The CCRIF is the Caribbean insurance pool which pays out when certain parametric earthquake or hurricane indices reach a threshold.  The pool provides fast liquidity to islands that can see multiples of their GDP wiped out in a single event.  The pool purchases reinsurance and the Lloyd’s market (via Hiscox) has been involved.

CCRIF explain that their intention is to help Caribbean islands increase their knowledge on natural catastrophes and climate change.  It is interesting to see this development in advance of the landmark Copenhagen meeting on Climate Change later this year which, it is hoped, will bring a major change in the politics of climate change.  Many stakeholders have submitted proposals to this meeting and at least two of these relate directly to insurance.

The proposals by AOSIS (Alliance of Small Island States) and the MCII (Munich Climate Change Initiative) both believe that insurers have a key role to play in helping the developing world adapt to climate change.  First they believe that countries must adapt and thereby attempt to offset the growing risk (for example by building flood defences, changing building methods, increasing risk management education); but they both admit that adaptation will not remove all risk and some of the residual risk can be pooled by insurers and reinsurers. 

The new CCRIF announcement is a good example of the education on risk (sometimes called “capacity building”) that adaptation will require.  They also state they will assist with disaster reduction schemes, which makes a lot of sense; by reducing the risk the pool will go further.

Deep and rapid cuts in greenhouse gasses are essential.  Yet there will be many years of unavoidable change (probably at least 100) and the global efforts to adapt will bring opportunities to those adept at managing risk.  Insurers have a lot to offer and need to be ready to act.

The recent incidence of Swine flu has brought some attention to the mortality bond market, and cat bond market issuers and investors will doubtless be keeping a watchful eye on the development of the outbreak with some interest.

Artemis.bm  reports that there are currently somewhere between USD1.5-2bn of outstanding mortality bonds in the cat bond market. The majority of these bonds have been issued by Swiss Re (via the Vita Capital Series), and most recently by Munich Re in February 2008, with USD100m of risk transferred to the capital markets. Other notable issuers include Axa and Scottish Life.

How material an issue is the current outbreak for bond investors and issuers?

It is clearly far too early to state, given that we are in the early stages of the pandemic. However, it may be useful to provide some context. An extreme mortality bond pays out to the sponsoring insurer if the mortality index to which it is linked exceeds a certain rate, typically 20% or more above what is expected for a given population.

The 1918 Spanish influenza pandemic, in which more than 50m people died, is the benchmark by which all modern pandemics are measured. And for any bond to be triggered, we would expect to see mortality rates of this order (ie millions not hundreds or thousands). The early news stories around the current Swine flu has some interesting characteristics, including a higher mortality rate when compared to 1918, although as at 30th April, only one fatality has been reported outside of Mexico.

The Insurance Information Institute estimated in 2006 that even a moderate avian flu pandemic could cost the US life insurance industry $31bn in additional death claims, while a pandemic on the scale of 1918 could cost $133bn.

The market has yet to see any impact on bond pricing – primarily due to a) the magnitude of the fatalities to date, and b) the geographic areas impacted (ie limited to Mexico). There may be far more concern if the number of reported cases increases exponentially and begins to impact the US and western Europe in particlar.

So the market will continue to watch the developing situation with interest, as will we all…

The gathering, organized by the Willis Research Network (WRN), heard how a perfect storm and its accompanying storm surge could wreak residential losses of between $36 billion and $140 billion.

The wide range of loss estimates reflects 89 track variations and the sensitivity of using differing assumptions in calculating damages. Some disaster scenarios envisaged storm surges, coinciding with a high tide 10ft higher than Manhattan’s sea walls.

Rowan Douglas, chairman of WRN, acknowledges that the wide range of possible loss outcomes demonstrates how much variance still exists in models—but he says that model technology is improving all the time.

“The insurance industry has always used historical data to form the basis of the event sets that drive insurance industry loss models,” he told lloyds.com. “But today’s climate is more dynamic than previously and it means that we are now at the limits of the value we can extract from historical data alone.”

But, as the Princeton conference delegates heard, climate scientists are developing physically based models of the planet that simulate the world’s oceans and atmosphere. They’re called General Circulation Models or, sometimes, Global Climate Models.

