Reinsurers need to prepare for rating agencies’ increased scrutiny of Asian cat risk

Rating agencies are likely to increase their scrutiny of catastrophe risk in Asia and many re/insurers will have to make substantial investments to address this new emphasis, says Aon Benfield, a global reinsurance intermediary and capital advisor.

There are many changes occurring in the way rating agencies are analysing re/insurers. The recent Indonesian earthquake and the flooding in Pakistan are recent evidence of the region’s exposure to natural disasters. The events in Indonesia and Pakistan, while causing extensive local devastation, have not severely impacted global re/insurers due to low insurance penetration in these countries.

However, as insurance penetration grows and economies develop in Asia Pacific, re/insurers will play an increasingly important role in funding the recovery from such disasters. This will increase rating agency scrutiny of re/insurer catastrophe risk, including the quality of data collected, the systems used to monitor exposures and the models used to determine Probable Maximum Losses.

Rating agencies have been restricted in their analyses due to the lack of catastrophe models for many Asian perils, in particular flood and tsunami. However, data quality is improving as insurers invest in systems capable of capturing location and construction information of a global best practice standard.

Rade Musulin, COO of Aon Benfield Analytics in Asia Pacific, says that the focus of rating agencies on catastrophe risk in Asia Pacific will increase as the insurance system plays a greater role in funding natural disaster losses in the region. He said: “Re/insurers with significant catastrophe exposure wishing to earn strong ratings will have to make substantial investments in several areas such as technological solutions to capture data and human capital to evaluate, underwrite, price, and reinsure property exposures. Many of these tasks will take years to implement, meaning re/insurers in Asia Pacific must make investments today to meet requirements likely to be imposed in coming years.”