Securitization linked to insurance to gain ground
Policymakers in the region seek to increase the sophistication of the regulatory framework of domestic insurance markets and foster economic and financial resilience to shocks (in particular, climate change), says S&P Global Ratings (S&P) in a recent Asia-Pacific reinsurers report.
Examples of such efforts include the Insurance Commission of the Philippines to roll out its catastrophe insurance mechanism, and China’s renewed efforts to improve catastrophe insurance penetration and product offerings.
In China, the regulator published a notice at the end of September 2021 calling on insurers to consider sponsoring catastrophe bonds in Hong Kong. This supports a way to diversify natural disaster risk mitigation. S&P sees the regulator’s initiative as positive and believes it should encourage mainland insurers to take more disaster risk with China’s vast market base. This should also gradually support the development of the Insurance Related Titles (ILS) region.
The increase in weather-related events could result in a higher premium rate for the transfer of disaster risk. The issuance of catastrophe bonds will also likely allow the ceding company to moderate sensitivities to rate hikes by using non-traditional reinsurance protection. From an investor perspective, catastrophe bonds as an investment offer diversification away from asset risk. In October 2921, China Property & Casualty Reinsurance issued a $ 30 million catastrophe bond, through a special purpose vehicle, Greater Bay Re.
In addition to regular issuance from Japanese insurers, other examples of ILS in the region include Peak Reinsurance’s launch of the reinsurance sidecar in 2018 and IAG’s sponsorship of a catastrophe bond in 2019. In 2018, the The Singapore Monetary Authority has launched an ILS grant program, which aims to fund up to 100% of the initial issuance costs of catastrophe bonds in Singapore.
COVID-19 has woken up regulators and market players to the region’s lack of protection, according to the report. The development of a more comprehensive insurance market will provide opportunities for reinsurers. This will include extensive service and product support for primary insurer risk mitigation solutions.