Fitch Ratings suggests that reinsurers/insurers must innovate to balance the potentially conflicting objectives of expanding access to affordable natural catastrophe insurance coverage without compromising prudent underwriting principles, with the rating agency highlighting solutions such as microinsurance, parametric insurance and insurance-linked securities (ILS) as potential ways to help achieve this goal.
In a new report, Fitch identifies wealth creation, urbanization and climate change as key structural drivers of growing demand for natural cat insurance. It added that this need has not yet been fully met and there is an ongoing material protection gap in natural disaster insurance.
The comments come as the entire industry is concerned about the same trend. In a separate report, Moody’s warned that the global insurance protection gap is widening as economic growth shifts to underinsured emerging markets, where insurance penetration remains low and catastrophe losses are increasingly uninsured.
Fitch estimates that over the medium to long term, economic and insurance natural losses will continue to grow faster than GDP, posing a dual challenge for the industry: managing rising risk exposure while seizing significant growth opportunities.
“Affordability issues, capacity constraints, lack of data and lack of an effective legal framework could lead to long-term franchise losses,” the rating agency explained.
Fitch continued: “To overcome this problem, policymakers, regulators, insurers and reinsurers need to work together to introduce innovative solutions such as microinsurance, parametric insurance and insurance-linked securities.
“If their policies are deemed too expensive or not fit for purpose, they risk underwriting losses or shrinking volumes.
“Reputational risk also comes into play as the insurance industry may not be able to meet social and political expectations. Innovative product solutions available today include microinsurance and parametric insurance. However, their relevance remains limited in absolute terms and geographical scope.”
In the report, Fitch noted continued innovation in risk transfer mechanisms, including the continued development of insurance-linked securities targeting peak risk, as well as advances in natural cat models and data analytics. It also highlights the central role of reinsurers in this ecosystem.
The ratings agency said: “Reinsurers are critical as they have superior underwriting expertise, sometimes run their own organic models, and have strong access to capital markets. They not only provide capabilities to cedants but also advise on best underwriting practices. In addition, they increasingly act as originators of ILS, bridging the gap between the insurance market and institutional investors.”
Fitch continued: “Over the longer term, natural catastrophe insurance is likely to remain a profitable and growing business for insurers and reinsurers if the insurance industry continues to deliver innovative solutions, supported by stronger public sector programs and a constructive regulatory framework.
“Adaptation measures, risk-sharing mechanisms and state-supported reinsurance schemes are also critical to avoid widening gaps in nature conservation.”
