Peak Re: Bridging the protection gap in emerging markets

Large and getting larger: Emerging Asia’s protection gaps

The prevalence of under-insurance and non-insurance in emerging markets is well-documented.[1] The proverbial protection gap persists across different risks, from property to health and mortality, variously also extending to include longevity and liability. There are many reasons underpinning the large protection gap and low insurance penetration in emerging markets, which can be summarised as the “Triple-A Conundrum” – i.e. lack of Accessibility, Affordability and Awareness.[2] These are considered key impediments to deepen insurance penetration in emerging markets including those in the Asia-Pacific region.

Empirical research on protection gaps has been stymied by a lack of data and standard definitions. In fact, different protection gaps are measured differently. For the property including natural catastrophe (nat cat) protection gap, it is measured in most cases as the difference between economic and insured losses over a period.[3] Mortality protection gap is the short-fall in household financial assets to sustain the living of surviving family members, in case of pre-mature death of the household breadwinner. The more challenging health protection gap is sometimes gauged by out-of-pocket expenses, while some estimates also consider the risk of catastrophic medical bills and non-treatment because of affordability and other reasons.

Notwithstanding the capriciousness of definitions and a dearth of data, empirical research is pointing to large protection gaps in emerging markets.[4] The gaps are of particular concern in emerging Asia, due to the region’s large population and fast economic growth. For instance, it is estimated that emerging Asia accounted for around 40% of the global health and mortality protection gaps, and some 20% of the nat cat protection gap.[5] The gaps are also widening. With property and nat cat protection gap, the rise in asset values particularly in disaster-prone coastal regions has outpaced the growth of insurance cover. This could have aggravated by increasing frequency and severity of calamities. Life-style considerations, rising medical inflation and aging population are some of the factors behind a widening health and mortality protection gap in emerging Asia. While the region has witnessed sustained strong life premium growth over the past decades, much of which is believed to be savings-type insurance policies.

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Hannover Re cedes up to 32% of cats, 24% of COVID losses to retro in 2020

ARTEMIS: German reinsurance giant Hannover Re benefited from its retrocessional protections throughout 2020, potentially ceding almost one-third of natural catastrophe losses and 24% of its losses from the COVID-19 pandemic.

The reinsurer reported its full-year 2020 results this morning, revealing that large losses came in well above budget for its P&C reinsurance business due to the contribution of the pandemic.

Hannover Re reported almost EUR 1.6 billion of net major losses in 2020, 950.1 million of which was from the COVID-19 pandemic.

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Cat bonds: Structurally diversifying & primed for growth, says Neuberger Berman

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Catastrophe bonds and insurance-linked securities are one of the “very few genuinely, structurally diversifying asset classes,” according to the Neuberger Berman Insurance-Linked Strategies team, who give the asset class a positive outlook for 2021.

Writing in a white paper, the Insurance-Linked Strategies team of global asset manager Neuberger Berman explain that they also believe catastrophe bonds remain attractively valued and as an asset class is set to continue growing.

Catastrophe bonds, among the ILS universe, are particularly attractive to institutional investors, given they enable access to the returns of “a fundamentally uncorrelated asset class (natural catastrophe risk) in a form that is typically more liquid than most reinsurance contracts and vehicles,” the Neuberger Berman ILS team states.

ILS fund manager Gildenbrook launched with $850m of capital by Brookman

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The Gildenbrook Group has been founded by experienced ILS industry executive Daniel Brookman and has today launched Gildenbrook Capital Management Ltd., an independent alternative investment fund manager focused on the insurance-linked securities (ILS) asset class.

Brookman most recently led alternative reinsurance and ILS activities at re/insurer AXA XL, before which he worked at reinsurance firm Montpelier Re leading capital market initiatives, and before that at investment bank Barclays again with a focus on reinsurance and ILS.

The Gildenbrook Capital Management Ltd. has launched in the fourth-quarter of 2020 and already has some $850 million of institutional assets under its advisory as of January 2021.

Catastrophe bonds “gained in importance” in 2020, says Fitch

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Catastrophe bonds became more important for the reinsurance market in 2020, as the record year of issuance saw use of the cat bond as a reinsurance or retrocession risk transfer tool increase, Fitch Ratings has said.

