WenWen Chen Hong Kong +852-2533-3559
Eunice Tan Hong Kong + 852-2533-3553
Ever-rising catastrophe claims are changing reinsurance markets. Higher costs for reinsurance inflate the costs for primary insurers and, ultimately, the buyers of protection. S&P Global Ratings expects policymakers in Asia-Pacific will increasingly collaborate with reinsurers, in an attempt to maintain affordability and necessary protection, as well as bolster risk awareness.
One form of involvement is through the development and backing of catastrophe insurance/reinsurance pools. These are a form of risk management against catastrophic risks such as typhoons, earthquakes, or terrorism. Some pools are also established to provide capacity for risks for which it is hard to find coverage. These pools and other types of collaboration are not new to the region. New Zealand was the first to establish an Earthquake Commission scheme in 1945 (see table 1).
In our view, such programs are a useful patch, but not a panacea. Increased risk awareness and preemptive risk management for weather events across the chain--from households and companies to insurers, reinsurers and government planners--are a more sustainable way to deal with more frequent weather-related cataclysms.
Table 1 | Government-initiated pools help fill protection gaps in Asia-Pacific
Jurisdictions
Year of establishment
Program
Perils covered
New Zealand
1945
Earthquake Commission
Earthquake, natural landslips, volcanic eruptions, tsunami, storm/flood
Japan
1966
Japan Earthquake Reinsurance
Earthquake, volcanic eruptions, tsunami
Taiwan
2002
Taiwan Residential Earthquake Insurance Fund
Earthquake
India
Indian Market Terrorism Risk Insurance Pool
Terrorism
Australia
2003
Australian Reinsurance Pool Corp.
Terrorism, cyclones
Thailand
2012
National Catastrophic Insurance Fund
Flood, earthquake, windstorm
China
2015
China Residential Earthquake Insurance Pool
Pacific Island
2016
Pacific Catastrophe Risk Assessment and Financing Initiative
All types of disasters
Southeast Asia
2018
Southeast Asia Disaster Risk Insurance Facility
Sources: Regulatory websites.
Losses caused by weather-related disasters, particularly those associated with climate change, could add to the challenges insurance/reinsurance companies face in the pricing mechanism and assessment of pricing adequacy. For Asia-Pacific, each year seems to bring outsized natural-disaster claim records to respective jurisdictions related to events such as flooding, drought, and typhoons. Recent examples include the heatwave in China, which interrupted power supply and led to industrial stoppages for some producers, and in Korea, where flooding and typhoon caused record natural disaster costs.
Chart 1 | Asia-Pacific markets are less insured against natural disasters
Data as of Dec. 31, 2021. yoy--Year on year. Source: Swiss Re Sigma.
Surges in claims don't just hit the insurance and reinsurance industry. They have broader social costs. Homeowners and businesses face surging insurance premiums--or widening gaps in protection if they can't afford their premiums. Fiscal burdens also rise, as the government foots the bill for social assets and infrastructure losses, clean-up, and other types of remediation. Climate change is also high on the agenda for policymakers.
These broader costs are motivating governments to get involved. One recent example is in Australia where heavy flooding in the first quarter of this year caused US$3.6 billion in insured losses, making it one of the costliest natural catastrophes for Asia-Pacific. Natural disasters for three consecutive years have led to surging catastrophe-coverage costs for homeowners in the affected areas.
In July 2022, the Australian government established a reinsurance pool, under the Australian Reinsurance Pool Corp., for cyclone and related flood damage in Northern Australia, backed by a A$10 billion government guarantee. This covers residential, strata (or common area) and small business property. Participation is mandatory for property casualty insurers with eligible policies. Large insurers must participate by Dec. 31, 2023.
The hope is that the pool will stem some of the inflation in reinsurance cost for primary insurers, and subsequently insurance prices, which will in turn will pass on savings to policyholders and prevent coverage gaps from widening.
Chart 2 | The natural catastrophe protection gap between Asia-Pacific and global remains wide Natural catastrophe-driven economic losses, and claims coverage
Source: Swiss Re Sigma.
A key challenge for quantifying natural-disaster exposures is risk modeling, particularly in emerging Asia. Rapid urbanization makes it hard to ensure data is up to date. Effective data analytics could facilitate policymakers' decisions about urban and infrastructure planning, such as drainage systems to adapt to and manage flooding. Risk identification will become increasingly important as reinsurers grow their business in these markets.
