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


TAIWAN’S FIRST CAT BOND By Mark Wei, chairman of KGI Securities


When I was insurance commissioner of the Ministry of Finance in Taiwan in 2003, we structured a three-year $100m principal at-risk variable rate note to diversify the catastrophe risk derived from our Taiwan Residential Earthquake Insurance Pool (TREIP) through the global capital markets. This was the first cat bond sponsored by the Taiwanese government.


As Taiwan’s earthquake frequency and severity is among the highest in the world, cat bonds can help reduce earthquake risk and increase capacity in Taiwan, in addition to the traditional insurance and reinsurance scheme under the TREIP. After the issuance of the cat bond, we started to set up our own earthquake risk assessment model and periodically practise TREIP’s early warning and claim management system, aimed at improving our technology and skills to cope with various natural disaster risks in Taiwan.


The total value of outstanding cat bonds increased significantly after 2005. As cat bonds offer attractive and stable returns with minimal exposure to the credit cycle, equity market, foreign exchange or interest rate risk, they became an important alternative asset class for institutional or professional investors, such as hedge funds, insurance and pension funds to invest in diversifying their portfolio.


There is a situation of rising catastrophe risks and limited insurance coverage in Asia, especially in Greater China. Going forward, we should consider promoting cat bonds to those capital market investors who have the capacity and interest in taking on some of these unexpected man-made or natural disaster risks in Asia.


OPPORTUNITY AND CHALLENGE


To date, there has been much discussion in the industry as to how “convergence” will impact the traditional reinsurance market. Willis Re predicts third-party capital could comprise 30% of the global catastrophe market within three to four years with a “significant and material” effect on the market, particularly for peak zones such as US wind. As a result, between $30bn and $40bn of traditional reinsurance capital could be displaced by the new money coming in.


Fitch Ratings director Martyn Street thinks the impact of alternative sources of capital will lead to an evolution of the market, rather than sweeping reforms. “If you look across our universe of rated reinsurers clearly some of those are likely to be more heavily impacted by the developments we’re seeing,” he says. “Some of the Bermudian players are larger writers of cat business in the first place so they are going to be more exposed to the current market trends versus the larger Europeans which are more diversified in their businesses.”


“My gut feel is that we are in the beginnings of a fairly major structural change for the reinsurance market and we’re just seeing some of the very early stages of it now.”


Steve Evans, founder of Artemis.


It is clear that new money coming into the market is affecting reinsurer strategies to varying degrees. Some have dipped their toes into the alternative market, launching sidecars or setting up ILS funds. The larger institutions, including Munich Re and Swiss Re, are actively involved in arranging and placing cat bonds.


“If you go back to some of the Bermudian players most affected by this development it will be interesting to see if they try and shift into other markets where they write a smaller proportion of their business at the moment or if they hold back and return some of that capital to investors to see how the market develops,” says Street. “The reinsurance industry is very good at returning capital or moving it around in a fluid way as required.”


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