Jebi officially the largest Japan typhoon insured loss ever

by Artemis on November 22, 2018

Typhoon Jebi has now officially become the largest Japan typhoon related insurance and reinsurance market loss on record, as the amount of insured claims paid for the storm have now reached almost $5.2 billion.

Typhoon JebiThe latest data from the General Insurance Association of Japan (GIAJ) shows that typhoon Jebi has now resulted in a massive 825,091 accepted insurance claims, 108,928 from automobiles, 694,310 from property fire insurance policies and 21,853 from other miscellaneous lines of business.

The resulting claims paid total has reached more than 585.1 billion Japanese Yen, equivalent to roughly US $5.2 billion, with around $475 million driven by auto losses, almost $4.7 billion from property damage claims and just over $90 million from other lines.

The new claims paid total of almost $5.2 billion puts typhoon Jebi above the previous record loss from a typhoon in Japan, which was typhoon Mireille in 1991, which drove just over $5 billion of losses.

The data from the GIAJ only includes that collected from domestic Japanese insurers, so does not include foreign insurers or reinsurance firms.

The industry is expecting that typhoon Jebi’s industry loss will actually settle somewhere around $8 billion, so it’s clear that this has been a very impactful event and it did drive some ILS fund losses in recent weeks.

In addition, the latest data related to typhoon Trami is also available and the GIAJ said that based on 379,697 accepted claims, the total amount of claims paid now sits at almost 187.4 billion Japanese Yen, equivalent to almost US $1.7 billion.

Typhoon Trami loss estimates typically range from $2 billion to as much as $4 billion, we understand.

So between just these two Japanese typhoons that struck the country in recent months the industry has paid almost US $7 billion of claims, while the total global re/insurance industry loss from the two events looks destined to settle above $10 billion.

Typhoon Trami also had an impact on some ILS funds and private ILS positions, coming soon after Jebi and pushing some insurers to strengthen their calls on reinsurance program support.

Japanese insurers had been buying more aggregate reinsurance protection in recent years and given the catastrophe activity experienced in 2018 it’s understood a number of these arrangements have faced losses.

Swiss Re sees $500bn global property & mortality protection gap opportunity

by Artemis on November 20, 2018

Global reinsurance firm Swiss Re has newly identified an enormous $500 billion global property (catastrophe and non-catastrophe) and mortality risks protection gap, saying that this is an opportunity for insurance and reinsurance markets to boost global resilience.

Of course we’d also say that such a gap is an opportunity for the capital markets and insurance-linked securities (ILS) funds, given the appetite to invest in insurance and risk-linked assets.

Reporting on the outlook for insurance through to 2020 today, Swiss Re said that innovation is key for the insurance and reinsurance market to grow, as it expands the boundaries of insurability and also helps to improve global resilience by plugging holes in protection gaps.

Global economic growth is set to continue for the next couple of years, Swiss Re’s chief economist noted today, but he said that it has peaked and that while it remains solid it is slowing.

“The global economy has been performing well, and growth will remain solid,” explained Jérôme Jean Haegeli, Chief Economist at Swiss Re. “However, the best is probably over. Cyclical momentum is positive but we expect real GDP to slow by about 1-2 percentage points in most parts of the world over the next two years. This also takes into account mounting structural challenges to growth, such as higher debt burdens, reduced savings on account of aging societies, and low productivity.”

As a result re/insurers need to look to macroeconomic trends that are shifting the balance of economic and consumer power from west to east, as emerging markets such as Asia are set to be the main drivers of growth, but also they need to look to innovation and to what they should be doing, rather than what they have always done.

Global insurance premiums are forecast to grow by around 3% annually in 2019 and 2020, which is 1% up on the growth seen in 2018, but in emerging Asia they will grow by around three times more than this with close to 9% premium growth anticipated.

“With the global economic power shift from west to east continuing unabated, China and emerging Asia in particular, will be the main source of insurance demand in the coming years,” Haegeli explained. “Based on our models, we project that in US dollar terms, the growth rate of insurance premiums in emerging Asia will be more than three times that of the world average over the next two years.”

As a result, re/insurers who want to succeed need to be set up to capitalise on growing demand in Asia, able to drive innovation in their product design and offerings, and offer solutions that can address areas of underinsurance and the evident protection gaps.

Swiss Re urges a “more-supportive policy environment” to help insurers and reinsurers to put more of their capital to work, to help build global resilience.

“Insurance is a central pillar of resilience and with a more-supportive policy environment, insurers will be better able to expand their risk-absorbing capacity and long-term investment activities in resilience-building projects such as infrastructure,” the company explained today.

Its estimates suggest that the global re/insurance sector has total assets under management of about US $30 trillion and Swiss Re says that “this large asset base should be fully mobilised as risk absorber.”

The firm found that the global mortality and property protection gap now stands at US $500 billion, in insurance premium- equivalent terms.

“The gap represents the still elevated vulnerability to adverse events for many households and businesses across the world, and the very large opportunity for insurers to further contribute to improving resilience,” Swiss Re said.

