Reassuring trend: New reinsurance programmes are bolstering coverage against natural disasters in 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.

“You have nothing but opportunity: big populations and tonnes of risks,” Tom Johansmeyer, assistant vice-president of property claim services at ISO Claims Analytics, a division of Verisk Insurance Solutions, told OBG. “Look at the populations and the potential growth in financial sophistication – it is an easy call to make.”

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 premiums, Western Europe paid 28.8% and the more advanced Asian markets, such as Japan, paid 19.8%.

However, the rate of growth in emerging markets outpaces these by far: according to global accountancy EY, life premiums in these markets rose by 7.8% in 2014, while advanced markets grew by 4%. Those figures were 13.2% and 3.4% in 2015, 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 of 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 the developed insurance markets possess. Munich Re has estimated that primary premiums 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%, MENA’s will rise from 1.3% to 1.8%, and sub-Saharan Africa’s share will remain at 1.1%. Swiss Re, another global reinsurer, forecast the global rate of growth in reinsurance at 1% over the three years to 2019. By comparison, reinsurance in emerging markets is growing at about 10% a year, which has seen these markets rise from accounting for 5% of world premiums in 2000 compared to 20% in 2016.

Reinsurance Trends

The global reinsurance market on the whole is healthy and on a firm footing, with capital reaching $605bn at the end of the second quarter 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 existing market. In its “Global Insurance Trends Analysis” for 2016, EY noted this flip in the market, with average event occurrence not only returning to the mean, but rising above it. According to the report, 2016 was the biggest year for catastrophe (CAT) claims since 2012, with $50bn in insurance losses reported on $175bn of damage; even more is expected for 2017, which will cost the sector. Reinsurance returns are already at or below the cost of capital: 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, is thought to have ranged between 6% and 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 considerable optimism as reinsurers and investors in related securities look for opportunities in fast-growing economies in Asia, Africa and the Gulf.


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 attempting to raise awareness of the benefits of insurance and are calling for better coverage of risk, which is helping to boost policy demand. The rise in cessions is also being driven by innovations being devised to address specific conditions, events and capacity constraints in various countries.

Micro-insurance, which has been targeted as one of the UN’s Sustainable Development Goals, is one such innovation. In August 2017 a global partnership was formally forged between the UN and the global insurance industry, which will help boost the segment. Swiss Re has forecast that the micro-insurance market could cover as many as 4bn people. Reinsurers will be vital to this sort of expansion. As the market increases in size, added capacity will be needed beyond what domestic markets can provide, and international players will be key in bridging that gap. So far, however, engagement has been minimal and the two markets are barely linked. While major reinsurance companies are supportive of micro-insurance – especially in terms of grants, research and promotion – their exact participation in the risk transference part of the equation remains unclear. This is partly a structural issue: The insured amount is usually so low with micro-insurance that reinsurance rarely kicks in on a per policy basis, as it is often seen as an unnecessary cost.

Index Linking

For the most part, reinsurance companies are only involved with the micro-segment indirectly via the index-linked market. These products utilise parametric triggers and deliver large payouts when the relevant criteria are met, making them well suited for reinsurers. Given the potential claim levels and their visibility in terms of the basis for any claims, there is a clear need for this type of product. 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 designed to support index-linked insurance in developing countries. In 2015 French insurance giant AXA announced it would provide reinsurance capacity for weather-linked products introduced by the World Bank under the GIIF.

Cat Risk

One of the main avenues to emerging markets for reinsurers is via CAT coverage. Developing countries are often compelled to go abroad to cover major disasters, as they have limited capacity due to the size of their domestic economies and local insurance markets. It is also a product line where the modes of participation for international reinsurers are straightforward, with ample opportunity available for innovation and product development. The triggers are transparent, the events are well defined and the duration of the cover tends to be short. While CAT coverage is needed and utilised everywhere, and most claims are paid in developed markets, CAT 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 and 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 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 effectively in order to cover the key regional risks, such as tsunamis, earthquakes and cyclones. In its sixth year the PCRIC mobilised $45m of coverage for the 2017-18 cyclone season, up from $38m a year earlier.

To cover the African market, African Risk Capital (ARC) was launched in 2014 as a sovereign CAT fund. It aims to have $1.5bn of coverage available by 2020; however, it will likely require significant international market support to meet this goal. In this regard, the ARC has reported that the response from the reinsurance market has been positive so far.


In addition to traditional reinsurance arrangements, CAT bonds and CAT swaps are becoming 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 capital markets oriented, a number of developing markets may be better served.

For instance, Mexico’s Fund for Natural Disasters (El Fondo de Desastres Naturales, FONDEN), uses an index based on the Richter scale to provide reinsurance to cover costs after the Mexican earthquake insurance fund is tapped out. In 2017 FONDEN sold a $360m CAT bond, surpassing the $290m that was initially planned.

In 2017 a parametric disaster line to cover the 25 most disaster-prone provinces in the Philippines was initiated. The fund is valued at P1bn ($19.8m), with support provided by the World Bank and risk fully ceded to international reinsurers. In a related development, the World Bank arranged a $206m CAT swap line, which will cover typhoon and earthquake risk.