For years, we had flagged the region as the fastest growing reinsurance market. In particular, we see reinsurance demand as accelerating in emerging Asia, supported by factors such as more natural catastrophes and growth prospects in agriculture insurance. Policymakers' initiatives to protect farmers facilitate such growth. Many emerging Asian markets have also set up insurance schemes to help build farmers' awareness. These include the National Rice Insurance Scheme established by the Thai government; the rice farming business insurance program in Indonesia; and the public-private partnership on agriculture insurance in the Philippines.
China offers another example. In safeguarding farming outputs, the central government allocated Chinese renminbi (RMB) 33.4 billion to agriculture insurance subsidies in 2021--a 16.8% year-on-year increase. This segment climbed 30% year on year for the first half of 2022. We estimate agriculture insurance in China will continue its rapid growth, likely at 30%-50% over the next two years.
Reinsurance companies, particularly national reinsurers, are responsible for supporting developments and risk mitigation arrangements for primary insurers. In 2020, the authorities in China established the China Agriculture Reinsurance Corp. (CARC) to support expanding coverage of agriculture insurance. CARC manages 20% of agriculture insurance exposures for the domestic market. It is co-sponsored by nine institutions. The Ministry of Finance is the majority shareholder (55.9%), followed by China Reinsurance (Group) Corp. and China's top five agricultural underwriters. Primary insurers' demand for agriculture reinsurance protection in addition to the cover provided by CARC will likely increase, in our view.
Recent weather events may motivate farmers to buy more protection. In addition, policymakers will likely consider widening coverage for agriculture insurance. An intense heatwave and low rainfall in China have led to severe drought in Sichuan and other southwestern locales. Property and casualty (P/C) insurers with large agriculture exposures in these provinces could face swings in their underwriting results. Claims may grow if the drought persists or has more prolonged effects. Sichuan is also in an earthquake zone, compounding its vulnerability (see "A Decade Since The Sichuan Earthquake, Catastrophe Reinsurance Is Gaining Momentum In China," published on RatingsDirect on Sept. 3, 2018). A magnitude 6.8 earthquake struck the province in early September.
Policymakers in Asia-Pacific will increasingly collaborate with reinsurers, in an attempt to maintain affordability and necessary protection, as well as bolster risk awareness.
China's diverse and expansive landscape exposes it to various perils such as flooding, earthquake, and typhoons. Considering the country's rapid urbanization, more frequent updates to the catastrophe models become crucial for effective risk assessment. While China's zero-COVID stance slows the country's economic growth, agriculture, liability and health insurance will support the P/C sector's growth over the next two years, particularly those segments associated with government initiatives. This growth potential could facilitate greater demand for reinsurance.
Technology initiatives are a must for the region's reinsurers to maintain home advantages (see "Asia-Pacific's Reinsurers: Evolve Or Dissolve?," published on Oct. 29, 2019). In addition, stakeholders across the value chain will strengthen risk management, in our view. For primary insurers, this could include using technology to enhance risk assessment, as well as supporting pricing analysis and selection in policy underwriting.
For reinsurers, we expect enhanced collaboration with primary insurers to share and increase knowledge systems. For example, this may involve insurers working with clients to initiate damage-prevention measures to fortify assets against risks from floods, storms or other events. Besides third-party catastrophe models, reinsurers may also invest in more customized models for assessing catastrophe risk.
If insurance claims and costs are to remain in check, government planners will also likely seek to stem future damages. For example, we expect vulnerable coastal areas may increasingly be zoned to prevent risky development, or to ensure better fortification ahead of development.
Another likely development is an increase in budgets for weather bureaus to better monitor systems and thus allow for the pre-emptive reinforcement and protection of buildings and other assets (e.g., private cars).
Given the rise of weather-related disasters in recent years, reinsurers will likely more actively review their retained exposures and recalibrate their risk appetite. They will also test the efficacy of their retrocession programs. This is because rising coverage costs make retrocession cover more expensive for reinsurers, which could squeeze their profit margin. Measures to help mitigate these challenges could include: enhancing the risk selection procedure, actively monitoring risk appetite, and more accurately pricing risk.
Reinsurers were buffered enough against recent claim records to withstand these pressures. But we are only seeing temporary solutions. Without enhanced risk management or an ability to pass on rising costs, the region's reinsurers will lose business prospects and credit quality. The clock is ticking.
Table 2 | Rated Asia-Pacific reinsurers
Source: S&P Global Ratings.
