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Commercial Insurers and their Clients Reassess Risk in the Wake of 2011's Thailand Floods

Source: BestWire

Posted on 10 Jan 2013 by Neilson

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Thailand floodingThe magnitude of losses related to the 2011 floods in Thailand prompted insurance companies to work more closely with their corporate clients on comprehensive studies of risk exposure on both a regional and global basis, according to Kevin Leong, chief executive of Allianz Global Corporate & Specialty AG in Singapore.

The floods created a knock-on impact on the global economy because the country is one of the world's major suppliers of components and parts for automobiles, computers and electronics, said Leong. A wider concern is how such events can affect corporation's financial planning, taking into account global supply chains risks and related financing.

The key issue, beyond insurance losses, are those financial influences on corporate clients related to global supply chains, said Leong. He added that most of the losses did not come from direct property damage but rather contingent and regular business interruption.

In Thailand, claims settlements for the commercial sector, including small and medium enterprises and industrial companies, have been delayed. Only about 46% of the claims for property and industrial all risks insurance were paid as of August 2012. There were about 12,387 claims cases for property and industrial all risks insurance with estimated exposures of 479 billion baht (US$15.7 billion), according to Thai General Insurance Association.

Given the flooded area was the size of Denmark and contained seven major industrial facilities, each the size of the city of Birmingham, England, and contained the world's leading manufacturers of computer hard drives and major automotive part manufacturers, adjusters faced huge challenges, said claims and administrative solutions provider Crawford & Co. in a report.

The seven flooded industry estates in Thailand are estimated to have insurance coverage of about 600 billion baht, with a major portion of the losses ceded to foreign reinsurers, said reinsurance intermediary Guy Carpenter & Co. in a report. But even with the large international presence, national reinsurer Thai Re posted a nine-month consolidated net operating loss of 4.51 billion baht, compared with a profit of 339 million baht in the same period a year earlier, due in large part to flood losses.

Large businesses in the industrial estates have insurance coverage for floods and business interruption. Most multinational firms bought coverage with foreign insurers rather than local companies. Japanese nonlife insurers were more exposed to the flooding given their high exposure to industrial all risk and business disruption coverage of Japanese manufacturers.

What's perhaps unique about the Thai floods is that building damage was largely superficial in comparison to the machinery and business interruption losses incurred by manufacturers in the region, said Ian Baxter, regional director of global technical services for the Asia-Pacific region at Crawford & Co. There were significant problems accessing the areas right after the floods. The slow receding rate of water also lengthened oxidation processes, causing greater damage to plant and machinery.

Losses from the floods were spread around global markets, from Japan to India and Europe. Leong said that from this experience, insurers will spend more time in open dialogue with clients to understand their risk exposures and scenarios along with better and more transparent data in the long run. The ultimate financial risks also have to be evaluated.

To improve global supply risk management, Leong said clients experiences are crucial sources of data and information to map out risk exposures to support underwriting. Awareness on contingent business interruption and business interruption have increased in the region after 2011s events.

Allianz Global Corporate & Specialty paid more than 250 million euros (US$334 million) for losses from the Tohoku earthquake and tsunami in Japan and the Thailand floods combined. The group's global natural catastrophe losses amounted 1.8 billion euros in 2011. A striking feature for the year's experience was that more than half of the losses were for business interruption or contingent business interruption, noted Leong.

Insurers and reinsurers are also worried about dense concentrations of factories in other part of the Asia-Pacific region, according to Crawford. Rising sea levels, increasing rainfall and more intense storms, together with more people and infrastructure imply the risks have multiplied. Crawford said the industry is vulnerable to another major flood, with scientists identifying coastal plans of southern China as one area at great risk.

The globalization of manufacturing processes made assessing contingent business interruption and business interruption risks more complex and more critical as parts of the supply chain are outsourced extensively. Leong said there are usually two types of covers, named and unnamed exposures, for the supply chain. The unnamed cover has become more difficult to acquire after the Thailand floods.

For commercial and industrial risk management, Leong noted there is a trend toward a more client-driven approach based on client experiences to map out risks exposures and scenarios. Clients are also looking for more centralized risk management for their business portfolios across the region.

The Asia-Pacific region is the growth engine for Allianz Global Corporate's business, contributing 12% of total global business and 30% from emerging markets, said Leong. The demand for risk management is growing and becoming more complex in Asia with clients expanding investment and business activities across the region.

The growth potential is not just driven by big corporation's but also small and medium enterprises, which have experienced increasing complexity in risk management due to expansion and changing regulations. Leong said there is an increasing internationalized of insurance programs to meet clients overseas expansion.

Leong said that despite the high losses, natural catastrophes in 2010 and 2011 have not triggered dramatic change in underwriting standards and approaches in the region. Reinsurance capacity is still growing in Asia but just there has been some structural changes in programs.