In our 2010 Asia Pacific Catastrophe report, we described how the Asia Pacific region has significant exposure to a wide variety of catastrophe perils. The events of the past 18 months have demonstrated how real these exposures are: a series of significant catastrophe losses in our region during 2010 and 2011 has turned the world’s focus on the Asia Pacific area.
Demand for catastrophe reinsurance in the Asia Pacific region has expanded considerably over recent years and all indications point to further growth for the future. The catastrophe losses during 2010 and 2011 are likely to stimulate this trend further by re-emphasizing the value of reinsurance. Underlying drivers of this growth include macro-economic factors such as the rapid growth of economies of, for example, China or India, but also an increasing level of sophistication in insurance organizations within the region. This sophistication has resulted in increased recognition of the importance of reinsurance as part of a insurers’ overall risk management strategies.
Guy Carpenter estimates that around a quarter of the total excess of loss catastrophe limit purchased in the world covers countries in the Asia Pacific region. The share of global catastrophe excess of loss premiums is slightly less, at just under 15 percent, but this figure represents double its share of global premiums in 2007, evidencing considerable growth of the region in just four years.
Within the region, the total limit and premium purchased are heavily dominated by the traditional mature markets in Japan and Australia. Insurance markets in these territories are characterized by relatively high levels of insurance penetration and there is an associated significant purchase of catastrophe reinsurance from the international reinsurance markets.
From an economic and insurance perspective, China, India and parts of South East Asia have shown the most impressive growth rates globally. These markets have competitive reinsurance environments, basically because supply still exceeds demand. Such oversupply has been created by the diversification strategies that international reinsurers have pursued over the past decade, which have in turn led them to pursue business, often aggressively. These “growth” territories, are targeted largely due to rapid economic development, current low insurance penetration with implied future growth potential, trends of tightening solvency regulation and increasing localized demand for comprehensive risk management. International reinsurers have therefore been keen to achieve a market presence in these territories. However will the recent loss activity for these international players cause them to re-think their business strategies?
Catastrophe Loss Activity in the Asia Pacific Region
The first half of 2011 saw powerful earthquakes in Japan and New Zealand as well as severe floods in Australia. Associated loss of human life has been devastating for some communities and re-building efforts are likely to take many years. These events also resulted in the reinsurance industry experiencing its most costly first half year on record. Although the economic impact on these regions and on the industry continue to develop, known losses from global catastrophes to date in 2011 have already surpassed those recorded in 2010 and 2009 combined. Compared to the reinsurance industry’s most costly year of natural catastrophe losses to date (2005), the 2011 year comes a close second, with events in the Asia Pacific region comprising over 67 percent of current estimated losses.
The Asia Pacific region has significant exposure to a wide variety of catastrophe perils: within the region lie some of the world’s most active earthquake areas, the northwest Pacific typhoon zone and numerous other localized threats of windstorm, flood, hail, snow, freeze and fire. In terms of insured losses however, the largest historical events have predominantly been earthquakes. Of the top ten most costly earthquake events from 1980 to 2011, seven occurred in the Asia Pacific region.
Asia Pacific Reinsurance Market Conditions
The chapters of this report mainly cover territories within the Asia Pacific region with significant or rapidly developing reinsurance catastrophe markets. This report not only demonstrates the rapid growth of the region as a whole, but also recognizes the extent to which the 2011 large loss events in Asia Pacific have affected reinsurance renewals in other loss-free territories.
In a wider context, there were several negative external indicators affecting reinsurers, many of whom claim reinsurance rates are currently inadequate. Interest rates were at or near historic lows for much of the world, affecting investment returns and bottom line results. Solvency II and higher risk based capital requirements are posing heavy regulatory and compliance costs to the industry. There are also concerns of growing inflation and uncertainty around future purchasing power. Although these factors may affect the overall cost of capital, reinsurer capital remains more than sufficient to meet demand and competition makes the general market direction difficult to foresee at the time of writing.
Loss activity and vendor model changes in certain territories were the main drivers of upwards reinsurance catastrophe pricing movements during the mid year renewals. The average global catastrophe reinsurance price change is shown in the chart below.
In the pages that follow, we will review the condition of each major catastrophe prone market in the Asia-Pacific region, helping set the stage not just for the 2012 renewal season, but also for this expanding region as it continues to develop as one of the major growth reinsurance markets worldwide.