“We’re entering a new era whereby we can begin to assess the regional impacts of a changing climate,” he says. “At the Princeton seminar we discussed how this emerging science will inform future cat models the insurance industry uses in its catastrophe risk management.”

Representatives from the leading model shops AIR, Eqecat and RMS explained to the conference how they were actively incorporating the latest scientific thinking into their products.

“We’re often asked by clients what is the best model to use,” Rowan Douglas says. “But there is no single ‘best’ model. Our philosophy is to take an ensemble approach by obtaining more than one modelled output.”

It’s an intriguing region for insurance industry watchers and the biennial convention reflects the diversity on offer.

On the one hand, there are representatives from mature and sophisticated insurance markets such as Japan, Singapore and Taiwan. On the other, there are chief executives from important emerging markets such as the Philippines, Indonesia and Vietnam.

Reflecting the importance of the region to the market, Lloyd’s will be represented by many delegates.

Although the convention is to be hosted this time around by the Hong Kong Federation of Insurers, on the doorstep of what is potentially the world’s biggest market, China is unlikely to dominate discussions.

Instead, discussions will revolve around issues that are also central to insurers in the Northern hemisphere: climate change and terrorism. A lot can happen in two years.

Like Europe and North America, Asia Pacific has been hit by its share of nat cats and the strongest typhoons are getting stronger.

Cyclone Nargis, which hit Burma in May, left as many as 150,000 dead. Earthquakes are also an issue, especially after the devastating Sichuan disaster in China.

Japan and Taiwan also have significant earthquake risk.

Terrorism is as pervasive in eastern Asia as anywhere else in the world and Lloyd’s 360 Risk event Terrorism in Asia  in February pointed up the growing threat of local insurgencies in the region.

There is no mention in the conference programme of turmoil in the financial markets and the effect it might have on insurers in the region. Though with local stock markets still suffering on the eve of the conference, it’s certain to be a topic of conversation.

Alex Faris, Lloyd’s general representative for Hong Kong, told me that with global insurers so active in the region, the financial crisis and its wider fall-out is certain to be a talking point.

“Marine business is also affected in the region, with problems in ship financing and the decrease in value of fleets, as well as the associated drop in cargoes at present,” Alex said.

Insiders believe that the industry has sufficiently strong fundamentals to withstand the current turmoil in the financial markets, though it is likely to see its profits eroded.

In a report of five markets with rated insurers (‘Asia’s Insurance Industry Can Shake Off The Negative Effects Of The Recent Market Turmoil’) Standard & Poor’s Ratings Services credit analyst Connie Wong says the industry’s operating performance is likely to deteriorate in 2008 and some companies may even report losses due to plummeting investment profits, slowing new-business sales, and falling confidence among policyholders.

“But we expect the rated insurers that have strengthened their balance sheets over the past five years to ride out the storm without major rating changes and believe that the sector’s strong growth potential will remain intact over the medium term,” Ms Wong said.

“The capitalization of most rated insurers has been hit by declining profits or a reduction in investment evaluation reserves. However, we believe these setbacks are still manageable and will not affect most ratings due to adequate capital levels for the current ratings. But if market conditions deteriorate, insurers that have thin capital buffers will prove vulnerable,” said Ms. Wong.

Another subject not on the conference agenda this year is talent. The scarcity of talent available to fill executive positions in the insurance sector is a growing problem in the US, Europe and Bermuda. In competition for smart individuals with other parts of the financial services sector, Asia’s insurers could soon be facing its own intellectual capital crunch.

“Insurance is considered a poor cousin of the banking industry in Asia as well and we have been struggling to find good people to join the industry,” says Jon Song, Associate Director of Lloyd’s Asia in Singapore.

In tandem with the General Insurance Association (GIA) in Singapore, Lloyd’s is taking steps, however, Jon says. “These include a talent outreach project (to inform students and young professionals of the insurance industry), numerous career fairs and profiling talks; and lastly a global internship programme.”

This is important. As the financial markets stabilize and the tiger economies re-sharpen their claws, places like Singapore and Hong Kong are likely to become even bigger insurance hubs, catching up with London and Bermuda, Zurich and New York. And they will all be competing for the same people.

So the problem facing East Asia’s insurers in the future could be two fold: first attracting the best local people into the industry—and then keeping them close to home.