New reinsurance programmes bolstering coverage against natural disasters in Indonesia and emerging markets


While advanced economies generate the vast majority of insurance and reinsurance business, emerging markets are posting higher rates of growth. Complementing this underlying trend is a strong and expanding interest in catastrophic risk, which by nature tends to pertain to emerging markets. This is coming alongside fast-paced, sector-transforming innovation, which could provide a major boost to industries in less-developed economies.

By the Numbers

In terms of simple throughput, insurance remains very much centred in North America, Europe and mature Asian markets. With long histories of trading risk, a general acceptance of the relevant products, and massive and increasingly vulnerable asset bases that need protection, developed economies generate steady volumes. According to insurance group Munich Re, in 2016 North America paid 31.1% of global premium, Western Europe paid 28.8% and the more advanced Asian markets, such as Japan, paid 19.8%.

However, growth rates in emerging markets outpace them by far: according to global accountancy EY, life premium in developing markets rose by 7.8% in 2014, while advanced markets grew by 4%. Those rates were 13.2% and 3.4% in 2015, respectively, 20.1% and 2% in 2016 and an estimated 14.9% against 2.1% in 2017. Particularly strong growth was noted in the life segments in Vietnam, Malaysia and Indonesia. Regarding non-life insurance, the growth in emerging markets has been in the range of 5-8.5% since 2012, while growth in developed markets has remained around 2%.

These trends are leading to a relative decline in the share of business in developed insurance markets. Munich Re has estimated that primary premium in North America will fall to 27.8% of the world’s total by 2026, Western Europe to 24.5% and mature Asian markets to 17.5%. Meanwhile, emerging Asia’s share will jump from 13.3% in 2016 to 21.4%, the MENA region’s allocation will rise from 1.3% to 1.8%, and the share held by sub-Saharan Africa will remain at 1.1%. International reinsurer Swiss Re forecasts global reinsurance will grow by 1% over 2016-19; by comparison, reinsurance in emerging markets is growing at around 10% per year.


The global reinsurance market on the whole is healthy, with capital reaching $605bn at the end of the first half of 2017. However, in the wake of hurricanes Irma, Maria, Harvey and Nate, among other natural disasters, the long period of relatively low claims appears to be coming to an end, inevitably altering the fundamentals of the market. In its “Global Insurance Trends Analysis” for the first half of 2017, EY noted this flip in the market, with average event occurrence rising above the mean. According to the report, 2016 was the biggest year for catastrophe (CAT) claims since 2012, with $54bn in insurance losses reported on $210bn worth of damage, a coverage rate of 26%; in the first half of 2017 this rose to 42%. Reinsurance returns are already at or below the cost of capital: ratings agency Fitch expected return on equity to fall from 8.5% in 2016 to 2.1% in 2017, but forecast it would increase to 7.1% in 2018. The cost of capital for companies, meanwhile, was projected at 6-7% in 2017. As reinsurance recovers from a turbulent year, emerging markets should help drive the rebound. Although conditions are likely to remain tight, there is optimism as reinsurers and investors look for opportunities in fast-growing economies in Asia, Africa and the Gulf. Latin America is not to be ignored, however, as Mexican insurance authorities reported strong demand from international markets and healthy pricing in early 2018, despite recent global catastrophes. At present, 236 reinsurers are operating in Mexico, serving 113 insurance companies – more than two reinsurers for every insurer.


The growth of reinsurance in the developing world is mainly the result of economic expansion and increased awareness, though regulatory changes are playing a role as well. Many local authorities are working to raise awareness of the benefits of insurance and are calling for better coverage of risk, which is boosting policy demand. The rise in cessions is also being driven by innovations addressing specific conditions, events and constraints in various countries.

Micro-insurance, which was targeted as one of the UN’s Sustainable Development Goals, is one such innovation. In 2017 an international partnership was forged between the UN and the global insurance industry to boost sector activity. Swiss Re estimates the micro-insurance market could cover 4bn people worldwide, and reinsurers will be vital to this expansion. As the market increases in size, added capacity will be needed beyond what domestic businesses can currently provide, and international players will be key in bridging the gap.

To date, however, the two markets have barely connected. While major reinsurance companies are supportive of the offerings of micro-insurance – in terms of grants, research and promotion – their exact participation in the risk-transfer part of the equation remains unclear. This is partially a structural issue: the insured amount is usually so low with micro-insurance that reinsurance rarely kicks in on a per policy basis.

Index Linking

For the most part, reinsurance companies are involved with the micro-segment indirectly via the index-linked market. These products utilise parametric triggers, deliver large payouts when the relevant criteria are met and offer clear visibility of the basis for any claims, making them well suited for reinsurers.

A number of programmes are under way to increase reinsurance participation in the index-linked market. For instance, Mongolia’s Agriculture Reinsurance (AgRe), which provides index-based livestock cover, is supported by major international players, including SCOR, Swiss Re and Qatar Re. AgRe was originally formed with the assistance of the World Bank in 2005, becoming a fully fledged corporate entity in 2014. Despite early losses, the programme has been in positive territory every year since 2010, according to company data.

In 2015 the International Financial Corporation, part of the World Bank Group, opened the Global Index Insurance Facility (GIIF) with Swiss Re as its technical partner. The GIIF is a donor-funded programme to support index-linked insurance in developing countries. The same year, French insurance giant AXA announced it would provide reinsurance capacity for weather-linked products introduced by the World Bank under the GIIF.

