Reinsurance pools 'no panacea' for rising claim costs: S&P

Rising catastrophe costs are likely to increase collaboration between policymakers and reinsurers, but government-backed risk management pools are a “useful patch” and not a panacea, S&P Global Ratings says.

The increased frequency of natural disasters has pushed up reinsurance costs and demand for catastrophe protection, while surging claims have social implications as homeowners and businesses face rising premiums or widening gaps in protection if they can’t afford cover.

Fiscal burdens are also rising for governments as they foot the bill for social assets and infrastructure losses, clean-ups and other remediation, motivating them to become more involved.

S&P says it expects Asia-Pacific policymakers will look to collaborate with reinsurers in an attempt to maintain affordability and protection, as well as bolster risk awareness. One form of involvement is through the development and backing of catastrophe insurance and reinsurance pools.

“In our view, such programs are a useful patch, but not a panacea,” Insurance Analyst WenWen Chen says in the report.

“Increased risk awareness and pre-emptive risk management for weather events across the chain – from households and companies to insurers, reinsurers and government planners – are a more sustainable way to deal with more frequent weather-related cataclysms.”

Australia has this year established a cyclone and related flood damage reinsurance pool, operated by the Australian Reinsurance Pool Corporation, which also provides cover for terrorism.

Other previously established programs in the region include New Zealand’s Earthquake Commission, Japan Earthquake Reinsurance, Thailand’s National Catastrophic Insurance Fund and the China Residential Earthquake Insurance Pool.

Losses caused by weather-related disasters, particularly those associated with climate change, could add to the challenges insurance and reinsurance companies face in the pricing mechanism and assessment of pricing adequacy, S&P says.

The report, Asia-Pacific Reinsurers and Governments Fortify Natural Disaster Defenses, says risk modelling to quantify exposures is a key challenge, particularly in emerging Asia, where rapid urbanisation makes it hard to ensure data is up to date.

S&P sees reinsurance demand accelerating in emerging Asia, supported by factors such as more catastrophes and growth prospects in agriculture insurance.

Technology will have a role to play in longer-term solutions across the region, while enhanced collaboration is expected between reinsurers and primary insurers.

“If insurance claims and costs are to remain in check, government planners will also likely seek to stem future damages,” Ms Chen says. “For example, we expect vulnerable coastal areas may increasingly be zoned to prevent risky development, or to ensure better fortification ahead of development.”

S&P says given the rise of weather-related disasters, reinsurers will likely more actively review retained exposures and recalibrate their risk appetite, and test the efficacy of tretrocession programs.

“Without enhanced risk management or an ability to pass on rising costs, the region’s reinsurers will lose business prospects and credit quality. The clock is ticking,” Ms Chen says.