ILS has potential for deployment and growth in Asia, where insurance penetration is low and natural and manmade catastrophes inflict huge economic costs on governments, causing considerable strain on state budgets.
JLT Re’s ex-CEO, Michael Reynolds believes that the Asian region with its underlying growth and development is going to be important for ILS in the future. “Asia is in a position to leapfrog some of the more developed regions and learn from what’s going on in the ILS space in other areas and take that development to the next level, which could mean longer tail lines of business playing in that particular space,” he said.
Still in its infancy
Data from Artemis indicates that out of the 106 ILS deals that have taken place since 1 January 2017, which amounted to $115.2bn, only five specifically cover risks in Asia. Those five deals were worth $1.8bn, representing just 1.5% of the total, in terms of value. AXA XL executive vice president and head of emerging markets Brendan Plessis, believes the data suggests that the ILS market in the region is still relatively untapped. “With the exception of one deal from Panda Re in 2015 for the China earthquake, those deals were limited to either Japanese earthquakes or typhoons. In other words, there have so far been no ILS deals covering risks in countries other than these,” he said.
Lessons from other regions
Mr Reynolds believes that the Asian region can learn from the experience of other regions where ILS has been tested and proven throughout 2017, especially in the US during the windstorm season followed by the significant hurricane activity there. “ILS is going to be important for the Asian region, not only in property CAT lines, but also in the longer tail lines of business,” he said.
Mr Plessis feels that there is limited understanding in the Asian region on how the insurance and reinsurance industry works and called for a dialogue between various stakeholders to create awareness. “We need to keep talking to all stakeholders, that ILS together with other risk management solutions, including reinsurance and government pools, has significant scope to play a larger role in reducing the financial impact of natural disasters,” he said.
Mr Plessis, however feels that on the supply side, a lack of data is still a major impediment to the expansion of the ILS market in Asia. “While there is increased appetite among investors for CAT bonds and ILS-backed protection, it is, not surprisingly, tilted toward areas and perils where the data sets and models are more highly developed and sophisticated,” he said.
Developing risk models is important
Catastrophe risk models also play an important role in the understanding of different perils and regions, ultimately supporting the development of markets by providing a view of potential losses and enabling risks to be priced. “The Asian region needs to improve in the area of modelling, as ILS is traditionally played in the CAT lines of business, because of its predictability and as it can be modelled very well,” said Mr Reynolds.
On the other hand, Mr Plessis believes that for regions and perils where off-the-shelf models don’t exist, which is the case for many parts of Asia Pacific, the reinsurance market does have the expertise to use more traditional forms of risk analysis and risk aggregation. “Until we have better data about the risks in certain regions, the capital markets will either look elsewhere or demand risk premiums that are prohibitively expensive,” he said.