Rating agency, S&P Global Ratings has released a report that shows how reinsurance protection is becoming essential although more costly for insurers as extreme weather events rise.
The Asia-Pacific region’s insurance and reinsurance sector saw its fair share of weather-induced woes over the past two years. And now, the COVID-19 pandemic is adding to this list.
After seeing significant catastrophe losses, insurance and reinsurance price hikes seem inevitable.
S&P believes the need for reinsurance protection has strengthened amid the successive catastrophes. This need has become more urgent with the unfolding of COVID-19.
At the same time, numerous disasters across the Asia-Pacific, or APAC, region highlighted important considerations for the broader reinsurance industry.
The rating agency believes that global reinsurers will continue to view the region as one of growth and diversification, despite increasing catastrophe losses.
The report notes an 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.
This is lower than the average 27% exposure of the top 20 global reinsurers. According to S&P, this shows there is scope for deepening insurance uptake of reinsurance in APAC, even though this would come with risk.
For the region’s reinsurers, rapid urbanisation and an evolving risk landscape make deepening an understanding of changing operating conditions an urgent matter.
Japan however, has a long history of having to adapt to life with natural disasters such as typhoons and earthquakes.
In spite of being equipped with catastrophe models supported by detailed historical data and a strong knowledge of domestic risk landscapes, the significant loss creep arising from typhoon Jebi in 2018 and high frequency of successive typhoons in 2018 and 2019 took the domestic insurers and global reinsurance industry by surprise.
By the end of 2019, insurance claims from Typhoon Jebi ballooned to more than US$12 billion (doubling from 2018’s estimates). The successive typhoons of 2018 and 2019 broke five of the top 10 wind/flood insurance payment records.
After Protection, Payback in the two years following the typhoons, Japanese insurers substantially drew down catastrophe loss reserves. S&P expects the recent COVID-19 losses will reduce insurers’ profit in fiscal 2020, leading to further capital buffer deterioration.
Based on the tendency for Japanese insurers to try and keep a lid on earnings volatility related to natural catastrophes, they believe the appetite for domestic catastrophe risk will be limited and demand for reinsurance will persist.
