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 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%. Swiss Re, another international reinsurer, forecasts 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% per year.

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 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 considerable optimism as reinsurers and investors in related securities 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 attempting to raise public knowledge 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 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 an international partnership was forged between the UN and the global insurance industry, which will help boost sector activity. Swiss Re has forecast that the micro-insurance market could cover as many as 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, engagement has been minimal and the two markets are barely connected. While major reinsurance companies are supportive of the offerings of micro-insurance – especially 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. That same year, French insurer AXA announced it would provide reinsurance capacity for weather-linked products introduced by the World Bank under the GIIF.

Catastrophe Risk

One of the main avenues to emerging markets for reinsurers is through CAT coverage. Developing countries are often compelled to 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. Thailand, the Philippines, Mexico, Indonesia, Papua New Guinea and a number of sub-Saharan African nations, for instance, are all highly vulnerable to natural disasters and are good candidates for coverage.

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.

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, although it will likely require significant international support to meet this goal. In this regard, the ARC has reported that the response from the global reinsurance market has been positive so far.


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

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; coronaviruses, 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.

Barriers to Risk

The micro- and index lines have historically faced challenges, and 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 and 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 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 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. “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.”

Similar requirements have been introduced in sub-Saharan Africa: 15% of life cessions and 10% of non-life cessions in Gabon must go to the 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 underwriters in the African Union; and in Nigeria 5% goes to Africa Re and 5% is ceded to the West African Insurance Companies Association Reinsurance Corporation. 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 had a mandatory 10% local cession since 2016.

Notably, Indonesia, via the Indonesian Financial Services Authority (OJK), has established a number of reinsurance rules to encourage more domestic cession. Motor, health, personal accident, credit, life and surety risk must remain in the country, though products for multinational companies underwritten by international insurers are allowed. Each insurer must prepare an insurance support strategy, which sets out a reinsurance and retention plan, while automatic reinsurance agreements must utilise domestic capacity first – going overseas only if the domestic market is unwilling or unable to fill the order, as long as proof of this is provided to the OJK. Furthermore, foreign insurers taking on risk must be rated above “BBB”.

Indonesia has also set up a national reinsurer, Indonesia Re. Formally established in 2015, Indonesia Re is an amalgamation of the existing reinsurers: Reasuransi Umum Indonesia, Reasuransi Internasional Indonesia, ASEI Re, Asuransi Kredit Indonesia and Reasuransi Nasional Indonesia. It was created to keep premium in the domestic market and may be recapitalised to achieve this goal. European insurers are worried that the new company could result in a higher rate of mandatory cession. While Indonesia is starting to employ protectionist measures, its economic growth is leading to overexposure in the domestic insurance sector. JLT Re, global provider of reinsurance broking, noted that although premium grew at a 10% rate from 2011 to 2016, the pace is not fast enough to fully cover the rise in exposure, placing underwriters at more risk.

Interestingly, Mexico and most Latin American markets are free of such protectionist measures, with the exception of Argentina, with a 15% mandatory cession.

Forcing up retention rates may be difficult, as insurers in developing countries often do not have the 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,” Mark Lwin, CEO of AIG Philippines Insurance, told OBG. “If you look at retention rates, they are between 1-2% and 6% at most. The gap between the desire to keep premium in the local market and the capacity to do so is significant.”

Structural Risks

Local conditions can impose specific challenges for insurers and reinsurers. 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, and some developing economies already have a substantial amount of data available. For example, PNG has 50 years of cyclone data and Mongolia’s livestock census dates to 1918.

Distribution is another issue in emerging markets, as extending coverage to both individuals and corporations can 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 have led to reinsurance payment challenges, 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

The reinsurance sector is changing in both developed and emerging economies all over the world. 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 all indications suggest that reinsurance in emerging markets is set to grow in both absolute and relative terms.