Here the firm urges innovation as a tool to expand insurability, so broadening the scope of coverage available in existing products, as well as developing entirely new products to answer risk management needs.

Opportunities in corporate risk insurability, as well as in the use of parametric triggers to expand the insurability of catastrophe risks, plus insuring the intangible, or previously uninsurable with the aid of technological developments, are all avenues of opportunity going forwards.

In addition, the firm also urges the use of more “private capital market solutions” to help build the economies capacity to absorb major shocks and says the public sector should promote private financial market standards wherever possible.

It’s also worth considering the role of the capital markets more broadly, in addressing these protection gaps and providing the capacity required to underpin new areas of insurability, a role for the ILS market and at the least securitization of insurance risks, we’d suggest.

Swiss Re says that the US $500 billion gap, “signals the existing high level of unprotected risks and significant growth potential for insurers.”

The firm notes that re/insurers “will continue to play a main role in strengthening system resilience” but it’s clear that outside of the traditional re/insurance business model there are opportunities for those able to marshal large quantities of financing from the capital markets as well.

The largest business opportunity is in mortality risks, Swiss Re says, where a near US $270 billion protection gap is almost 90% of the size of the current relevant market. A clear opportunity for the securitization of mortality risk to make a comeback, to support re/insurers efforts to close this gap, in tandem with the priorities of governments around the world.

The firm notes that in addressing this gap, as well as the catastrophe and non-catastrophe property insurance gap, both public and private efforts are required.

This is where the opportunity exists for re/insurers to leverage the capital markets and work with governments to provide risk buffering and absorbing solutions, that through the protection they offer will better enable local insurance markets to become established and to flourish.

Climate change will exacerbate pandemics, risk transfer a must: Report

by Artemis

Climate change impacts will directly and indirectly exacerbate the frequency and intensity of pandemic outbreaks, according to research, emphasising the importance of the Pandemic Emergency Financing Facility (PEF), reinsurance and other risk transfer solutions.

A group of students from John Hopkins’ School of Advanced International Studies (SAIS) have collaborated with from reinsurance giant Swiss Re to examine the potential impact climate change could have on the outbreak of infectious diseases across the globe.

“Climate change is a threat multiplier that can increase the exposure to vectors and vulnerability before a pandemic outbreak, and also exacerbate the severity of an outbreak,” says the report.

The report explains that prior to a pandemic outbreak climate change can drive changes in temperature, disrupt precipitation patterns, among other factors, that in turn can result in changes to migration patterns and the habitat of certain insects and animals, including those that spread infectious disease.

“Climate change will affect the environment, animals, insects, and human populations through various channels, increasing exposure and sensitivity to infectious diseases before and during a pandemic outbreak,” explains the report.

A good example of this explains the study is with mosquitos, which carry a range of infectious diseases that can quickly turn into a pandemic event. Mosquitos “will likely expand in regions where climate change will create a more favourable environment for them to live in. Their population will also grow more rapidly during their most active seasons, and will survive for longer periods of time.”

The reality is that it’s very difficult to predict when and where the next pandemic outbreak is going to happen. Combined with the inherent uncertainties surrounding the impacts of climate change across the globe, the need for preparedness becomes apparent.

The report highlights the recent announcement from the World Bank of the establishment of the Pandemic Emergency Financing Facility (PEF). The world’s first insurance market for pandemic risk that will utilise reinsurance and insurance-linked securities (ILS) mechanisms such as pandemic catastrophe bonds, to rapidly disburse capital in the event of deadly pandemics.

While this is certainly a step in the right direction and will hopefully, overtime, reduce the cost of pandemic outbreaks on global economies and governments, and also improve global resilience by improving preparedness and awareness of outbreaks, the impact of climate change emphasises the need for such a global fund and other risk transfer solutions.

Climate change and pandemic risks by themselves are huge, complicated and unpredictable issues that require sophisticated mechanisms and structures to improve resilience and financing.

“When a number of climatic factors are combined with other non-climatic trends, such as urbanization, changes in land-use and livestock, potentially dangerous synergies will be created.

“Unfortunately, however, it is extremely difficult to predict the precise location and timing of the next emergence or re-emergence of an infectious disease strain. Thus, in addition to efforts to enhance health infrastructure and preparedness, robust response mechanisms need to be in place. Both global and national response mechanisms and funding are crucially necessary,” says the report.

That climate change will likely exacerbate future pandemic outbreaks, according to the report which can be read in full here, really amplifies the necessity of reinsurance funds and risk transfer solutions, such as the PEF and the African Risk Capacity (ARC), at both an international and local level.

It also amplifies the need for risk capital to be efficient for pandemic exposures, making the capital market solutions of pandemic cat bonds a valuable addition to traditional risk transfer sources, such as insurance and reinsurance.

Climate change presents both P&C threat & opportunity: Moody’s

by Artemis on March 22, 2018

Climate change will create challenges and also opportunities for the property & casualty insurance and reinsurance industry, according to rating agency Moody’s. However the threats presented by a changing climate are likely greater and Moody’s says this has a “net negative credit impact on the industry.”

