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Portfolio management in an evolving world

As the world changes in profound ways, so is risk. Climate change, pandemic events, and cyber attacks are some of the threats we all now have to consider in new and innovative ways. With better understanding of risks, better decisions can be made, enabling better risk management. RMS’ Mr Hemant Nagpal shares his views.

Figure 1: Using ExposureIQ to visualise portfolio exposure values for regional book

Businesses have an urgency to be proactive in understanding and analysing exposures to their portfolios. Today, portfolio managers are kept busier than ever: Trying to juggle managing portfolio profitability, growth, exposed limits set by management, as well as being responsible for keeping losses to a tolerable level.

Industry-leading data

The RMS ExposureIQTM application, available on the RMS Risk IntelligenceTM (RI) platform, offers an intuitive, user friendly, powerful portfolio management solution to make managing an entire book of business simple, with speed and accuracy. ExposureIQ leverages industry-leading expertise to help users access data, manage exposures and build sophisticated deterministic scenarios. It provides users with access to the same data that RMS uses to build its probabilistic models, including that used for latest high-definition (HD) models.

Delivering event-response insights

Also incorporated is RMS’s real-time event response analysis, which enables you to assess and respond to evolving conditions as the event unfolds. Snapshots allow you to understand event characteristics and anticipate where claims and business interruption are likely to occur, while footprints help inform accurate positioning of response and recovery assets, as well as post-event performance and loss assessment.

How to help your frontline underwriters

Downstream functions - such as portfolio managers and reinsurance purchasers through to brokers - have become accustomed to utilising the best risk data that catastrophe modelling can offer, whereas underwriters have often struggled to get the risk insight they need.

Many underwriters rely on data that focuses on hazard only, but this approach fails to account for today’s wide range of detail that is often captured. For perils such as flood that are highly granular, detail is vital, or else decisions taken could be similar to taking a gamble.

For high-volume residential locations, in-house teams are often not equipped to support such analysis. Serving underwriters with the risk data they require would be resource intensive (both cost and time) and often still not satisfy the speeds needed to be competitive.

Same data at all levels

The same sophisticated CAT risk analytics used for portfolio and reinsurance processes are now available for underwriting, derived from our global suite of catastrophe models. They provide location-level data that is ready to be used by underwriters for geocoding, hazard, exposure, risk scoring or loss costs.

Insights ready to implement directly into high-performance underwriting systems via the RMS location intelligence API (or as a ready-made application, SiteIQTM) give underwriters readily available location data. This data goes beyond hazard and allows you to benefit from the information you collect and refine.

Advanced, customisable pricing analytics

RMS has designed TreatyIQTM to deliver advanced risk, profit and marginal impact insights direct to property treaty underwriters to facilitate flexible treaty pricing decisions, underpinned by vast, fast roll-up capabilities. With flexible pricing and capital formulae, underwriters can forecast the marginal impact, combined ratio and return on capital of every treaty and programme before signing. This delivers game-changing portfolio roll-up performance to monitor risk positions, analyse drivers and assess pricing performance.

Applying new science and new data to risk modelling

RMS is committed to delivering the best quality models and science to the Asia Pacific market demonstrated with the recent updates to Japan earthquake and tsunami HD and New Zealand earthquake HD models; together with updated Japan typhoon and flood HD model that incorporates the most recent events such as typhoons Jebi and Hagibis.

Mr Hemant Nagpal is a director with RMS

Building flood resilience in a changing climate

As the world responds to the COVID-19 crisis and governments prepare their economic stimulus plans, the potential compounding effects of weather-related extremes such as floods, tropical cyclones and wildfires could significantly challenge a country’s emergency management capacities and slow down socio-economic recovery, says The Geneva Association’s Maryam Golnaraghi.

A new Geneva Association study, focused on building resilience to floods in a changing climate, points to the need for a paradigm shift from reacting to crises towards a risk-based, anticipatory, holistic and all-of-society approach to managing the potential impacts of catastrophes.

