Lloyd’s Analyzes Repercussions of Thai Flood Losses a Year Later

October 3, 2012

Lloyd’s has published an analysis of the floods that hit Thailand in October 2011, which notes that “after weeks of slowly spreading their way through many of Thailand’s provinces, flood waters eventually reached the capital city, Bangkok. There they remained for several weeks, inundating large swathes of the city and causing damage to homes and businesses.”

While Bangkok suffered direct property damage, Lloyd’s notes that it was “out of the city in the major industrial parks that the impact was felt on a global scale as production ground to a halt and supply chains around the world were left short. Seven major industrial estates were inundated by as much 3 meters (10 feet) during the floods.”

The economic cost of the floods has reached $45.7 billion, according to the World Bank. “For insurance and reinsurance companies, the total claims tally – much of it from business interruption and contingent business interruption – came to an estimated $12 billion, according to figures from Swiss Re. Lloyd’s share of this was $2.2 billion.”

The supply chain disruptions led to a reexamination of the threats posed to companies dependent on the constant delivery of industrial components. Lloyd’s points out that “as a major producer of hard drives, the floods meant producers of PCs and servers were unable to access component parts as easily. As a result, the cost of hard drives more than doubled.

“Japanese electronics and motor manufacturers took a big hit with Sony, Nikon, Canon, Honda, Nissan and Toyota factories among those affected.”  However, in a somewhat ironic twist of fate, the floods hit a number of Japanese organizations, who “had located their manufacturing premises in Thailand to take advantage of the country’s lower overheads but also to avoid some of the catastrophe exposures at home.

“Coming just seven months after the Tohoku Earthquake and Tsunami there was a double hit for many businesses. For Japan’s big three property casualty insurers, the floods proved more costly than the March 2011 earthquake,” Lloyd’s added.

Thailand’s important role as a key supplier to global supply chains had grown quickly over the past two decades as the country’s economy developed rapidly. This role was underestimated, according to Willis Re chairman Peter Hearn.

He indicated that “one of the most difficult losses the global industry has had to manage is the flood loss which occurred in Thailand at the end of 2011. Exposures were significantly underestimated, especially as regards the extent of global connections across sophisticated supply chains.”

In addition to its global supply chain exposure, the country’s flood hazard had not been modeled and was poorly understood and appreciated.

Adityam Krovvidi, head of Aon Benfield’s Impact Forecasting in Asia Pacific, explained that “of all the cat perils, flood is the most frequent to occur and the most complex to model. This is due to its varied phenomena, ever increasing human interventions and climate variability.  Notwithstanding these factors, Thailand had no major flood loss experience before 2011 to receive the attention of the insurance industry.”

However, he also pointed out that “flood risk is not static and socio-economic factors have changed over time in Thailand. A little more rain than the historical maximum in the northern region led to a ‘perfect storm’ last year, aided by man-made factors. The event was not a ‘Black Swan’ – the industry simply never paid sufficient attention to potential flood risk – we were simply fooled by historical experience.”

Impact Forecasting is currently working on a riverine flood risk model for Thailand. The model, which will be released in November, is timed to assist clients during the  January 1, 2013 renewals.

“The Thailand floods provide a great learning opportunity to take these risks more seriously,” Krovvidi observed. “Now the big question is, ‘Where is the next Thailand?’ The solution lies in an analytical and scientific approach that identifies where the exposures are and evaluates how they are exposed to potential flood risks.”  

Source: Lloyd’s of London

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