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Nov 2019

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Monte Carlo: CAT losses, pricing and ILS hot issues of $600bn reinsurance market

Source: Middle East Insurance Review | Oct 2019

Hurricane Dorian was edging slowly up the east coast of the US after devastating the Bahamas – causing multiple deaths and at least $3bn worth of damage – while the world’s reinsurance community gathered in the balmy sunshine of Monte Carlo for Les Rendez-Vous de Septembre.
 
The year to date has been kind to reinsurers with prices rising with few big Nat CAT payouts so far. Both 2017 and 2018 were cruel years for reinsurers because of a stream of Nat CATs, but weather-friendly 2019 has seen the world’s reinsurers ask for – and get – higher prices on contract renewal, and more price hardening is forecast on the back of ‘loss creep’ – where original estimates of catastrophe costs prove to be far below reality.
 
But reinsurers in Monte Carlo kept a weather eye on the continued influx of competitive alternative capital – with yield-hungry investors piling in on the lookout for margin in an otherwise bleak low-interest-rate environment.
 
Three drivers of the market
At a media briefing in Monte Carlo Fitch Ratings senior director, insurance ratings Graham Coutts pointed to CAT losses, pricing and ILS as being the three main drivers of the $600bn reinsurance market. “The pricing outlook is improving,” he said. “But not enough to affect the ratings outlook for the sector.”
 
“Hurricane Dorian isn’t going to be a very large event,” said Mr Coutts and predicted that final losses would come in under $10bn. Perhaps more significantly, however, Mr Coutts said, “Pricing is much more local and what happens in one market may not affect other markets.” The other significant prediction was that, “We may see further ILS capital retreat from the market in the face of continued loss-creep.” 
 
Data from Willis Towers Watson indicates that there has been a huge fall-off in CAT bond issuance in the first half of 2019 – down to $2.7bn from $7bn for the corresponding period the year before. “We think a further firming of rates is likely,” Mr Coutts said.
 
$1.2tn protection gap needs filling 
The reinsurers’ annual shindig saw a kickstart when Swiss Re released its latest sigma report that showed that the global economy is less resilient and has less capacity to absorb shocks than it did at the onset of the global financial crisis in 2007.
 
The good news for the Asia Pacific region is that it has seen insurance resilience improve in both the advanced and emerging economies of the region since 2007 – whereas the Euro area has seen resilience decrease the most since 2007.
 
“It is a trillion-dollar opportunity for the insurance industry,” said Swiss Re group chief economist Jerome Jean Haegeli. “The insurance industry has largely kept pace with growing loss potentials and can do more to improve resilience. Emerging markets, in particular, benefit more strongly from insurance protection than mature economies, which often have greater access to alternative sources of funding.”
 
According to the report, Asia and Oceania had fairly stable economic resilience scores between 2007 and 2018. Resilience levels in China, Japan and Australia improved slightly, while India’s resilience declined mostly due to lower index scores for the financial-sector components, including banking industry environment, financial market development and insurance penetration.
 
Insurance resilience in APAC
In relative terms, the composite insurance resilience index improved in both advanced and emerging countries in Asia Pacific. The largest improvement in insurance resilience was in Oceania, where the index increased by 18 percentage points since the turn of the century to 77%, making the region the most resilient geographic area by far. Oceania also has the highest resilience score for Nat CAT risks of any region in the world at 69%. This reflects compulsory earthquake covers in New Zealand and success in efforts to increase uptake of flood insurance in Australia.
 
In the rest of advanced Asia Pacific, the composite insurance resilience index was up four percentage points to 59%, while for emerging economies in the region it rose seven percentage points to 31%. Advanced Asia Pacific countries have the highest insurance resilience score for mortality risks of any region globally at 62%. Taiwan, Hong Kong, South Korea and Japan are among the economies with the highest life insurance penetration in the world, driven by savings type products.
 
In emerging Asia Pacific countries, insurance protection against the main three risks (Nat CATs, mortality and healthcare spending) continues to be at significantly lower levels compared with advanced economy counterparts. One notable development in emerging APAC is the strong gain in resilience against healthcare spending risk, reflecting the major universal health coverage-inspired reforms that have been implemented in China, India, Indonesia, the Philippines, Thailand and Vietnam.
 
Emerging economies in Asia Pacific have the largest absolute insurance protection gap of $456bn, representing almost 80% of the region’s total of $572bn. M 
 
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