Overall economic losses associated with weather-related and flood-related disasters 1980– 2019

The costs associated with floods are exacerbated by various factors leading to growing exposure, increasing vulnerabilities and changes to the underlying hazard. These include:

  • Increasing concentrations of people and assets in areas of high flood risk linked to land use, urbanisation and development practices; and
  • Increasing frequency and severity of weather-related events linked to climate change (e.g. changing storm and precipitation patterns and rising sea levels).

The Geneva Association’s study takes a deep look at the evolution of flood risk management (FRM) in the US, England and Germany.

Trends and findings include:

  • Flood risk: The rising socio-economic impacts of floods have become a national concern in all three countries particularly in the immediate aftermath of flood events. Recurrent, high-impact flooding has led to growing political, public and insurance industry concern, particularly around the need for action to reform FRM systems and strengthen flood resilience.
  • Institutional roles and responsibilities: There is growing evidence that approaches to FRM are slowly evolving from efforts to control water to building resilience to floods. Countries are increasingly taking into consideration a risk-based and more collaborative approach to FRM. Protection of the most vulnerable citizens, particularly those residing in very high-risk areas, remains a critical issue for governments.
  • Risk information and communication: In the last decade, the need for flood-risk assessment and communicating about risks has gained significant momentum although with different levels of success and impact on government, business, community and homeowner decisions. The level of risk awareness and utilisation of risk information in decision-making varies greatly among stakeholders.
  • Alerts and early warnings: The three case studies confirm significant progress toward the implementation of early warning systems to enhance emergency preparedness and response operations to save lives and expedite post-disaster assessments and claims pay-outs.
  • Risk reduction and risk prevention: The need for ex-ante investments in risk reduction and risk prevention measures by governments, businesses, communities and homeowners is slowly coming into focus. Implementing these measures is critical to driving affordability and to the sustainability of insurance programmes.
  • Risk financing: Risk financing and contingency planning for protection of government budgets is gaining some attention, particularly at the national level. However, none of the three countries have established a pre-disaster budget or contingency planning process, with funds appropriated by the government after the event.
  • Risk transfer: The value proposition of the insurance industry is evident. Beyond facilitating financial protection for recovery, the insurance sector in some countries provides flood-risk analytics and modelling, assists in flood-risk communication and awareness campaigns, and incentivising risk-reduction and risk-prevention measures.

Furthermore, limited take-up of insurance is linked to low levels of flood-risk awareness and understanding of the benefits of insurance, underestimating the potential impacts of severe floods and reliance on other support mechanisms such as post-disaster government hand-outs. Collaboration between the government and insurance industry can help boost accessibility, affordability and the sustainability of insurance as a key contributor to enhancing flood resilience, as well as promote and incentivise risk reduction and risk prevention.

Number and impacts of flood events by region: 1980–2019

  • Reconstruction: There is growing recognition of the need to build back smarter after an event in order to strengthen resilience to future events in medium- and high-risk regions, with clear guidelines on how to build. However, meaningful action from those involved in the recovery and reconstruction process has been limited.
  • Multi-stakeholder engagement: Cross-sectoral and multi-stakeholder collaboration and initiatives prove to be highly beneficial, although efforts are needed to develop and sustain such mechanisms beyond awareness raising and towards real action.
  • Overall FRM approach: Despite all the developments, FRM systems remain, in general, reactive to floods, pointing to the need for a more anticipatory, cohesive and systems-based approach to addressing this growing risk. Furthermore, development of FRM systems need to be an integral part of economic development and climate adaptation strategies at all levels of the government.

Finally, countries need to rigorously and systematically monitor the impacts and benefits of investments in risk awareness and communication, risk reduction and risk-prevention measures in order to make ongoing improvements to the system.

Ms Maryam Golnaraghi is The Geneva Association’s director climate change and emerging environmental topics.

Reinsurance – what to expect in 2021?

