Typhoon Haiyan won’t drive reinsurers out of Asia Pacific

Typhoon Haiyan-- which according to AM Best will lead to insured losses of only a fraction of the $14 billion in economic losses—will not deter reinsurers from activity in the Asia Pacific region. This is the view of Rade Musulin, COO of Aon Benfield Analytics for Asia Pacific.

Musulin told Bermuda:Re: “While the event has had extremely tragic consequences, the insured loss is expected to be low with respect to recent major catastrophes.”

He continued: “The region provides significant diversification opportunities for reinsurers.  While there is still opportunity for model development across the region, typhoon and earthquake models in the region are available and can form the basis for appropriate reinsurance pricing. The reinsurance industry has access to ample capital, so it is unlikely that reinsurers will significantly pull back. Of course, whenever there is a major event there are temporal effects in local markets for up to a few years, but such effects rarely affect entire regions.”

While some sectors of the media have expressed surprise at the gap between insured and uninsured losses, Musulin argued that this case is not unusual. As in many developing countries, property catastrophe insurance penetration is low and concentrated on commercial buildings as opposed to family homes. He said: “I would not characterize the gap between insured and uninsured economic losses as startling. What we are seeing in the Philippines is similar to what we have seen in other large losses in developing countries, such as with the Boxing Day tsunami in 2004.

“Creating a vibrant residential market will take considerable time and may require some form of government involvement, particularly for poorer people. Despite this, the insurance industry is rapidly expanding in countries across the world and rising insurance penetration is almost certain in coming decades. This will lead to a realignment of ‘peak zones’ to include some places in Asia to compliment current ones in places like Japan or Florida.”

The government of the Philippines, which is currently facing scrutiny for its response to the Typhoon, will be forced to rebuild without the benefit of reinsurance. This, according to Musulin, is an interesting contrast with New Zealand’s response to the Christchurch earthquake.

He said: “once the initial emergency period passes the Philippines will require a huge investment to rebuild. Lacking funds from the re/insurance industry, the government will have to rely on limited disaster reserves, international donations and borrowing. This will not provide adequate funding in the short term, which will slow recovery and make it much harder to fund the often modest additional cost of stronger buildings to make the community more resilient in the future.

“Clearly, the reinsurance mechanisms which worked so well in New Zealand cannot be easily replicated in developing countries in the short term. This will require some creative thinking from reinsurers and capital markets in the form of things like parametric or microinsurance products. In many cases Public-Private partnerships will be required for governments to kick start the process of funding an increasing proportion of disaster losses through the insurance system.”