The dragon and the tiger

Whitepaper navigation:

As data from the International Energy Agency shows, China remains the world’s largest and fastest-growing producer of renewable energy.

Despite the significance of China’s renewable energy markets, the vast majority of reinsurance capacity in the sector still comes from a single player, China Re, which is government-owned. Sources report that there is still a lot of capacity in the market, since any losses are absorbed by state coffers. However, some are now wondering how long it will be before the losses become so big that Beijing no longer wants to absorb them on its own.

“China can’t continue to fund investments indefinitely without getting something in return. I think it could be a really good idea to establish a pool in China, with some of this money coming from overseas,” says Lee from Marsh.

Lee says there is also a good case for bringing localised pools to Japan and Taiwan, where susceptibility to earthquakes makes sourcing insurance capacity more challenging.

India, which is currently the world’s fastest-growing insurance market, is another obvious country to consider.

The Asian Development Bank (ADB) is currently working on a pilot scheme in the country to help develop technical underwriting capabilities for domestic (re)insurers. While the ADB project does not seek to bring in fresh capacity, Arup Kumar Chatterjee, Principal Financial Sector Specialist, says a case could be made for having a reinsurance pool.

“A pool would help make insurance more affordable by reducing the portfolio risk through risk diversification and offering a layer of risk retention before risk transfer. The success of this, however, hinges on the government’s decision to incentivize the setting up of a pooling mechanism,” he says.

Chatterjee underscores the potential of a captive structure, particularly one where national governments play an active role as stakeholders in the pool. This model, he suggests, could be a highly effective and viable solution for India.

With a pool you have to find consensus, with the technical committee and the underwriting committee looking into the different aspects.
Ahmad Noor Azhari Abdul Manaf, Chief Executive Officer of Malaysia Re

As renewable energy becomes increasingly important to APAC’s economies, many more areas suitable for pool deployment will emerge. But the important thing is to make sure that the pool is designed in such a way as to guarantee long-lasting success.

“For insurance pools to be successful and sustainable, there needs to be effective management and regulatory oversight to ensure that risks are adequately assessed and priced,” says Cibario from Swiss Re.

This means making sure that participants agree in areas such as risk assessment methodology, pricing strategy and claims management: no easy feat in such a complex and rapidly-evolving space as renewable energy. It may also mean being aware of regulatory compliance issues across multiple jurisdictions.

Having had the experience of setting up the ASEAN pool, Manaf says that developing a more localised structure – or “scheme” as he terms it – can help overcome some of these challenges.

“With a pool you have to find consensus, with the technical committee and the underwriting committee looking into the different aspects. This can become a sticking point, depending on the diversity and risk appetite of the pool members,” says Manaf. “With a scheme, participation is based on the risk itself, so all participating members should be prepared to share in this.”

Next: Acknowledgements