Opportunities emerge for Asian reinsurers amid business uncertainty

By Fitch Ratings’ Ms Jessica Pratiwi and Mr Siew Wai Wan

Due to significant catastrophe losses in Asia during 2019 and 1H2020 and an expectation of tougher times following the coronavirus pandemic, Asian reinsurers are likely to emphasise risk management to enhance their coverage while exploring growth opportunities including insurance-linked securities, project syndication and co-development say Fitch Ratings’ Ms Jessica Pratiwi and Mr Siew Wai Wan

Fitch sees underwriting loss exposure from the pandemic as manageable for Asian reinsurers given the relatively small size of the impacted business classes, and the use of policy limits or sub-limits and exclusions. As reinsurers entered the crisis well-capitalised, Asian reinsurers will have sufficient capital buffers to cushion against losses both from the pandemic and increasing catastrophe claims.

In search of higher yield in a sustained low-rate environment, reinsurers tend to shift some of their investment portfolios towards riskier assets. Although we do not expect this move to be aggressive as reinsurer will need to consider local solvency margin requirements, as investments in riskier assets require higher capital charges under regulatory capital frameworks.

Most are also seeking to optimise their business strategies to balance the investment challenges in terms of assets and liabilities. Additionally, slower business growth is likely to offset insurers’ need to inject additional capital, allowing some breathing space.

Growing insurance awareness

Despite slow business growth and direct insurers' premium growth deceleration, Fitch believes business disruption caused by the pandemic could heighten awareness of insurance in a low-penetration market. The penetration rate in emerging APAC markets is still below 10% or among the lowest in the world, leaving many individuals and businesses at risk of huge losses when disaster strikes. Therefore, there is a huge opportunity for reinsurers to extend their reach, as they develop economically and demonstrate their potential to support and add value.

An area ripe for expansion in Asia is insurance-linked securities (ILS). These instruments are useful in developing countries where insurance penetration is typically low and governments have limited financial reserves, meaning losses from catastrophes can derail fiscal budgets and roll back development gains.

Catastrophe bonds can mitigate the impact of natural disasters on fiscal accounts while expanding reinsurers’ capacity and diversifying their sources of capital. We see growing momentum behind these ILSs, but their success will hinge on whether investors have favourable catastrophe-loss experiences.

Asia: CAT hot-spot

Asia accounted for the world’s largest share of economic losses from catastrophes in 2019, at $66bn or 45% of the global total. Typhoons in Japan caused losses of over JPY1tn ($9.5bn) in FY2020 and losses from severe floods in southern China amounting to $10bn by 10 July 2020. Disasters

elsewhere in the region, including Sri Lanka and Australia, have also spurred demand for reinsurance as the frequency and intensity of catastrophe events increase.

Companies from outside Asia recognise the region's business potential and have sought opportunities in to the Asia. For example, Belgian insurance company Ageas in August 2020 announced that it had concluded an agreement with China Taiping Insurance Holdings to subscribe to a capital increase in its wholly controlled subsidiary Taiping Reinsurance.

However, the deal-making sentiment has been tempered by the current economic turmoil. Hence M&A is likely to slow as reinsurers reassess priorities and brace for what could be an extended period of economic turbulence. As a result, reinsurers may consider alternatives to expand and mitigate insurance risk.

Syndication and collaboration

One example of a strategy to aid business expansion is joint or project syndication. China Reinsurance in October 2019 teamed up with Lloyd’s syndicates to launch a political violence cover facility. The company also signed a memorandum of understanding in July 2019, with Spanish giant Mapfre for joint coverage of projects under China's Belt and Road Initiative.

Co-development is another option. In July 2020, Korean Reinsurance, a South Korea-based provider of life and non-life reinsurance products, signed a memorandum of understanding with Carlyle Group, a US-based global alternative asset management firm, to co-develop co-insurance solutions for local primary insurers and collaborate on product designing and structuring, reinsurance asset management, capital management and capital raising.

In addition, Fitch expects regulatory developments that reflect market changes in the region to push reinsurers to develop the necessary internal capabilities and risk-management frameworks to manage the impact. The unprecedented challenges and uncertainties will also force reinsurers to recognise new opportunities to deal with the immediate economic impact on business or to mitigate similar events in the future.

Ms Jessica Pratiwi is a senior analyst, insurance and Mr Siew Wai Wan is a senior director, insurance with Fitch Ratings.

