‘The Pacific dimension: The role of the insurance sector in supporting resilience & the international reinsurance market view of the Pacific’
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This document discusses reinsurance and its role in managing climate risks in the Pacific region. It provides an overview of reinsurance, including how it works and what it can do. It notes challenges in the Pacific region like low insurance penetration and issues around information, resilience, and scale. Potential ideas to help manage risks in the region are presented, like regional approaches, risk pooling, microinsurance, and partnerships with governments. The document emphasizes that without partnership approaches, reliance on post-disaster funding will continue and it will remain difficult to attract private sector support.
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‘The Pacific dimension: The role of the insurance sector in supporting resilience & the international reinsurance market view of the Pacific’
- 2. Pacific Dialogue on Financial Management of Climate Risks Reinsurance & the Pacific Region • An Overview of Reinsurance, including recent market trends • Reinsurance in the Pacific Region – why it is so important • Potential ideas for managing risks in the region • Where might we go from here? © 2017 inuRE. All rights reserved. 2
- 3. An Overview of Reinsurance Reinsurance helps us to manage the financial risk of known & unknown hazards • Protects finances • Helps insurers to provide more insurance • Provides financial stability & strength • Protects against insolvency • Loss protection (Claims) – Catastrophe, Frequency, Risk • Supports economic growth, social welfare & resilience • Promotes risk awareness, solutions, skills & ownership © 2017 inuRE. All rights reserved. 3
- 4. An Overview of Reinsurance Insured / Policyholder Four Options Retail/Wholesale Broker Agent MGA / Broker Direct Insurer Insurer Two Options Reinsurance Broker Direct Reinsurer Two Options Capital Markets Reinsurance Retrocession Broker Retrocession Markets Market Dynamics Insurer A Reinsurer A Reinsurer B Reinsurer C Reinsurer D Reinsurer E Reinsurance Insurer A Reinsurer C Reinsurer D Reinsurance Direct insurance © 2017 inuRE. All rights reserved. 4
- 5. An Overview of Reinsurance What influences the cycle? • Availability of Capacity • Loss Events • New Capital Some General Observations • Total Global reinsurance ~ USD 600 bn • Relatively low insured Catastrophe losses since 2011 • Casualty & Speciality business showing loss developments • High level of competition amongst reinsurers • Global market is generally soft, but….. • Reinsurers trying to find balance between income, market position and discipline • Question of when the global market might turn and what might cause it to turn Global Market Cycle © 2017 inuRE. All rights reserved. 5
- 6. An Overview of Reinsurance What it can do Loss limitation Protection from: Single Risk Losses Catastrophic Events Higher Loss Frequency Reinsurance = Claims Providing capacity Insurers are able to provide more insurance Creating stability Helps insurers to manage losses of various sizes Business Management Protects revenue of insurers Protects the insurers’ policyholders Provides technical support, knowledge and ideas Strengthening finances Helps insurers to protect their finances Protects insurers against insolvency Reinsurance = Capital What it cannot do Guarantee a profit Turn a bad business in to good business Transfer only poor risks to reinsurers – reinsurers need a balance Protect against damage and losses from gradually changing conditions (e.g. ocean warming; changes in ocean acidity) – reinsurance protects against losses that are sudden and identifiable in time © 2017 inuRE. All rights reserved. 6
- 7. An Overview of Reinsurance Reinsurance is………. An investment The reinsurance premium is an investment Reinsurers are effectively lending insurers money to help their business A long-term consideration We look to generate a long-term partnership between insurers and reinsurers (although conditions may change) The insurer and reinsurers aim to achieve a balance between exposures and premium Not cover for poor business The insurance business should show the potential for profit over the long-term Reinsurers should not be expected to simply absorb losses What can be reinsured? Practically anything, provided that….. • It is legal • You adhere to the principles of reinsurance • You can find someone to underwrite the risk Some typical examples: • Natural Perils - Earthquake, Flood, Cyclone, Typhoon, Hurricane, Windstorm, Wildfire • Liability – Workers Compensation, Employers Liability, Professional Indemnity • Other – Travel, Terrorism, Industrial Accident The less obvious: • Sugar crop in Mauritius • Yak farms in Mongolia • Peacekeeping operations in Iraq • Travelling sports teams • Temples in Japan © 2017 inuRE. All rights reserved. 7
