November 15th, 2012

Implications of Emerging Market Growth on the (Re)insurance Sector

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President
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As the marketplace becomes increasingly competitive, and economic and socio-political conditions stabilize in many emerging markets, these territories will become more central to carrier companies’ strategies. However, pursuing growth opportunities in such developing economies brings new and different risks. There are growing concerns about increasing exposure and vulnerability to natural hazards in such growth regions. Writing business that is catastrophe exposed at adequate prices and terms is crucial for profitable growth in new markets, and it is important that (re)insurers maintain underwriting discipline when entering emerging economies.

Understanding the risks involved and carefully monitoring exposure growth as insurance demand rises are the biggest challenges companies face. In addition, companies need to recognize the unique characteristics that define each developing nation. Market entry strategies will vary by region and country, and these areas should not be approached with one generic or common strategy. Indeed, insurance CEOs are increasingly rethinking their strategies due to the varying potential challenges in emerging markets. Given Asia’s size and diversity, wide-ranging opportunities and risks exist across the region. Latin America also comprises a number of uniquely different markets, each with their own set of challenges.

(Re)insurers have come to rely on a variety of tools to help identify and manage risks. Strong ERM frameworks, catastrophe models and reinsurance cover are some of the tools and techniques the industry has used to monitor and manage its exposures in recent years. However, the increasing desire to expand into new markets and to seek further growth opportunities presents new challenges since some of these territories are unmodeled or inadequately modeled.

Many companies are therefore calling for the development of new and better catastrophe models to support their evolving business needs. The importance of robust ERM practices has also been reinforced. In addition, reinsurance cover remains the most effective method for protecting insurance companies against unexpected catastrophe losses. Furthermore, given the threefold challenge of increased debt costs in certain regions, heightened costs of equity exacerbated by near record low valuations and increased frequency, severity and diversity of insured catastrophe losses, many carriers are now revisiting the benefits of aggregate reinsurance coverage. Property catastrophe insurance pools are also likely to be developed in some emerging economies in the near future. These solutions will play an increasingly important role as companies expand and open new operations in emerging and non-peak regions.

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