The World Bank has initiated a pandemic CAT programme, issuing a $320m bond and completing $105m of swaps transactions in 2017. The pandemic emergency financing facility will provide coverage for the flu, coronaviruses such as SARS, filoviruses such as Ebola, Crimean-Congo fever, Rift Valley fever and Lassa fever, among others. Figures from the World Health Organisation for the number of people affected by an outbreak are 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.

Barriers To Risk

The micro-, index and CAT lines have historically faced challenges. Notably, it can be difficult to generate demand for these products. The Manggarai Water Gate micro-insurance programme, for example, was established in 2009 with the help of Munich Re. It paid out a fixed amount when the level at the Manggarai Gate – built to help control floods in Jakarta – breached a predetermined level. However, the demand was not there; only 50 policies were sold, and as a result the programme was discontinued in 2010.

In terms of index-linked initiatives, it is not clear whether these securities can be fully self-sustaining, as most rely on multilateral and donor support. In places like China or India, markets are able to fund the risk internally, but in smaller markets, the mismatch between the potential losses and the critical mass on the ground is substantial. Island nations in particular lack the domestic markets to fund the amount of reinsurance required to cover inevitable natural disasters. Poor performance also threatens the sector, and one major loss can shift sentiment, which can freeze markets and make risk difficult to transfer. For instance, an 8.1-magnitude earthquake in Mexico in August 2017 could have wiped out FONDEN’s financing completely. Although the payout ended up being a manageable $150m, it highlighted potential problems.


Another challenge for reinsurers in emerging markets is the rise of protectionism. According to AM Best, an insurance ratings agency, the trend towards more open economies has hit a speed bump in recent times, as populist sentiment and isolationism increase 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, meanwhile, 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 has identified 28 countries or regions that have restrictions on reinsurance or are in the process of putting them in place. While a number of developed countries are included – such as the US, Germany and France – mandatory cession and other similar 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.

In 2008 authorities in Saudi Arabia announced that all foreign insurance companies operating in the country had to become locally incorporated. In addition, non-local ownership was restricted to 30% of the total capital of an insurer, while all risk was required to be placed with local insurers. A report by AM Best concluded that these rules were ineffective, as informal fronting arrangements meant much of the risk was placed internationally anyway. To mitigate this, authorities initiated minimum retention levels, requiring that 30% of premiums ceded be kept in the country.

Similar requirements have been introduced across sub-Saharan Africa: 15% of life cessions and 10% of non-life cessions in Gabon must go to Société Commerciale de Réassurance du Gabon, 15% of all reinsurance cessions in Uganda must be made to Uganda National Reinsurance, African Reinsurance Corporation (Africa Re) is entitled to 5% from companies that are based in Africa, and in Nigeria 5% goes to Africa Re and 5% of risk is ceded to West Africa Insurance Companies Association Reinsurance. Furthermore, Nigeria, Ghana and Uganda require that all local capacity be exhausted before placing risk overseas, but due to the small size of domestic markets, this threshold is generally reached.

Protectionism is increasingly evident in Asian markets as well. So-called voluntary cessions to Malaysia Re will continue at a rate of 2.5% until the end of 2019 at least. In the Philippines, 10% must be ceded to the National Reinsurance Company of the Philippines, while in Sri Lanka 30% must go to National Insurance Trust Fund, up from 10% in 2013. Thailand has required 5% cessions to Thai Re since 2005, though this has not been enforced since the damaging 2011 floods. Vietnam, meanwhile, has required mandatory 10% local cession since 2016.

From a global perspective, the main competitors to the reinsurers are now governments. According to Lloyd’s of London, 50 years ago insurers took 80% of the risk, but now governments are taking 80%. This shift suggests that countries may be assuming too much of the burden, raising questions about whether economies and taxpayers are in danger from this level of exposure.

Structural Risks

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 away from investment-linked products and towards protection products. In terms of non-life, EY has forecast a pick-up following a period of slower growth stemming from macroeconomic concerns, though 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 emerging markets already have a substantial amount of detailed information available. For example, PNG has 50 years of cyclone data and Mongolia’s livestock census dates to 1918. Distribution is another widespread issue in emerging markets, as extending coverage to both individuals and corporations can often be challenging. Reinsurers becoming more involved at the local level is one potential solution; however, this sort of activity is outside the normal field of operations and responsibility.

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

Looking Ahead

The reinsurance sector is changing in both developing and emerging markets. Although natural disasters have tightened the market, new technologies and innovation are assisting insurers and reinsurers in reaching underpenetrated areas. Alternative solutions are likely to create uncertainties as well as opportunities, but indications suggest that reinsurance in emerging markets is set to grow in both absolute and relative terms. While there are concerns surrounding protectionism, it is also likely to bolster industry development within emerging economies.

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The Report: Ghana 2018

Insurance chapter from The Report: Ghana 2018

The Report: Ghana 2018

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