- 8. Reinsurance in the Pacific Region Insurance Gap • Awareness & Engagement • Insurance Penetration • Availability • Affordability • Trust • Cultural Understanding Resilience • Partnership • Mitigation • Post-Loss recovery • Regulation • Attractiveness & Scale • Building Standards & Codes Information • Co-operation & Transparency • Resource • Analysis • Quantification • Exposure understanding • Claims management Common Themes & Challenges Without Partnership….. • Reliance on post-loss funding • Lack of public awareness and understanding of risk • Insurance gap remains – how do we close it? • Understanding of risks and exposures is slow to develop • Available support remains limited – difficulties attracting new support • Challenges for availability and affordability of support © 2017 inuRE. All rights reserved. 8
- 9. Reinsurance in the Pacific Region Regional Challenges Insurance Penetration* • OECD Nations average ~ 9% of GDP (Non-Life ~ 3 – 5%) (source: http://www.gsdrc.org) • Pacific Region total ~ 3.6% of GDP (Non-Life ~ 1 – 2%) • Percentage of losses insured ~ 5% - 20% (global range between 15% and 45%) Increasing Insurance Uptake • Consumer awareness and cultural issues (lack of trust?) • Information to help insurers and reinsurers • Affordability of premiums • Ability of local insurers to retain risk – they need reinsurance support Scale • Relatively small economic scale • Expense and lack of infrastructure insurance • High transactions costs owing to lack of territorial spread Reinsurance • Relatively few reinsurers offering supporting for the region (see next slide) • Relatively low level of total capacity available limits risks acceptance and maintains relatively high premium levels © 2017 inuRE. All rights reserved. 9
- 10. Reinsurance in the Pacific Region Key Reinsurers for the Pacific Islands Australia • Hannover Re • Munich Re • Swiss Re • XL Catlin Lloyds Singapore • Chaucer • Hiscox • MS Amlin Asia-Pacific • Aspen Re • Korean Re • Pacific Re • Peak Re Europe • R&V • Sava Re © 2017 inuRE. All rights reserved. 10
- 11. Reinsurance in the Pacific Region Reinsurer Perspectives Information & Analysis • Processes and systems for collecting and managing historical data on risks • Inadequate building codes and certification mechanisms, including lack of public asset registers • Low understanding of vulnerabilities and losses to design and price insurance products • Information gaps – more information and analysis required to assist reinsurers to review risks Operational Factors • Reinsurers cannot afford to operate in the region unless there is wider support • Relatively low-level of reinsurance purchase (preference to maximise retained premiums) • Perceived lack of investment in local insurance markets • Conservative approach taken in the absence of information and analysis Socio-economic • Adequacy of disaster risk-mitigation • Dependence on post-disaster funding • Market driven by branches of global companies (risk profiles based on higher returns and less risk exposure than the Pacific region) • Conservative approaches adopted in the absence of local knowledge and information © 2017 inuRE. All rights reserved. 11
- 12. Reinsurance in the Pacific Region What Reinsurers are looking for HIGH LEVEL • Alignment of interests (partnership) • Underwriting control, discipline and performance • Technically and financially sound clients • Prospect of making an underwriting profit • Type of business • Diversified and non-correlating (non-clashing) exposures • Risk appetite DETAIL Strong narrative: • Company development • Financial strength & history • Underwriting and claims controls • Future plans Portfolio: • Aggregate exposure management • Insurance policies - structure, premium income, limits, risk retained, exclusions • Coverage for perils and classes of business • Construction type and nature of portfolio • Claims History © 2017 inuRE. All rights reserved. 12
- 13. Reinsurance in the Pacific Region Loss Activity Cyclone Winston 2016 Fiji ~ USD 0.5bn – 1.4bn (10%+ of GDP) Cyclone Zena 2016 Fiji & Tonga: Total cost unknown Drought 2016 Marshall Islands: Total cost unknown (virtually all families affected) Cyclone Pam 2015 Vanuatu ~ USD 360 - 450 m (90% crop damage) Tuvalu ~ USD 11 m Cyclone Heta 2003/04 Samoa / Tonga / Niue ~ USD 300 m Cyclone Val 1991 Samoa ~ USD 115 m Natural disasters 2013-2015 306,000 affected 20,000 displaced “Something like Cyclone Pam can just destroy ten years of good policy, good government, good economics in a matter of a couple of hours.” Neville Koop, managing director of Fiji's Nadraki weather service Loss information from various sources © 2017 inuRE. All rights reserved. 13
