November 18, 2011

Extent to which loss penetrates international market determines whether rates are affected


Q & A with Nick Cochrane, Operations Director, PWS East Asia Pte Ltd in Singapore

Cochrane, who works for one of the companies that re-insures Cambodian insurance companies from Singapore, has worked in the insurance industry for 40 years and in the major international re-insurance centres of Bermuda, London (Lloyd’s) and now Singapore.

Do you think the floods in Thailand and disasters such as the Japanese tsunami will make the price of insurance go up?  Why?

Disasters such as Thailand, Japan and New Zealand will cause the price of  property insurance to go up in the respective territories, and these disasters can even cause insurance to be withdrawn in certain instances. The question is whether such disasters cause the price to increase in neighbouring territories or on the other side of the world. Disasters will normally be re-insured into the international market, and it is the extent to which the loss penetrates the international market that determines whether rates are affected. Insurance and its pricing, like any other commodity, is driven by supply and demand. 9/11 is an example of a disaster that occurred in one area of the world but caused the insurance market to withdraw capacity, resulting in rates being increased world-wide.

Which company do you work for, how long have you worked there, and what do you do?
I work for a subsidiary of a Lloyd’s broker in Singapore, PWS East Asia Pte Ltd, and work as a re-insurance broker. Fundamentally, this involves relieving insurance companies of risk that is unacceptable to them and putting it with insurance/re-insurance markets that are able to accept such risk.

If insurance companies are in turn re-insured by other insurance companies, what happens in big disasters? Do the re-insurers default or go bankrupt?
Potentially, insurers and re-insurers can go bankrupt, and therefore it is important that the insurer/re-insurer accepting the risk is able to fulfil its commitment when called upon. This is referred to as re-insurance security, and if it fails the risk passes back to the original insurer. In a disaster, re-insurers will be called upon to pay their share of the risk which they may receive from more than one source. It is important that they are able to pay their claims because if they can’t it is possible that the original insurer will not be able to meet its obligations.

The strength of a re-insurer is very important to a local insurer.

How does a developing market like Cambodia, where the legal system is weak, differ from places like Singapore or Australia?
A country with a weak legal system discourages international investment. An investor needs to know that in the event of a difficulty, they will be dealt with fairly by the local courts. In terms of insurance, a liability market will develop on the back of a sound legal system.

Which companies in Cambodia do you reinsure?
We have been involved with the re-insurance of several Cambodian insurers, but currently we work with Infinity Insurance.

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