12 // THE DISASTER GAP: HOW INSURERS AND THE CAPITAL MARKETS CAN HARNESS BIG DATA TO CLOSE THE GAP


3.BRIDGING THE GAP


The future growth potential of the ILS market is dependent on two key supply and demand drivers. The first, whether the reinsurance sector – both traditional and non-traditional – can grow its overall premium base and second, whether the investors in insurance products have a long-term commitment and are willing to deploy their capital to new areas of risk.


We expect reinsurance demand covering natural catastrophes to double in high- growth markets. But much of this depends on how quickly emerging insurance markets can grow and mature. “It’s about how can the capital markets come together with the traditional insurers and reinsurers to solve these problems, because I don’t think for the most part the capital markets can do it alone,” says WCMA’s Dubinsky.


“How can we increase the amount of insured interest in the world so that shareholders, government and taxpayers do not have to keep on paying for catastrophes?”


Luca Albertini,chief executive officer of Leadenhall Capital Partners.


“There is clearly a significant opportunity to grow,” adds Fitch’s Chris Waterman. “Many traditional players are looking to expand in Asia on the back of that growth potential. The growth in premium volumes for the major reinsurers is faster in Asia than in more developed markets – so they are beginning to take advantage of that. Although it’s relatively early days, the potential is significant.”


Increasing insurance penetration in underserved catastrophe-exposed markets is a major challenge for the future. “When you sell a cat policy you charge $1 per $1,000 of risk exposure – that’s typical risk pricing,” explains the World Bank’s Eugene Gurenko. “Imagine the sophistication you need to enable you to manage that risk. For many insurers this is a scary proposition. Many don’t have the expertise and resources to develop this line of business from scratch because it’s highly knowledge- and capital-intensive, so as a result cat risk insurance in most emerging markets is a second thought.”


But without better penetration in many markets, there is little opportunity for traditional reinsurers or the ILS market to deploy their capacity and knowledge. “For reinsurance to grow globally – particularly property catastrophe risk insurance beyond the boundaries of the developed economies – local primary insurers will need to achieve better penetration,” thinks Waterman. “It will be difficult to increase demand for reinsurance capacity and related cessions from emerging markets without that.”


“Better penetration is unlikely to be achieved unless there is a combined effort between local governments and local primary insurers to educate the local population on the economic benefits that insurance provides,” he continues. “This effort could be supported by traditional insurers and reinsurers providing their knowhow and expertise, which they’ve been very good at exporting for years.”


There is also an opportunity to improve catastrophe protection in mature insurance markets, as the recent floods in Colorado and Central Europe have shown. “We’ve seen people structure cat bonds linked to flood and now storm surge so there’s no reason why investors wouldn’t accept it,” thinks Artemis’ Steve Evans. “If you could get full earthquake insurance penetration across the US and flood coverage in Europe, Canada and other regions that have that same risk, then cat bonds do seem very well suited to it.”


The lack of earthquake cover for homeowners in California needs to be addressed, thinks Leadenhall’s Albertini. “There is a gap between insured and economic losses, but that’s not only in Bangalore, in Bangladesh and in Thailand. That is in California… that is in Florida. The question is: How can we increase the amount of insured interest in the world so that shareholders, government and taxpayers do not have to keep on paying for catastrophes?”


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