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Jul 2020

Endurance Re: Further economic growth needed to drive (re)insurance industry

Source: Asia Insurance Review | Nov 2015

Mr Rene Lamer, Chief Executive, Singapore Branch, Endurance Re assesses the catastrophe insurance landscape in Asia and believes that governments need to work closely with the private sector to further develop the CAT reinsurance market in developing nations. And as primary rates are currently insufficient, a subsidy is needed to make the market sustainable until further economic growth occurs.
By Dawn Sit
The primary insurance rates for CAT perils in some parts of Asia are presently not sufficient to support the development of CAT reinsurance. As such, Mr Lamer advocates that regional governments manage catastrophe risks with some level of subsidies and have the private sector provide support – essentially, as public-private partnerships (PPPs).
   He also makes it clear that in a PPP, governments will need to lead the partnership development with a subsidy or affordable primary policy – and that sometimes tends to be a sticky issue. 
   “The private sector can provide expertise and know-how, but at the end of the day, we are for-profit organisations. Ultimately, when you have a PPP to develop the insurance and reinsurance industry, there needs to be a government that is capable and willing to subsidise the base rate,” he said, citing examples such as the US wind pools and Japan’s residential earthquake scheme where governments are the effective providers of insurance, and are then reinsured by the private sector.
Economic growth a crucial factor 
He noted that while the region’s CAT reinsurance market is “poised to grow dramatically” over the next few years, underpinning it all is economic growth. 
   “If we look at CAT reinsurance globally, where it’s most prevalent and sought-after, we will tend to find areas which are very CAT-prone and have a relatively high degree of economic development. So economic growth is really the key point in order to develop the CAT reinsurance market in Asia.”
Regulations must be tempered
Another key factor in encouraging the growth of the reinsurance business in the region is how governments and regulatory bodies control and regulate the industry. 
   The extent to which the reinsurance market can develop, he said, has a lot to do with how regulators view reinsurance. In particular, regulators need to keep in mind that as a business, reinsurers spread risks globally through diversified underwriting and efficient use of capital; curtailing reinsurers with overly-burdensome regulations can drive “the opposite of what reinsurance is all about”.
   “When regulators regulate the industry, they have to be cautious about keeping too much risk in any one area,” he added.
Significant correlation between different lines of business
Turning to his view on the evolution of the CAT (re)insurance landscape in the last decade, Mr Lamer noted that over the last 15 years, the global catastrophe insurance and reinsurance industry has seen a number of extreme events take place which have wreaked havoc on countries across the globe. With the occurrence of each extreme event came the realisation that there is a “tremendous amount of correlation” between different lines of business.
   He cited the tragic occurrence of the 9-11 terrorist attacks as a significant example of this realisation, and more recently, the explosions in Tianjin, China. Underwriters are now seeing significant correlation between traditional CAT lines, casualty, marine and property lines, to name a few – and this is probably one of the biggest changes the industry has witnessed in the last decade and a half.
Reliance on data
Another observation he made is the industry’s reliance on data. Following Hurricane Andrew in 1992 and then the 9-11 tragedy later on, underwriters had started to put a “huge reliance” on modelling output and data and had probably “gone a little too far in that direction”. 
   In some instances, he said modelled output alone was used to judge how much a treaty should be priced. This is not ideal as “using pure modelled output works when you want to look at the overall global portfolio or manage PMLs, but it does not necessarily work at the time of pricing the individual contract.” 
   Experts are now coming back around to making sure that aside from an emphasis on modelled output, sound judgement plays a large role too, he added.
Modelling man-made CATs – Deterministic, not probabilistic
On man-made catastrophes such as terrorist or cyber-attacks however, Mr Lamer said this is a gap that the industry still struggles with. At the moment, there is still no model that can accurately predict the frequency of these man-made CAT events, largely because there are insufficient data points for modellers to build or calibrate a probabilistic model. 
   As such, CAT modellers are only able to take a deterministic approach with man-made CATs – not whether the event would happen, but what the severity might be when it does. Those would be the questions that insurers and reinsurers “can better affect than actually determining a frequency”, he said.
   But there remains a conundrum when it comes to pricing because underwriters still need to have “some kind of frequency” in order to price the risk. So this is where market forces come in, with capacity, supply and demand affecting prices.
Challenges in the short-term
On his outlook of the region, he said that in the short-term, business would remain a challenge given abundant capacity, the continuing soft market, and a slower economic growth forecast for Asia. He cited China as an example, where economic growth is predicted at 5.8% compared to an 8% per annum average for the last decade. 
   “When an insurance industry is growing rapidly, you have a lot of cashflow and it’s easier to make money in such a market. But when economic growth slows, insured losses catch up to that cashflow. I think we’re heading into a period of time where we are in that catch-up phase and it’s going to be rather challenging.”
Committed to Asia
Notwithstanding, he said the long-term outlook remains promising given the region’s potential to develop and become one of the largest insurance and reinsurance markets globally. And this is also why he said Endurance has made the conscious decision to set up its Singapore office as a full-functioning reinsurance branch, writing all lines of business for Asia out of the city-state.
   “We’re very committed to Asia as a whole and we are constantly seeking to find out ways to best support our clients in the various markets. To make it happen, we’ve brought our underwriting teams here, and all our underwriting, CAT modelling and pricing for Asia is done in Asia. We’re coordinating a truly client-focused approach so that we can build a stronger trading relationship with our clients,” he said.
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