NatCAT in Asia 2020

Reinsurance highlights in Asia

Indonesia insight

Despite entering 2020 on the back of a strong showing last year, both Maskapai Reasuransi Indonesia (Marein) and Tugu Reasuransi Indonesia (Tugure) have been affected by the impact of COVID-19.

In July, Tugure president director Adi Pramana said that Tugure had recorded a decline in premium income as of June 2020. While the decline was not significant, he said the company was working on various strategies to keep its business growing in addition to focusing on liquidity, mainly by increasing the proportion of dollar-denominated assets.

Marein president director Yanto Wibisono said that he expected Marein’s premiums to drop by 7% this year, and that its growth could remain negative for a while. He said the company is trying to maintain business continuity by implementing several strategies including improving the quality of human resources, improving its risk management systems and striving to maintain an RBC ratio of more than 200%.

Terrorism pool approach to pandemic risk

It has become clear, however, that the terrorism pool approach would have to be tweaked significantly to be of real value in its application to a pandemic pool.

Australian Reinsurance Pool Corporation CEO Dr Wallace said, “There is, however, a pandemic pool design attribute which is a negative: The biggest problem with insuring pandemic is the speed and the massive scale of financial response that is required. In Australia, the A$10bn ($7.27bn) guarantee in the TI Act for an act of terrorism would be of limited benefit in a pandemic.

“For example, the Australian government has so far announced over A$289bn in COVID-19 pandemic relief measures to save jobs and businesses, through direct subsidies to businesses and the unemployed.

“Pandemic business interruption can really only work in an insurance setting if it is targeted to small business, time limited in duration, and front-end paid. A traditional insurance or payment after the event will not deliver the support needed. A fast, simple and targeted defined benefit for pandemic peril would provide support where it is needed most.”

Cyber attacks

Malicious email remains a weapon of choice for a wide range of cyber attacks, with spam emails accounting for 85% of all email sent. Email is also the top vector for both malware distribution (92.4%) and phishing attacks (96%). Ransomware continues to plague businesses and consumers, with indiscriminate campaigns pushing out significant volumes of malicious email.

Around 1.5m new phishing sites are created each month. The average lifetime of a phishing site is five days. Anti-phishing filters receive information about a new threat very quickly and so phishers constantly must register new sites that imitate the official sites of various credible organisations. The most popular phishing targets are financial institutions, email services and internet service providers.

Data drawn from INTERPOL’s private partners and research conducted by the ASEAN desk showed that there was an increase in both quantity and sophistication in phishing campaigns in 2019.

“We saw a more advanced exploitation of social engineering techniques worldwide with e-mail remaining the top vector for phishing (96%). Southeast Asia remains a target for cyber criminals attempting to infect networks and devices through the simple but effective trick of phishing,” INTERPOL said in a recently published report on cyber threats in the ASEAN region.

Given that most cyber crime impacts home users and SMEs, a set of preventive advice for users would raise awareness and empower them to protect themselves against malicious software and threat actors, said the report.

More volatile risk environment

The COVID-19 crisis has had an impact in altering Japan’s risk landscape and Toa Re president and chief executive Masaaki Matsunaga expects a more unpredictable risk environment overall, shaped by a volatility, uncertainty, complexity, ambiguity outlook.

“In such an environment, the importance of risk-based management is bound to increase. It will be essential not only to promote risk reduction but also to be acutely sensitive to risk and be able to take decisive action.

“This means detecting and recognising the diverse risks that will arise along with the change in the era and the business environment, addressing the risks appropriately and capturing the business opportunities thus created,” he said.

Regulatory developments

In a positive development for Korean Re, regulatory changes introduced this year means that ‘co-insurance’ is now permitted as a type of reinsurance arrangement for both life and non-life insurers.

Co-insurance is a modified type of reinsurance, which is widely used in Europe. Under traditional reinsurance placements, only risk premiums are ceded to reinsurers, but modified reinsurance contracts allow primary insurers to transfer other risks to reinsurers such as savings, premiums and interest-rate risk.

“With the new option given, primary insurers in Korea will be able to raise more available capital or lower required capital by ceding interest-rate risk and insurance risk as well as pure underwriting risk to reinsurers,” said Korean Re.