stresses that this confluence of factors means the need for reinsurance protection has strengthened. “We believe global reinsurers will continue to view the region as one of growth and diversification, despite increasing catastrophe losses,” it said.

“S&P Global Ratings believes the underlying proposition of reinsurers and insurers remains unchanged: They help policyholders manage risk and reduce financial burdens related to extreme weather and, more recently, pandemic-induced losses.”

The report suggested that the results of regional reinsurers suggest there is scope for increasing insurance uptake of reinsurance in Asia-Pacific, even though this would come with risk. These include rapid urbanisation, an evolving risk landscape, catastrophes more frequent and severe than the historical average, and mounting concerns around concentration risk and risk accumulations.

It also noted that the surge in extreme weather events suggests the broader effects of climate change could be raising disaster risk amid rapid urbanisation across the region. In China, COVID-19 and recent severe floods have led to a renewed push by Chinese authorities to deepen the penetration of catastrophe insurance, facilitated by a three-year action plan released by the China Banking and Insurance Regulatory Commission in early August 2020.

“China is exposed to flooding, earthquakes, and typhoons. Furthermore, its rapidly changing urban landscape makes historical data less representative of the actual risk exposures. In our view, uneven insurance penetration across the country and a lack of awareness of insurance among many limits the effective use of reinsurance to insulate against financial losses,” the report noted.

“The 2020 China floods bring back memories of those that wrought devastation in 1998. We believe the severe floods will likely weigh on underwriting results in 2020 for some P/C and reinsurance market participants.”