Navigating volatility to make protection a certainty

Recent months have served up more reminders that unpredictable, high-impact weather events are the new norm for Asia Pacific (APAC). The rain that lashed Hong Kong on September 8 was the heaviest since records began 140 years ago, flooding malls, streets, metro stations and tunnels. That came just days after two typhoons, Saola and Haikui, hit East Asia, with widespread damage reported in Taiwan, Hong Kong and southern parts of China. 

Events like these are driving demand for protection and highlighting the need for re/insurers to continue to serve as societal shock absorbers. We must be level-headed about the balance of risks and potential returns our industry faces if this is a role we are to continue to play. 

Climate change, rapid urbanisation, higher property values and inflation confluence to render natural catastrophe events more frequent and devastating, to lives and livelihoods, and in terms of the financial cost to property and infrastructure. There has been a noticeable escalation in secondary perils - those that generate small to mid-sized losses like hail, floods, storms and bushfires, and which tend to be less monitored and modelled.

Yet secondary perils are, as it turns out, anything but secondary in their impact. In the past six months, for instance, in addition to the typhoons and flooding affecting Greater China, APAC has seen: 

• Australia in the grip of an El Niño climate pattern; 
• Two unprecedented floods hitting New Zealand, with combined insured losses of about USD 2.3 billion; 
• Extreme weather events in India for 84 of the first 120 days of 2023. 

Rising losses stemming from more frequent natural catastrophe events are having a major impact on the property re/insurance market. Globally, insured losses from natural catastrophes amounted to USD 50 billion for the first half of 2023 - the second-highest since 2011—and the second half has already seen them mount further. The likely outcome, Swiss Re predicts, is that the global market will have to deal with annual insured losses in excess of USD 100 billion going forward. 

To sum up, elevated uncertainty, and losses, are to be expected and we need to assess our capacity to absorb both. 

The expanding protection gap signals a pressing need for insurers to take proactive measures. This is especially pertinent for APAC as the region stands at a turning point  where right actions can mitigate these escalating risks. 

Higher volatility and increased uncertainty potentially impose serious implications for APAC, because this region is growing faster than the rest of the world and becoming richer. That increases urbanisation, a strong structural driver of economic growth—but, given the resulting concentration of infrastructure, also of vulnerability to natural catastrophe events. 

Although APAC’s rising wealth brings greater exposure to natural catastrophes, it also means the region has more resources to pay for the necessary insurance protection. Equally, as the risks in APAC grow, pricing of risks and structures will need to reflect the evolving, more volatile environment.

More broadly, real interest rates are also rising, transforming the economics of insurance and placing insurers on a more financially sustainable long-term path. Higher rates are benefiting insurers’ investments, and far outpacing the accompanying increased cost of capital. This will prove crucial going forward because narrowing the existing protection gaps means industry resources must match the growth in demand from evolving risks. 

That should prove easier in APAC than in many other regions. The Swiss Re Institute (SRI) notes Asia’s emerging economies made significant progress on disinflation this year, and at a relatively low cost in terms of foregone growth or jobs. This relative outperformance post-pandemic is why the SRI reckons the region could be on the cusp of a virtuous cycle - with reduced long-term volatility, inflation and interest rates attracting global insurers and investors as regional economies outperform the rest of the world in terms of real GDP growth into 2024. 

Despite an accelerating risk environment, the outlook for APAC's re/insurance industry is generally positive, with growing demand for non-life insurance, an increased ability to pay for it, and better returns on insurers’ investments. 

All that said, with increased natural catastrophe activity, and inflation and higher replacement values raising exposure and losses, we expect to see imbalances in the supply and demand of non-life insurance in certain lines, particularly in property catastrophe. This has contributed to a hard market for property catastrophe reinsurance.

Achieving market equilibrium will require proactive measures, and advancements in addressing the evolving risks associated with natural catastrophes. This entails fostering a clear alignment of interests across the insurance value chain, along with sound structures and advances in data-driven underwriting to ensure that catastrophe models more adequately measure risks. Here, data quality will prove crucial, as will the ability to adopt a 360-degree view of risk and enhance modelling of secondary perils to further minimise avoidable surprises. 

Additionally, re/insurers will need to keep an eye on the broader picture, ensuring that they consider prevailing macroeconomic trends, including inflation and interest rates, given the profound impact these exert on the insurance market.

The fact is that insurers and reinsurers play complimentary roles in protecting our region. While primary insurers are best-suited to absorbing frequency and attritional losses, reinsurers are reverting to their core function—supporting insurers in recovering from large loss events like the 2023 earthquake in Turkey. We expect the trend towards a more sustainable balance in risk-sharing to continue.

If we are to narrow APAC’s protection gaps, we need a concerted and ongoing push to make optimal uses of all the resources at our disposal, and to ensure that the development of these resources outpaces the trajectory of risks. Arguably the most important element of this approach will be partnerships. 

As a long-term proponent of collaboration, we believe it has never been more important for us to work with our clients to help them anticipate and manage insurable risks, and respond to a future in which catastrophic events are likely to become more commonplace, both in APAC and beyond. Whether it is in sharing data, developing our capacity for risk assessment or identifying potential challenges to our industry’s sustained financial health, our efforts need to be collective if they are to support our shared goal of progress in the region's resilience.