Hybrid solutions for China's natural catastrophes
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According to a PwC report published in May 2022, the insurance protection gap could reach $1.86tn by 2025 and Asia Pacific could account for nearly 50% of all uninsured risks.
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Phoenix CRetro Reinsurance chief executive Kirill Savrassov speaking with Asia Insurance Review said, “While discussing natural disasters, it is important to focus on three areas – hazard, exposure and vulnerability. Hazard refers to the perils to which we are exposed. Exposure looks at things like population density in highly exposed areas and vulnerability looks at how well a country can cope with the occurrence of a disaster.
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Parametric catastrophe bonds are a hybrid insurance and capital market instrument that are being used by sovereign nations and risk pools to speed up the claims payment process and increase the transparency of risk transfer.
A parametric product works on an IF:THEN basis. If wind speeds or an earthquake magnitude surpass a certain threshold, then the purchaser will receive a pre-defined payout amount. Governments currently using these products include the Philippines, Mexico and Jamaica, and there is great potential for other countries or sovereign risk pools to use them too.
Catastrophe bonds are specialised instruments but the level of knowledge outside the community is still limited. In order to broaden their use, better education and awareness is required, both at a private and public level.
Once the beneficiaries are comfortable with the product, they can utilise innovative grant schemes to sponsor catastrophe bonds at very affordable rates. Hong Kong has set up a two-year ILS grant scheme which covers up to 100% or HK$12m ($1.53m) of the upfront issuance costs, making it an appealing place for those looking to transfer climate-related risk to the capital markets.
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