Cat Risk

CAT coverage is a key avenue to emerging markets for reinsurers. Developing countries often turn abroad to cover major disasters, as they have limited domestic capacity due to the size of their economies and local insurance markets. It is also a product line where the modes of participation for international reinsurers are straightforward, with ample opportunity for innovation and product development. The triggers are transparent, the events are well defined and the duration of the cover tends to be short.

Although CAT coverage is needed and utilised everywhere, and most claims are paid in developed markets, the insurance is particularly suited to emerging economies. Because of their locations, populations and lack of infrastructure, these countries tend to be most affected by weather-related and seismic events.

Development of the segment is ongoing, but a number of programmes are already in place. For example, the Caribbean Catastrophe Risk Insurance Facility (CCRIF), which is currently owned and operated by 16 governments from the region, was created in 2007 with international assistance. It is the first and only regional fund to date that pays out claims based on statistical parameters rather than actual losses incurred. Reinsurance is a key component of the coverage, as it allows for the purchase of CAT insurance at lower rates than would usually be available commercially. Payouts from the CCRIF totalled $100m as of late 2017.

Another such entity is the Pacific Catastrophe Risk Insurance Company (PCRIC), which covers the Cook Islands, the Republic of the Marshall Islands, Samoa, Tonga and Vanuatu. The entity was designed to pool risk and tap international reinsurance markets to cover key regional risks, such as tsunamis, earthquakes and cyclones. Established in June 2016 after the completion of a pilot programme from 2013 to 2015, the PCRIC mobilised $45m worth of coverage for the 2017/18 cyclone season, up from $38m a year earlier.


In addition to traditional reinsurance arrangements, CAT bonds and CAT swaps are becoming a bigger part of the landscape. Under a swap, the exposure is transferred to investors in return for a payment – similar to a bond or a reinsurance agreement, but with less structure. These developments allow for the quick identification of risk and deployment of capital, in turn resulting in highly competitive terms. As reinsurance becomes more oriented towards capital markets, some developing economies may be better served. At a global level, the World Bank has initiated a pandemic CAT programme, issuing a $320m bond and completing $105m worth of swap transactions in 2017. The pandemic emergency financing facility will provide cover for the flu; corona viruses, such as SARS; filoviruses, including Ebola and Marburg; Crimean-Congo fever; Rift Valley fever; Lassa fever; and others. World Health Organisation data on the number of people affected by an outbreak is used to trigger payments.

The size of the CAT bond market has more than doubled over the past decade. It reached record volumes in 2017, estimated at $12bn, with more than $30bn outstanding. There are signs that alternative financing is outpacing traditional reinsurance, which could have a major impact on developing economies, given the speed and flexibility of market-based solutions.


The rise of protectionism presents one challenge to reinsurance growth. The trend towards more open economies has hit a speed bump in recent times, as populist sentiment rises around the globe. In insurance markets, these trends have resulted in new efforts to restrict entry, such as local incorporation rules and higher capitalisation levels. Reinsurance is often targeted directly. This can include mandatory cessions to state reinsurers, minimum retention levels and high capital requirements for overseas cessions.

The Global Reinsurance Forum identified 28 countries or regions that have or are implementing restrictions on reinsurance. While a number of developed countries are included – such as the US, Germany and France – mandatory cession and other such requirements are more common in emerging markets. For instance, Kazakhstan and Russia have been particularly restrictive, with the latter forming the Russian National Reinsurance Company in 2016. “The introduction of local requirements is influencing international reinsurers,” Solomon Lartey, CEO of Activa International Insurance in Ghana, told OBG. “The global view of the reinsurer is bittersweet. For the big players facing natural disasters, they are getting squeezed from every angle.”

Mandating retention rates may be difficult, as insurers in developing countries often do not have the necessary capital to serve all business. A good portion of premium required to remain domestic already ends up overseas; national reinsurers often have no choice but to turn to international markets. “A lot of our local players are more distribution organisations or consumer insurers,” Mark Lwin, CEO of AIG Philippines Insurance, told OBG. “If you look at retention rates, they are as low as 1-2% or 8% at most for larger commercial risks. The gap between the desire to keep premium in the local market and the capacity to do so is significant.


Local conditions can impose specific challenges for insurers and reinsurers alike. On the life side, EY anticipates a tapering of growth in East Asia, as demand shifts from investment-linked products to protection products. In terms of non-life, EY has forecast a pick-up following a period of slower growth stemming from macroeconomic concerns, although the rebound will likely be capped by competitive and regulatory pressures. There are common structural risks in emerging markets, such as limited data and underwriting experience; however, advances in technology should see these areas improve over time, and some developing economies already have substantial information available. For example, PNG has 50 years of cyclone data and Mongolia’s livestock census dates to 1918.

Globally, the reinsurance market is becoming increasingly concentrated – the top-five players control 90% of the market – but in some cases, local markets are becoming too competitive, which can lead to a mismatch in pricing. In PNG foreign exchange restrictions have led to reinsurance payment issues, while in other markets, the fall in local currencies has led to a decline in the market size in dollar terms, despite strong business.

Looking Ahead

Reinsurance is changing globally.

Although natural disasters have led to a tightening of the market, new technologies and innovation are assisting insurers and reinsurers in reaching historically underpenetrated areas. Alternative solutions are likely to create uncertainties as well as opportunities, but reinsurance in emerging markets appears set to grow in both absolute and relative terms. While there are concerns about increased protectionism, the desire to keep more premium within emerging economies is likely to bolster development. “It is up to global players, but they must stop thinking that African business is too small,” Lartey told OBG. “African regulators are talking to each other, fighting to close every loophole. If multinationals don’t take action, local players will step in and work to meet business needs. Eventually, global players will have to shift to doing more business in Africa.”

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