- 14. Potential ideas for managing risks in the region Potential ideas to consider REGIONAL APPROACH Aggregating risks and/or centralising regional purchasing of protection, achieving benefits such as risk diversification, pooling of resources and sharing of (and potentially reduction of) costs. RISK POOLING The pooling of risks by insurance companies and/or state organisations where a common or difficult challenged is faced. Benefits may be similar to that of a Regional Approach. TRADITIONAL REINSURANCE Traditional risk transfer approaches, as opposed to financial and investment approaches and non-indemnity approaches. MICROINSURANCE Protection mechanism for low-income people or businesses, and/or those with limited access to mainstream insurance. It specifically addresses aspects such as affordability, inclusiveness, simplicity, clarity, accessibility and building trust. © 2017 inuRE. All rights reserved. 14
- 15. Potential ideas for managing risks in the region Potential ideas to consider GOVERNMENT PARTNERSHIPS State programmes provide affordable coverage in high risk areas and/or in areas where insurability might be under scrutiny. NON-INDEMNITY Such as Industry Loss Warranties (ILW) or Parametric covers. Such protections do not directly respond to the loss of a (re)insured, but to pre- agreed and defined loss triggers. RISK FUNDING Self-insuring through post-loss funding (i.e. building and managing and fund which responds to certain loss events). PARTIAL RISK FUNDING Use of higher deductibles to assume (self-insure) more risk. This also reduces the costs of the risk protection. © 2017 inuRE. All rights reserved. 15
- 16. Potential ideas for managing risks in the region Potential ideas to consider CAPTIVES Single parent captives; rent-a-captive (joining a previously formed captive); segregated portfolio companies (purchasing a “cell” or “stake” in a captive). FINANCIAL REINSURANCE Typically multi-year, premium paid to and invested by reinsurer – premium returned (minus profit-margin) at end of period or when loss occurs (therefore, little / no actual risk transfer). ILS MARKETS Continually emerging and evolving investment asset class offering alternative sources of capital for risk protection. RISK SECURITISATION The practice of converting known potential risk scenarios, such as the potential for a hurricane, into a marketable security. Examples include Catastrophe Bonds, Collateralised Reinsurance and Sidecars. © 2017 inuRE. All rights reserved. 16
- 17. Where might we go from here? Some views if we DON’T take a partnership approach CONTINUE WITH CURRENT APPROACH § Continued reliance on aid and post-loss funding § Difficult to attract support from private sector and global reinsurers LIMITED CAPACITY POOL § PCRAFI is in place, but more capacity will be needed § Need to attract more interest from global reinsurers LOW ENGAGEMENT & UNDERSTANDING § Relatively little public engagement and understanding § Issues with affordability and availability of insurance and reinsurance remain MORE RESEARCH & ENGAGEMENT IS NEEDED § Plenty of study and research has been conducted – we have a good foundation of understanding of the issues and challenges § We need to build upon the foundation to continue to improve our understanding of risks in the region © 2017 inuRE. All rights reserved. 17
- 18. Where might we go from here? Some views if we DO adopt a partnership approach FRONT LINE OF CLIMATE CHANGE § Reinsurers and other partners can learn and benefit through engagement § The Pacific Islands can take the lead and partner with insurers, reinsurers, academic institutions, financial organisations and research agencies REGIONAL APPROACH § Partnership approach to Engage, Educate & Enable reinsurers § Generate scale and spread through partnership § Take charge of risks and risk protection ATTRACTIVENESS § Growing economies with common challenges and goals § Attract support through common approach, growth, diversification and partnership scale PARTNERSHIP APPROACH § We can build upon and complement PCRAFI § Long-term and viable success via public-private partnerships as opposed to reliance on top-down government funding § Pooling of information, technology, resources, knowledge and ideas © 2017 inuRE. All rights reserved. 18
