Fitch Ratings has suggested that re/insurance companies must innovate to balance the potentially conflicting goals of expanding access to affordable natural catastrophe cover without compromising prudent underwriting principles, with the rating agency highlighting solutions such as microinsurance, parametric insurance and insurance-linked securities (ILS) as potential ways to help achieve this.
In a new report, Fitch observed that wealth creation, urbanisation and climate change are key structural drivers of rising demand for nat cat cover. It added that this demand is already not being fully met, with a persistent and material protection gap in natural catastrophe insurance.
The comments come amid broader industry concern over the same trend. In a separate report, Moody’s warned that the global insurance protection gap is widening as economic growth shifts toward underinsured emerging markets, where penetration remains low, and catastrophe losses are increasingly uninsured.
Fitch has estimated that both economic and insured nat cat losses will continue to grow faster than GDP over the medium to long term, creating a dual challenge for the sector: managing rising risk exposure while also capturing significant growth opportunities.
“Affordability concerns, capacity constraints, an absence of data, and a lack of effective legal frameworks could lead to long-term franchise losses,” the rating agency explained.
Fitch continued, “To overcome this, policymakers, supervisors, insurers and reinsurers need to work together to roll out innovative solutions such as microinsurance, parametric covers and insurance-linked securities.
“They otherwise risk underwriting losses or contracting business volumes if their policies are deemed too expensive or not fit for purpose.
“Reputational risk also comes into play as the insurance sector may fail to meet societal and political expectations. Innovative product solutions available today include microinsurance and parametric insurance. However, their relevance is still limited in absolute terms and in their geographical reach.”
In its report, Fitch noted ongoing innovation in risk-transfer mechanisms, including the continued development of insurance-linked securities for peak risks, alongside advances in nat cat modelling and data analytics. It also highlighted the central role of reinsurers in this ecosystem.
“Reinsurers are pivotal as they have superior underwriting expertise, sometimes run their own nat cat models, and have strong access to capital markets. They not only provide capacity to cedents, but also advice on best-practice underwriting. In addition, they increasingly act as originators of ILS, bridging the gap between insurance markets and institutional investors,” the rating agency said.
Fitch went on, “Natural catastrophe covers are likely to remain a profitable and growing business for insurers and reinsurers in the long term if the insurance industry continues to provide innovative solutions, supported by stronger public-sector schemes and a constructive regulatory framework.
“Adaptation measures, risk-sharing mechanisms and state-backed reinsurance schemes are also pivotal to avoid a widening of the nat cat protection gap.”
