Allianz Re Asia Pacific: Monitoring Maximum Exposure in Cat-Prone Regions

Because of these unanticipated losses, global reinsurers now are refocusing on improving risk management, attempting to better understand catastrophe models and looking for more detailed exposure data from each ceding company, he says.

This additional data also will benefit insurers, Jung points out. "With good data and comprehensive risk analysis, business clients can better determine their range of exposures," he says. "Therefore, we continue to emphasize the need to improve data and its quality."

In the meantime, in the burgeoning Asia-Pacific region, where growing economies increasingly are found in catastrophe-prone regions, reinsurers are now underwriting cat risk in a different way that affords them better protection—but does not reduce reinsurance-market capacity, according to Jung.

"In order to provide capacity and ensure a positive capital position, reinsurers will aim at separating cat risks from non-cat treaties and provide sustainable reinsurance coverage at adequate price and conditions," he says.

"The times when proportional treaties were offered without event limits are definitely over," he asserts, "even for countries that formerly were not perceived as critically nat-cat exposed."

Allianz Re combines global and local perspectives on risk in determining how much capacity to provide, says Jung.

"We monitor exposure on a maximum-exposed-limits basis," he says. "We steer globally the capacities per market and underwrite locally. We develop models for different cat scenarios in a global approach, and we proceed locally with risk-management controls. It is essential to combine the global perspective of the business with local understanding."

In an assessment that differs from that of his peers at XL (see opposite page), Jung says the current market has allowed reinsurers to toughen terms and conditions, at least through the first half of 2012.

"At Allianz Re, we have seen substantial improvements in the reinsurance conditions and achieved a better transparency on the portfolio," he says.

RETRO REPORT

When it comes to trends in the retrocessional market, reinsurers are more often creating sidecars, or specialized reinsurance investment vehicles, that have a limited life and are managed by reinsurers, Jung notes.

"These vehicles tend to be created at times when pricing conditions are attractive in certain segments of the market, such as following major loss events," he says.

Reinsurers, of course, are involved in the insurance-linked securities (ILS) market in ways other than as investors. They also are cedents of risk and serve as intermediaries—structuring transactions and placing risk in the ILS market on behalf of third-party clients.

"Larger reinsurers have for years ceded risk into the ILS market in various forms, including cat bonds, retrocession sidecars and contingent capital. Their use of capital markets for retrocession purposes has appeared to be relatively stable, albeit somewhat influenced by pricing conditions in reinsurance/retrocession markets," Jung says.

"Smaller reinsurers have not regularly turned to the bond market for retrocessions but to the industry loss warranties market, which is more efficient for smaller transactions," adds Jung.

"As long as capital in the reinsurance industry is still abundant, it is unlikely that the use of ILS instruments for retrocession will increase dramatically," Jung predicts.