- 21. Sources & Acknowledgements • DLA Piper: IUA Market Briefing (March 2013) • https://agenda.weforum.org/2014/10/regulations-global-insurance-industry-systemic-risk/ • https://crawford.anu.edu.au/sites/default/files/events/attachments/201607/pacific_islands_climate_change_insurance_facility_anu.pdf • KPMG: Evolving Insurance Regulation (April 2015) • Lloyd’s of London • “Making a Market for Acts of God: The practice of risk-trading in the global reinsurance industry” (Paula Jarzabkowski) • Munich Re • OCHA • OECD • Swiss Re • The United Nations Office for Disaster Risk Reduction (UNIISDR) • The World Economic Forum: Global Risks 2015 report • Willis Re • www.carriermanagement.com • www.ey.com/GL/en/Industries/Financial-Services/Insurance/Business-Pulse--top-10-risks-and-opportunities-2013-15 • www.gsdrc.org • www.riskandinsurance.com/top-five-uninsurable-risks/ • www.standardandpoors.com/ratingsdirect • www.strategic-risk-global.com © 2017 inuRE. All rights reserved. 21
- 22. Disclaimer This analysis has been prepared by inuRE Reinsurance Training & Solutions (“inuRE”) on condition that it shall be treated as strictly confidential and shall not be communicated in whole, in part, or in summary to any third party without written consent from inuRE. inuRE has relied upon data from public and/or other sources when preparing this analysis. No attempt has been made to verify independently the accuracy of this data. inuRE does not represent or otherwise guarantee the accuracy or completeness of such data nor assume responsibility for the result of any error or omission in the data or other materials gathered from any source in the preparation of this analysis. inuRE shall have no liability in connection with any results, including, without limitation, those arising from based upon or in connection with errors, omissions, inaccuracies, or inadequacies associated with the data or arising from, based upon or in connection with any methodologies used or applied by inuRE in producing this analysis or any results contained herein. inuRE expressly disclaims any and all liability arising from, based upon or in connection with this analysis. inuRE assumes no duty in contract, tort or otherwise to any party arising from, based upon or in connection with this analysis, and no party should expect inuRE to owe it any such duty. There are many uncertainties inherent in this analysis including, but not limited to, issues such as limitations in the available data, reliance on client data and outside data sources, the underlying volatility of loss and other random processes, uncertainties that characterize the application of professional judgment in estimates and assumptions, etc. Ultimate losses, liabilities and claims depend upon future contingent events, including but not limited to unanticipated changes in inflation, laws, and regulations. As a result of these uncertainties, the actual outcomes could vary significantly from inuRE’s estimates in either direction. inuRE makes no representation about and does not guarantee the outcome, results, success, or profitability of any insurance or reinsurance program or venture, whether or not the analyses or conclusions contained herein apply to such program or venture. inuRE does not recommend making decisions based solely on the information contained in this analysis. Rather, this analysis should be viewed as a supplement to other information, including specific business practice, claims experience, and financial situation. Independent professional advisors should be consulted with respect to the issues and conclusions presented herein and their possible application. inuRE makes no representation or warranty as to the accuracy or completeness of this document and its contents. This analysis is not intended to be a complete actuarial communication, and as such is not intended to be relied upon. inuRE does not provide legal, accounting, or tax advice. This analysis does not constitute, is not intended to provide, and should not be construed as such advice. Qualified advisers should be consulted in these areas. inuRE makes no representation, does not guarantee and assumes no liability for the accuracy or completeness of, or any results obtained by application of, this analysis and conclusions provided herein. Where data is supplied by way of CD or other electronic format, inuRE accepts no liability for any loss or damage caused to the Recipient directly or indirectly through use of any such CD or other electronic format, even where caused by negligence. Without limitation, inuRE shall not be liable for: loss or corruption of data, damage to any computer or communications system, indirect or consequential losses. The Recipient should take proper precautions to prevent loss or damage – including the use of a virus checker. This limitation of liability does not apply to losses or damage caused by death, personal injury, dishonesty or any other liability which cannot be excluded by law. Acceptance of this document shall be deemed agreement to the above. © 2017 inuRE. All rights reserved. 22