GIC Re’s chairman and managing director says the global (re)insurance industry can do more to prepare for natural catastrophes
To what extent has the heavy 2011 catastrophe burden affected price and availability of catastrophe reinsurance coverage?
I really don’t think there has been a hardening of pricing and non-availability of catastrophe reinsurance coverage. There was a sharp increase in rates in nat cat affected regions like Japan, Thailand, New Zealand and Australia, but this has not resulted in a general hardening of the market due to abundant capacity for cat business and excess reinsurance capital available. Again, the losses suffered by reinsurers in 2011 have already been recouped by major players if the results being declared for 2012 are any indication. This shows that the global reinsurance industry is highly resilient.
What can be done to improve exposure measurement and management across the region?
Events of 2005 and then again in 2011 have provided no evidence of the insurance industry changing or improving its exposure measurement and management systems. The insurance industry will have to adopt a more informed approach to underwrite its risks. We will need to augment our dependency on historical data and take into account the impacts of other external factors such as global warming.
Climate change and the consequential increase in nat cat events puts our exposures in a continuous state of flux. In addition, the casualty and property losses, business interruption, political risks and other similar events have a cascading effect on our exposures. The industry will need to regularly review conditions of coverage, its risk appetite and need to innovate products suited to the changing situations. All stakeholders will need to engage with each other on a continuous basis. There is a need for greater co-operation and collaboration on risk information and technology cutting across political boundaries.
How best can governments and the (re)insurance industry work together to ensure adequate protection against natural catastrophes, and to what extent do alternatives such as cat bonds play a role?
Insurers can only help society recover after a cat event. The government has to take up the responsibility for the first line of defence, and increase society’s preparedness. Nat cat events are not new to us, however, the increasing trend of events and the consequential losses show that risks are moving to risk-prone areas. Governments will need to encourage responsible behaviour from the society. Eco-friendly behaviour will have to be incentivised.
With regards to alternatives as risk diversification vehicles, major insurers in the UK/European are turning to capital markets to diversify their risk by marketing securities such as catastrophe bonds that are attractive to investors. As market risk is not related to catastrophe risk, the catastrophe securities can thus provide a means of portfolio diversification for investors.
In addition, we can also look at the creation of a catastrophe reserve which could be tax-exempted. Such tax deductible reserves would facilitate the insurance industry to build up specific long-term reserves that are earmarked to meet the fund requirements of industry when faced with the catastrophe claims in the event of major disasters.
How will the growing influence of India affect the (re)insurance market?
In an emerging market like India, the demand for insurance continues to expand and the insurers need a robust and dependable reinsurance infrastructure to sustain it as it grows. Penetration is still quite low by the global standards, and this provides an opportunity for the industry. Moreover, despite the global economic downturn, India is still on a better wicket. The Indian government has plans to further liberalise the policies related to insurance and other financial services in the country, which should provide an impetus to the global insurance industry.
What impact do state-backed reinsurers have in the markets that they dominate?
To answer your question I would like to give you a brief insight into the Indian insurance market. In 2000, the country’s insurance sector was liberalised, heralding the entry of private players. These insurers did not have to look beyond the shores for technical know-how, skilled manpower, industry infrastructure and a system to co-ordinate the entire market that was just opening up. The past decade has been wonderful for the Indian insurance market with excellent growth. It was the state-backed (re)insurance environment that provided a solid foundation for the liberalised sector to capitalise and grow upon.
For innovations to happen, the industry requires a proper foundation and infrastructure, and that very often is laid down in a controlled environment.