Moody’s highlights a number of reasons that it sees climate risk as increasing in insurance and reinsurance, which of course suggests it’s also increasing in the insurance-linked securities (ILS) or catastrophe bond sector as well, in the rating agencies view.

While catastrophe risks have always been a key exposure for P&C re/insurers, Moody’s believes that the continued rise in insured property values along the coastline and the increasing volatility of weather-related catastrophe loss events, both will serve to “magnify” the volatility within insurer and reinsurer results over time.

“The effects of climate change on the frequency and severity of catastrophic events are difficult to predict, and the correlation of climate-exposed risks that span P&C (re)insurers’ balance sheets increases the magnitude of potential losses arising from the physical and transition risks associated with climate change,” commented James Eck, Moody’s Vice President.

Any increased volatility within insurance and reinsurance company results, due to climate change, will also affect the insurance-linked investments market and ILS funds.

Climate risks are priced in, as well as they can be, with transactions modelled both on the current views of risk and also under warm sea surface temperature scenarios, or stressed for other climate related variables.

But the volatility within weather related catastrophe patterns are considerably harder to analyse, understand and forecast, leaving investments linked to weather and catastrophe risks potentially exposed.

Of course the majority of transactions are just one to three-years in duration, so priced for that short term or reset with new exposure factors each year, and as a result are not exposed to climate changes over a longer multi-decadal horizon.

But record-setting events (such as hurricane Harvey’s rainfall) and the general uncertainty and the unpredictability associated with the weather, mean there is always an element of climate volatility risk being taken.

Moody’s believes that as the volatility of climate risk becomes more evident in the results of the insurance and reinsurance industry, companies are going to face a number of risk management challenges related to the assessment, measurement and mitigation of catastrophic risks.

“We expect P&C (re)insurers to continue to adapt to the economic and regulatory challenges that result from climate change, as these firms can reprice risk on an annual basis, and further diversify their underwriting exposures and investment portfolios,” Eck explains.

However, Moody’s notes that smaller, more geographically concentrated re/insurers could struggle to adequately adapt to these challenges.

Moody’s forecasts that the industry’s risk modelling and pricing methodologies will face an additional level of uncertainty, given climate change can produce an unpredictable environment which makes the assessment and pricing of risk more testing.

Moody’s notes that the result could be that pricing lags behind the loss trends the industry faces due to climate change, which it says, “may force the industry to play “catch up” in raising premiums to match increasing losses.”

Re/insurers have been playing pricing catch-up forever though, as they can only price risks based on what they know about the exposure and the science is constantly moving, evolving and learning from events, with data augmented every year and new findings from meteorological or geological science emerging that need to be factored in.

Risk model update and development lag times could become an increasing risk factor for re/insurers and also the ILS or catastrophe bond market. As risk models often only undergo major updates every few years, so increasing the need for underwriters and ILS portfolio managers to layer on top their own view of climate risk.

Having their own view of this risk is going to become increasingly important and will be a significant differentiator for some firms in years to come, as those who can better analyse and price risks based on their understanding of the science and meteorology, could have an edge, as their results may prove to be less volatile than others.

The majority of ILS funds, insurers and reinsurers all layer their own views of risk on top of the main vendor models already, which will help to reduce some of the uncertainty and the impact of model update lag time.

But with more volatile weather anticipated, due to the variability or changes in our climate, it’s going to become increasingly important to manage this view of risk proactively to ensure it’s always priced in.

One area that most ILS funds do not have to worry so much is in the potential for correlation of risks.

Insurers and reinsurers face climate related risks on the underwriting side of their book, both in property exposures and liability or casualty risks as well. Additionally, re/insurers face risks from climate to their investment portfolios as well, so both sides of the balance-sheet are potentially exposed.

ILS investors of course likely have numerous sources of climate related risks within their overall portfolios, so for them it is key to understand how ILS funds look to manage and address any exposures.

On the other side of the risks posed by climate and also of particular relevance to the ILS market, Moody’s believes that as the understanding and acceptance of climate related risk changes increase among corporations and governments, there will be opportunities to provide more protection and to develop new products, to help those looking to hedge their climate volatility.

“As governments, businesses and individuals become more aware of the financial and economic risks arising from climate change, P&C (re)insurers could generate business growth by providing broader risk management solutions and products that help close the “protection gap”,” Moody’s explains.

In fact, this is not just in covering the protection gap, but also in creating products that have not existed before, to cover risks that have previously gone uninsured.

A number of ILS funds have been working on initiatives in this area, looking to cover corporate climate volatility as an insurance product and working to identify what elements of catastrophe reinsurance, capital markets structures and risk transfer trigger design can provide coverage that will smooth earnings volatility caused by climate-linked weather risks.

But overall, climate related risks are likely to outweigh any opportunities, Moody’s believes, which will make hedging an increasingly vital piece of the ILS fund toolkit, as well as for re/insurers.

For if climate and weather related risks is to be an area of expansion for the sector, it will need to identify the best ways to hedge the volatility that will be assumed and that will manifest in its results.