Asia is poised to be the next frontier for the growth of insurance linked securities (ILS) as ILS funds continue to diversify their investment portfolios, according to Ms Jacqueline Loh, deputy managing director of MAS at the Artemis ILS Asia 2018 Conference on 12 July.
She said that although at first glance, the economics of ILS in Asia appear to be challenging with the continent still a developing market with low insurance penetration, it is likely that ILS will achieve a breakthrough in the coming years as the protection gap in Asia widens.
Over the last 20 years, Asia has accounted for almost half of the world’s economic losses from natural disasters, amounting to more than $900bn. Economic losses in Asia Pacific is projected to exceed $160bn annually by 2030. The protection gap in Asia is set to widen for the following three reasons:
a. First, the frequency and severity of natural catastrophes is increasing. According to UN data, the number of natural disasters in the Asia-Pacific has increased from an annual average of 44 disasters in the 1970s to 146 in the 2000s.
b. Second, the wealth and value of assets at risk have also increased. Strong economic growth in Asia and growing urbanisation has led to the rise of small highly-populated megacities, many of which lie along areas that are exposed to natural perils.
c. Third, insurance penetration is still low in Asia. Just over 8% of natural catastrophe losses are insured in Asia as compared to 40% in developed regions.
There are positive signs of change, with ASEAN making a push to address its rising exposures to natural catastrophe. Let me provide some examples of recent developments:
a. ASEAN has commenced a holistic approach to disaster risk management through the ASEAN Disaster Risk Financing and Insurance (ADRFI) Programme. The Programme will strengthen ASEAN’s disaster risk management capabilities through:
- Improving data required for assessing disaster risk exposure and financing solutions.
- Enhancing knowledge on disaster financing solutions through capacity building.
- Harnessing risk advisory expertise to provide advice and design risk financing solutions.
b. Governments are increasingly using alternative risk transfer mechanisms such as government pools, like the Philippines parametric disaster insurance pilot, the Thai crop insurance scheme and the Vietnam pilot agriculture programme. In May this year, the establishment of the Southeast Asia Disaster Risk Insurance Facility (SEADRIF) in Singapore was officially announced. As ASEAN’s first regional catastrophe risk facility, SEADRIF will start by establishing a regional catastrophe pool to insure the flood risks of Lao and Myanmar. SEADRIF will also seek to sponsor different risk management strategies, including issuance of catastrophe bonds, or to act as a reinsurer to national catastrophe pools.
The presence of a full-fledged ILS market and ecosystem in the region will encourage the development of this risk financing instrument. However, there is currently no established market in Asia for ILS.
Singapore is well positioned to fill this need, Ms Loh said, citing the island state's status as a well-established regional insurance hub that offers a comprehensive spectrum of re/insurance activities through a vibrant ecosystem of re/insurance players and service providers. There is also a strong catastrophe risk ecosystem to support ILS issuances, with the leading catastrophe modelling firms with ILS expertise present in Singapore, and research institutes such as the Earth Observatory of Singapore and the Institute of Catastrophe Risk Management, to support data and modelling needs. Singapore also aims to serve as the Asian knowledge centre for new and emerging risks.
With Singapore as the gateway to alternative capital providers such as pension funds, family offices, and hedge funds in Asia, ILS fund managers are increasingly assessing Asian investors through Singapore.
Singapore has a deep debt capital market, with a broad range of bond offerings to provide collateral for and to support innovative ILS products and structures. SGX, a dynamic stock exchange, can facilitate bond trading. The country also has ready corporate, regulatory and tax frameworks to facilitate ILS issuances.
In addition, MAS has taken steps to nurture the growth of the ILS market in the region. MAS launched the ILS grant scheme in January this year, which will fund 100% upfront issuance costs of catastrophe bonds in Singapore, up to S$2m ($1.5m). MAS has formed an industry-led Alternative Risk Transfer work-group to advise the regulator on initiatives to support the development of Singapore as an ILS domicile.