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RISK MANAGEMENT FOCUS
Risk management in
reinsurance – an Asian
perspective
Mr Raj Juta and Mr David Menezes of Deloitte, say that the Mr Raj Juta Mr David Menezes
reinsurance industry has performed admirably as Asia weathered
a number of large CAT events in recent years. Looking ahead, the
role of risk management has come under the spotlight particularly
given the widespread regulatory thrust for risk-based capital
regimes.
A deep-rooted tradition of risk management
King Hammurabi (c1800 BC) is often credited as one of the
first individuals to establish insurance-type contracts to support
maritime loans; however, earlier references can be found to
Chinese merchants spreading cargoes over a number of ships
in order to reduce the risk from any one boat sinking. In short,
risk management is no new concept to Asia and now the role
of Asian reinsurers has never been greater.
With great (economic) power comes great consume a material part of the entire insurance premium for
responsibility … the province.
In 2011, research by Danny Quah at London School of
Economics suggested that the world’s economic center of Regulation and reinsurance
gravity was moving East. Around the same time, McKinsey At present, the reinsurance market is facing considerable
published a report highlighting the same shift but this time regulatory changes across the region. Two drivers appear
they considered how the position evolved over two millennia; to be having a clear impact:
tracking from East to West and back again. Risk based capital
In 1992, the Third Non-Life Insurance Directive 92/49/EEC
Adding to the compelling evidence of Asia’s growing was passed allowing general insurers in the European Union
importance, in September 2015, Lloyd’s of London released (EU) to sell insurance across all member states. Regulators
the results of its new City Risk Index, a joint research initiative quickly established that equivalent levels of protection
with Cambridge University that analysed the resilience of 301 needed to be afforded to all policyholders and this led to the
global cities’ GDP to 18 natural and man-made perils. The creation of the initial Solvency 2 Directive in 2009. The new
top 20 cities are shown below, with green bars indicating just regime will come into play in 2016 and will bring changes
how influential Asia has become: to the face of European insurance.
The illustrations above provide a sense of potential 2011 saw the publication of the International Association
exposures in this part of the world, but what does this mean for of Insurance Supervisors (IAIS) set of Insurance Core
losses? Historically, insurance losses in Asia have been muted Principles or ICPs. This document provides a high-level
due to low levels of insurance penetration; however, this notion framework for the operation of (re)insurers and also codifies
has been challenged in recent years by the Thai Floods (2011), explicitly the notion of enterprise risk management (ERM)
Tohoku earthquake (2011) and most recently, the catastrophic practices. Consistent with Solvency 2, the ICPs stress the
explosion in Tianjin, China. At the time of writing, various importance of risk based capital (RBC) within ERM.
sources indicate that the eventual cost of insurance losses in Over the last five years, much of the world, and Asia in
Tianjin will be between US$1 billion and $5 billion and will particular, has established or enacted RBC proposals including
China, Hong Kong, Malaysia, Sri Lanka, Singapore and
Thailand. These changes are a positive development as the
impact of capital relief for those who purchase reinsurance is
now directly quantifiable. It also means that reinsurers have
another more direct means of comparing cedents. Set against
this, these changes also present threats.
58 SIRC Supplement • November 2015 • www.asiainsurancereview.com Back to Contents
