September 25, 2015

Asia-Pacific needs ‘responsive’ disaster risk transfer instruments: ABAC

The Asia-Pacific region is in need of greater access to disaster insurance and risk transfer instruments which can be responsive to actual catastrophe or weather conditions, ensuring a rapid payout can be made, helping to boost the regions resilience.

The importance of having access to post-disaster risk finance is becoming increasingly apparent in regions such as Asia-Pacific. As the call for countries to become more resilient to disasters and weather events grow louder, countries and regions are once again turning to insurance and risk transfer products, with a focus on those that can pay out rapidly.

Enter index insurance, parametric triggers, catastrophe bonds and similar structures, all risk transfer, insurance or reinsurance solutions that can be parameterised and designed to pay out capital just-in-time after an event occurs.

It is expected that there will be an increasing uptake of such products in years to come, as resilience becomes a core goal of both developed and developing regions.

There is an awareness that exposure to catastrophe and weather events is increasing, not least due to migration, increasing urbanisation, development in coastal and flood exposed areas, rising sea levels and the expected increased severity and frequency of weather events.

Of course insurance penetration rates are not yet keeping up, making responsive disaster risk transfer a valuable tool for sovereign or regional governments, cities, councils, corporations and companies, and even for people (in microinsurance form).

The Amtrak catastrophe bond, PennUnion Re Ltd., which launched just in the last week is a prime example.

Benefitting the U.S. railroad company Amtrak, PennUnion Re will provide a responsive source of collateralised insurance protection, based on parametric triggers that payout when storm surge, wind or earthquake parameters breach the triggers.

How many large global corporations could benefit from such a risk transfer product? How many global automotive manufacturers, clothing companies, drinks producers, retailers, mining organisations, computer & cellphone companies, and more, could all benefit from some sort of responsive disaster protection?

The answer is almost all of them, most will find a solution designed effectively will actually extend protection, narrow deductibles or gaps in insurance and cover risks that were previously uninsured, as well as provide a valuable source of business interruption risk financing.

The APEC Business Advisory Council (ABAC), the business focused arm of the 21 member economies of the Asia-Pacific Economic Cooperation (APEC), recognises the advantage to responsive forms of disaster risk transfer and calls on regional micro, small, and medium enterprises (MSME’s) to consider them.

Chair of the APEC Business Advisory Council (ABAC), Doris Magsaysay-Ho, said in a speech this week that she wants to see a range of financing options available to these MSME’s, including risk transfer and insurance products, according to the Philippines Information Agency.

Ho called for “responsive financial instruments” which would allow MSME’s to mitigate disaster risks and provide capital rapidly in order to help them recover.

Recovery of local businesses after an event is key, as it helps to enable the economy to keep running and brings much-needed jobs, capital and continuity to a regions business prospects. Vital after a disaster event.

“We see a great need for financial instruments such as microinsurance for business continuity and catastrophe bonds to help communities in their reconstruction,” Ho continued.

The fact that awareness of the need for responsive disaster risk transfer is increasing bodes well for future requirements for insurance-linked securities (ILS) and reinsurance cover for these schemes. Even the lowest level microinsurance could one days scale to become a major source of index based insurance, requiring risk transfer and reinsurance protection.

As the re/insurance industry looks to narrow the protection gaps, it should look to responsive solutions featuring index or parametric triggers. It’s key to be able to demonstrate to potential clients where these tools fit, how responsive they can be and how they can complement traditional insurance, while providing capital for resilience and recovery and immediate financing for business interruption as well.

The continued push for responsive risk transfer and catastrophe bonds will be an opportunity for both traditional and alternative reinsurance capital players. The market would do well to watch these developments closely.

Read the full article via the Artemis website


Sign up for the latest ILS Bermuda news and alerts


Join the conversation on our social media channels below: