October 24th, 2012

Cold Spots Heating Up: Executive Summary

Posted at 1:00 AM ET

The succession of costly and global catastrophe losses over the last few years has had a wide-ranging impact on the (re)insurance sector. Since 2010, (re)insurers have been hit by powerful earthquakes in Chile, New Zealand and Japan, while devastating floods also caused widespread damage in Australia and Thailand. The exceptional cluster of global natural catastrophes in 2011 in particular emphasized increasing risk in emerging markets. The result has been unexpectedly expensive ‘cold spot’ losses in areas that were not considered as risky in the past.

All of this has come during a period of rapid economic growth in developing markets. Slow or stagnant growth in the established markets of the United States and Western Europe, as well as some implicit pressure from rating agencies to avoid geographic concentration, has prompted many (re)insurers to look towards new regions for top-line growth. Asia and Latin America in particular have been pinpointed as important markets with premium growth in these regions projected to outpace the rest of the world. Yet pursuing growth opportunities in emerging economies brings new and different risks for (re)insurers. As insurance penetration increases in these markets, catastrophe losses in regions previously considered cold spots are likely to rise.

The emergence of potential new losses poses significant challenges to (re)insurers as they penetrate new markets. Historically, catastrophe experience in the United States has been the primary determinant of the availability of global catastrophe reinsurance cover and the direction of rates since the majority of large losses occurred in the country. However, the recent spate of expensive cold spot losses has highlighted carriers’ limited understanding of natural catastrophes in non-peak zones and the difficulty of adequately pricing business and monitoring exposure growth without appropriate risk modeling tools. Indeed, the lack of catastrophe modeling solutions in many developing economies suggests that some (re)insurers may not possess an adequate understanding of the scale and nature of losses that can occur in these territories. Flood risk in particular is a major concern, given that flooding is a regular occurrence in most emerging economies and modeling solutions for this peril are virtually non-existent in most regions.

Therefore, the importance of better understanding underwriting catastrophe risks in emerging markets and of overcoming model limitations is a key factor to ensure profitable growth in these regions. (Re)insurers can meet these challenges through careful planning and risk analysis. Strong enterprise risk management (ERM) practices, improved catastrophe models and robust reinsurance protection can help insurers manage their risk exposures as they enter new markets. However, these tools and techniques must be improved and expanded so that (re)insurers can make informed risk management and reinsurance decisions in each new region and identify potential hidden loss exposures in their portfolios.

The purpose of this report is to give timely insight into catastrophe risks in developing economies and how they are likely to affect the (re)insurance sector as companies target growth opportunities in these new markets.

Link to full report: Cold Spots Heating Up; The Impact of Insured Catastrophe Losses in New Growth Markets >>

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