Rapid economic growth and good long-term fundamentals in Asian markets are fueling reinsurance revenue and positioning the region as a key element in balancing a portfolio of the global catastrophe insurance risk, according to the Monetary Authority of Singapore.

Teo Swee Lian, deputy managing director of the Monetary Authority, said Asia's economic growth prospects and rising affluence over the medium and long term will result in "increasing demand for insurance, particularly for asset protection and insurance coverage across a wide range of personal and commercial lines."

Despite the uncertainties of the global financial crisis, economic growth in Asia is projected to top 10% annually, with insurance growth occurring at an even faster pace, said Teo at the 10th Singapore International Reinsurance Conference.

Besides the "obvious" enhancement in reinsurance revenue, Teo said growth figures also indicate the potential of Asia as "a key element in diversifying and balancing a portfolio of insurance risk, which currently typically comprises predominantly risks from America or Europe."

Teo cited insurance broker Aon Benfield's 2008 annual global climate and catastrophe report that concludes China would likely overtake the United States and Europe to become the country with the "most insurance cover for natural catastrophes," which she believes would give insurers an opportunity to diversify their catastrophe risk by "adding Asian perils to their portfolios."

"When the coverage for natural catastrophes in China and India become more proportionate to their share of the global economic losses from such catastrophes, the U.S. and Europe will benefit from lower relative catastrophe insurance and reinsurance costs," said Teo.

Room to Grow

Looking at the current Asian reinsurance market, the Singaporean regulator said the challenge of relatively low penetration in reinsurance coverage in Asia, as well as the immature catastrophe insurance market in the region, stem from "a lack of awareness among the general population about its benefit" and "a shortage of good historical loss data" for the region to value and mitigate risks.

According to the research by Swiss Re, Asia's share of the total market for insurance premiums is only about 22%, compared with 34% and 41% for the Americas and Europe, respectively.

In terms of premiums per capita, Teo said research found that insurance premiums in Asia amount to only about US $235 per capita, which "lags significantly" behind America and Europe at more than US $1,500 and US $2,000 per capita, respectively.

Despite rising loss potential from natural disasters in Asia, excluding Japan and Australia, the places most at risk from natural catastrophes have "extremely low" insurance penetration compared with other parts of the world, according to Swiss Re.

The reinsurer also noted that for 2008, of the 20 worst catastrophes in terms of number of victims, 16 occurred in Asia. Of those, only three had some insurance coverage.

A recent report from Munich Re said natural catastrophes in 2008, including the Sichuan earthquake in China, floods and typhoons, triggered estimated global losses of some US $200 billion, and Asia's share of that was US $118 billion. In terms of insurance coverage, the reinsurer noted the amount that was covered worldwide was US$45 billion, and Asia's share was US $2.25 billion or only 5%.

An example illustrating the low insurance penetration in Asia is the massive earthquake in China's Sichuan province on May 12, 2008. Teo said the earthquake killed about 88,000 people and was responsible for nearly US $85 billion of economic losses. However, it was estimated that the insured life and nonlife losses amounted to a "modest" US $759 million.

She explained that large domestic or multinational companies often buy earthquake coverage for high-value commercial property, while such insurance is "rarely" purchased by small and medium-size enterprises, and is "nearly nonexistent" for residential property in China.

"In most of Asia's developing countries, it will take years or even decades for the insurance markets to grow sufficiently and absorb a meaningful portion of catastrophe losses," claimed Teo.

However, Teo believes that with the continuous positive growth of the Asia markets, the challenges also represent good opportunities for innovation, where reinsurers can use market-based solutions, such as micro-insurance for emerging market economies and the setting up of catastrophe pools, as well as issuance of state-based catastrophe bonds, to develop affordable insurance coverage.

In the area of improving historical loss data collection, Teo said Australia's Insurance Council has recently coordinated the development of a National Flood Information Database, which would enable insurers to assess, select and price residential flood risk.

To effectively advance insurance regulators' supervisory tools that draw from lessons learned from the financial crisis, the Singapore's Monetary Authority said in a statement that the International Association of Insurance Supervisors has embarked on several initiatives to move toward an improved standard of supervisory practice that will facilitate effective supervision of cross-border activities and greater supervisory cooperation.

As a member of the IAIS, Teo said the Singapore regulator will continue to participate and support the work of the association to enhance the supervision effectiveness of insurance groups, both domestically and internationally.