While alternative capital levels remained relatively flat overall through 2020 it seems, the catastrophe bond market was one area that gained during the year.

Catastrophe bonds gained in importance at the expense of collateralised reinsurance programmes, Fitch Ratings said in a recent report, highlighting a bit of a shift in investor demand for ILS products that was one of the drivers.

City National Rochdale ILW fund lifts assets by 13%

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City National Rochdale’s largely industry loss warranty (ILW) focused mutual insurance-linked securities (ILS) investment fund increased its total net assets under management to $147.8 million by the end of October 2020, an increase of 13% in the quarter.

The City National Rochdale Select Strategies (CNRLX) fund is an interval style mutual fund with a focus on investments in industry loss warranty (ILW) reinsurance and retrocession contracts across global peak peril zones, as well as some regional U.S. ILW contracts. In addition, the fund also holds some investments in catastrophe bonds.

The fund accesses the returns of the ILW market and sources its risk-linked investments through a relationship with asset manager Neuberger Berman’s experienced ILW and index reinsurance investment team.

Turker Re launches Capital Solutions unit & Turkey quake ILW product

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Turker Re, a Lloyd’s broker with a significant insurance and reinsurance broking footprint in the Turkish marketplace and surrounding region, has launched a new product offering of a Turkey earthquake industry loss warranty (ILW) as the first under a new Capital Solutions unit.

The broker hopes to create a new market category for insurance, reinsurance and insurance-linked securities (ILS) companies, offering the Turkish earthquake ILW as an effective hedging tool for any companies with property exposure in the region.

Turker Re is aiming to cement a role for itself in helping the Turkey, MENA and Eastern Europe regions access the capital markets and insurance-linked securities (ILS) investors for reinsurance capacity and has launched a Turker Capital Solutions division, to focus on this opportunity.

Hamilton looks to Singapore for first full cat bond with Easton Re Pte. Ltd.

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Hamilton, the Bermuda based insurance and reinsurance holding company, is entering the catastrophe bond market for its first full, syndicated Rule 144a transaction and Singapore is to be the domicile of choice, after the company registered Easton Re Pte. Ltd.  as an issuer.

Our sources told us that Hamilton would likely return to the catastrophe bond market towards the end of this year, as it seeks out third-party capitalised retrocessional reinsurance protection for the book underwritten by its reinsurer Hamilton Re.

Hamilton Re has sponsored a private catastrophe bond issuance before, using reinsurance broker Guy Carpenter’s cat bond issuance vehicle Cerulean Re SAC Ltd.

Briefing – ILS: resilience despite the thrills

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Institutional investors have piled into insurance-linked securities (ILS) with the goal of adding reliable returns and a touch of diversification to their investment strategies. 

  • A series of natural catastrophes has made investors more aware of the risks embodied in insurance-linked securities
  • ILS have proven less liquid than expected in the wake of these disasters
  • Catastrophe bonds are the most traditional and most liquid ILS instrument

A series of natural catastrophes that hit the world in the past three years has taught them that they have incorporated the potential for large losses into their portfolios.

A relatively young asset class, ILS investments have been put to test since the summer of 2017, as a destructive series of hurricanes, earthquakes, floods and wildfires shot insurance losses through the roof. They also affected investments that, to some extent, constitute a bet that catastrophic events will not happen, or at least will not be too severe in terms of property destruction.

Falling gov bond yields make ILS an even more valuable diversifier: Schroders

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The value of insurance-linked securities (ILS) as a diversification play within asset portfolios is now even higher, as falling government bond yields have made other diversifiers less attractive at a time when ILS is only increasing its value proposition to investors.

This is according to Stephan Ruoff, Head of specialist insurance-linked securities (ILS) and reinsurance investing firm Schroder Secquaero and Brad Angle, Alternatives Director at global asset manager Schroders, in a recent paper.

The response of Central Banks to the COVID-19 pandemic has driven a divergence in the fortunes of some alternative asset classes known typically as offering portfolio diversification.