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Seizing natural catastrophe (Nat Cat) risks in Asia, current and future headache for GI insurers

Asia has recently experienced some of the largest natural catastrophes in the world. These events, such as the earthquake that struck central Nepal in April 2015 and the Tianjin explosion in August 2015, have proven to be poorly anticipated by insurers.

The highly unpredictable nature of these events led them to underestimate their potential losses and the capital to save for that purpose. The growing awareness in the industry coupled with the future regulatory requirements are showing that Nat Cat risk calculation will be crucial to Asian GI insurance companies.

Nevertheless, choosing the right approach to understand these risks can be difficult for insurers. Fortunately, insurers can already take preliminary measures to minimize the operational impact on their activity.

Asian specific challenges are making Nat Cat risk estimation a headache for the whole industry

Data Quality is low across Asia

The first challenge relates to the data used in the framework. Data granularity is lower quality compared to other parts of the world. For example, CRESTA’s exposure data is not available in Laos and Cambodia.

Consistency in data sets is beginning to create a large difficulty in ensuring data integrity. Pan-Asian groups are often based in financial hubs, following advanced risk management and actuarial practices, while local entities struggle to follow the group guideline as they use different processes and systems for collecting or reconciling data. Insurers also experience inconsistencies in local norms, which make it challenging to record data in the same way in all their entities.

On top of this, outsourcing levels are high and may lower data consistency, as they fragment the flow of information. Data may be missing in some parts of Asia, especially as observations of some outlier events are not available. Richard Hewitt, Senior analyst at Allianz, admits there is a delay in assessing this risk in Asia: “Retrospectively we can see where we recognized trends too late, overlooked customer needs, or underestimated interdependencies.”[1]

Nat Cat risk is not yet under control by risk managers

The second challenge is that Nat Cat risk is often underestimated while the region is experiencing an increasing number of losses due to recent changes in natural conditions. For example, due to global warming, events are occurring more frequently. Another example is that man activities are more and more concentrated in risk-prone areas, such as seashores, which contribute to the loss experience increase.

Technology risk also is growing and often is not well monitored. A 107-page report released in February 2016 by an investigation team led by the Chinese State Council, blamed more than 10 government departments for their role in the Tianjin disaster, proving technology risk frameworks may not be able to adequately capture losses [2]

The industry needs more qualified actuaries for such risks

Even when data is available, exploiting it is not always straightforward. Asia is experiencing an extreme shortage of actuaries. In June 2015, the Vietnam Insurance Association revealed that non-life insurance companies in the country are facing a shortage of qualified actuaries [3].  According to the deputy general secretary of the association, only one actuary in Vietnam met the national standards set-up.

On top of these challenges, the high employee turnover rates in Asia makes it difficult for insurers to retain the brightest talents and improve their practices.

Regulators are increasing their focus on Nat Cat risks, leading to some contradictions for the industry

Asian regulatory focus is now looking after Nat Cat risks, as RBC in Hong Kong and RBC 2 in Singapore will include requirements on Cat Nat risks. Additionally, The Philippines’ Insurance Commission announced in October 2016 that they will review their compulsory catastrophe insurance cover for small and medium companies[4]. This proves that Nat Cat risk is growing more important in the risk management area. However, the regulatory developments could lead to contradictions for the market.

In theory, insurers will need to move towards building internal models in to fully understand their risk. In practice, regulators are planning for less sophisticated frameworks. As an example, the upcoming RBC in Hong Kong will confirm this orientation, as it will impose the use of the standardized approach in Nat Cat models. In addition, it is expected to increase the fragmentation for groups that have already adopted an internal model, as European insurers under Solvency II.

Which direction should insurers take on Nat Cat risks?

Insurers can begin act to anticipate these future changes while improving their current risk management practices.

High uncertainty and expectation on the future guideline from the supervisors

Regulators will have to ensure they listen to the local players before enforcing their new frameworks, otherwise there will be a large challenge to maintain risk frameworks between group standards and local specificities. As of now, risk managers will have to stay attentive in order to anticipate these changes.

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