Climate change spells costlier catastrophe coverage

         

Business Times, 8th January 2008

By Jeeva Arulampalam

Catastrophe coverage will be expensive and scarce in future as climate change gives rise to more catastrophes, says a top official with a local reinsurer.

 This combination will result in very few specialists and sizeable reinsurers providing such coverage for catastrophe exposure.

"The smaller-sized reinsurers could be putting their solvency margin position at risk if they continue to underwrite such exposures given that global warming and other related concerns will lead to more catastrophes," Malaysian Reinsurance Bhd senior vice president and chief financial officer Norazman Hashim said in an interview with Business Times.

Natural catastrophes usually escalate the prices of insurance and reinsurance policies, more so for catastrophe-prone countries.

"Although Malaysia is not a catastrophe-prone country, we will still be affected as reinsurers tend to review their costs on an overall basis by increasing and spreading their (recovery) costs worldwide," said Norazman.

While natural disasters like Hurricane Katrina in the US definitely affect the domestic industry, local reinsurers usually rate local risks based on local loss experiences.

"Thus, a national reinsurer can provide very competitive pricing on reinsurance costs to local insurance companies compared to international reinsurers," he said.


 
Norazman added that to save on cost, insurers and reinsurers alike may have to retain more risks for their own net account. As such, they would suffer even more losses to their net account in the event of a catastrophe.

As major reinsurers usually have substantial net account exposures, their bottom-line results will be significantly impacted, he said.

Norazman added that reinsurers have been charging increased rates in order to shorten the recovery (pay-back) period for catastrophic losses.

For instance, the recovery period for a RM50 million coverage with a two per cent rate-on-line is 50 years.

"This has certainly been an observed trend, coupled with the fact that reinsurers are also trying to build up more reserves to meet such future events," he said.

He added that reinsurers and insurers need to be vigilant in monitoring their catastrophe exposures so as not expose or impair their shareholders's funds in a significant manner.

"Reliance will be placed on more sophisticated catastrophe-modelling techniques and tools to monitor reinsurers' exposures to such losses," he said.

It will also provide valuable insight into determining their own reinsurance requirements and type of coverage to purchase to protect their underwriting position.

To standardised the risk management framework within its companies such as Malaysian Re, holding company MNRB Holdings Bhd has created a two-tier risk management structure.

The upper tier focuses on developing and overseeing the implementation of an enterprise-wide risk management in each company while the operational level complements the upper tier in ensuring a proactive risk management culture at the divisional level.

"The group utilises a corporate risk scorecard methodology to identify and classify the risks faced by each of its company. The risks are categorised by the significance of their impact vis-a-vis their possibility of occurrence," he said.



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