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. 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, the rate of growth in emerging markets outpaces these by far: according to global accountancy EY, life premium 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 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%, MENA’s will rise from 1.3% to 1.8%, and sub-Saharan Africa’s share will stay at 1.1%. Swiss Re, another international reinsurer, forecast the worldwide rate of growth in reinsurance at 1% over the three years to 2019; by comparison, reinsurance in emerging markets is expanding by about 10% per year.

Reinsurance Trends

The global reinsurance market on the whole is on a firm footing, with capital reaching $605bn at the end of the second quarter of 2017. However, according to its “Global Insurance Trends Analysis” for the first half of 2017, EY reported that 2016 was the biggest year for catastrophe (CAT) claims since 2012, with $54bn in insurance losses reported on $210bn of damage, a coverage rate of 26%. In the first six months of 2017 the proportion of insured losses rose to 42% of the total.

Reinsurance returns are already at or below the cost of capital: Fitch ratings agency expected return on equity to fall from 8.5% in 2016 to 2.1% in 2017, but forecast it would increase to approximately 7.1% in 2018. The cost of capital for companies, meanwhile, is thought to have ranged between 6% and 7% in 2017.


In August 2017 a global partnership was formally forged between the global insurance industry and the UN, which will help boost the micro-insurance segment. Swiss Re has forecast that the this market could cover as many as 4bn people. As the market increases in size, added capacity will be needed beyond what domestic markets can provide, making international reinsurers vital to expansion, though to date their participation has been limited.

While major reinsurance companies are supportive of micro-insurance – especially in terms of grants, research and promotion – the exact level of their engagement 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.

Index Linking

For the most part, reinsurance companies are only involved with the micro-segment indirectly via the index-linked market, and a number of programmes are under way to increase reinsurance participation in this 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, it 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), a donor-funded programme designed to support index-linked insurance in developing countries, with Swiss Re as its technical partner. In that same year, France’s 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 through CAT coverage, as developing countries often need to go abroad to cover major disasters due to limited domestic capacity. 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 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. 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. The scheme aims to have $1.5bn of coverage available by 2020, though ARC will likely require significant international market support to meet this goal.


Adding to traditional reinsurance arrangements, CAT bonds and CAT swaps are becoming part of the landscape. 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, some developing markets 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 Mexican earthquake insurance fund is tapped out. In 2017 FONDEN sold a $360m CAT bond, surpassing the $290m that was initially planned.

In the Philippines, a parametric disaster line to cover the 25 most disaster-prone provinces was initiated in 2017. The fund was 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 for the country, which will cover typhoon and earthquake risk.

Globally, the size of the CAT bond market has more than doubled over the past decade. It reached record volumes in 2017, at some $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. Notably, it can be difficult to generate demand for these products. Jakarta’s Manggarai Water Gate micro-insurance programme, for example, sold only 50 policies, and as a result was discontinued a year after its inception in 2009.

In terms of index-linked initiatives, it is not clear whether these securities can be fully self-sustaining, as a majority of them 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.

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. Although the payout ended up being a manageable $150m, it highlighted potential problems.

Structural Risks

There are also 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, Papua New Guinea 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. More involvement by reinsurers 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 activity – but in some cases local markets are becoming too competitive, which can lead to a mismatch in terms of pricing. In Papua New Guinea, 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 developing and emerging markets 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.