Killer Tsunamis and the Marine Insurance Market

Early in the morning on Dec. 26, 2004, opposing subterranean tectonic plates deep beneath the Indian Ocean floor shifted in violent unison along a line about 300 miles long.

The energy released was on par with a 50-kiloton atomic bomb, which the ocean decompressed into waves radiating out towards 15 national shorelines, and into the history books.

The violence of the plate movement was unexpected, even though the Indian Sub-Continental plates are known to normally move ever so gradually about an inch per year.

In this case and for insurance purposes, the Lloyd’s List has located the event under the “earthquake” casualty category of losses, and such a proximate cause of loss would likely be included perhaps with a sub-limit, in an “all risk” form of commercial inland marine cover often employed at shipyards, port warehouses, and container yards.

Shipboard claims on the ocean marine side of the ledger respond to different dynamics, and complex claims have arisen for the large hull and protection and indemnity mutual ship insurers in the aftermath of the tsunami’s call on various Indian ports.

Here a “covered event” can include both direct and collision damage, affecting other ships, as well as the servicing port facility; plus, there is usually an expensive sub-limit applying to “wreck removal.” These losses may be somewhat costly and contentious to settle.

Fortunately there was relatively little shipboard loss of life – other than the Sinar Andulas whose 15 crewmen went missing following that concrete carrier’s capsize near Aceh province – and little actual pollution emission.

But the foremost consideration for the marine hull and P&I covers is whether the events amounted to an unforeseeable “Act of God.” Otherwise – if this “killer tsunami” is deemed a customary “peril of the sea”- insurers may assert that negligence and/or a lack of preparedness (unseaworthiness) on the part of ship management contributed more prominently to the maritime losses.

In any case, reports indicate that on shore insured losses are only a fraction of the actual losses. Luckily, other than a few light taps, cargo and shipping industry were largely unaffected. A few hundred-million dollar vessels with half-billion dollar cargos were lying in deep water; they simply rolled and yawed as the tsunami swept past.

The Port of Colombo, Sri Lanka, is back in continuous operation, but there was at least a week when ships leaving Saudi ports had dropped Colombo from their schedules. The Indian ports of Tuticorin and Chennai took pro-active steps to suspend operations and evacuate ports on the news of possible follow up tsunamis, a factor for seven days following such quakes. The Chennai Container Terminal resumed operations with a re-route of traffic around refugee camps of fisherman and slum residents now in hundreds of temporary shelters just outside Gate 1.

And the earliest reports in Lloyd’s List had the insurance loss exposure ranging between $0.5 billion to $10 billion with the largest European reinsurers retaining perhaps 10 percent, leaving AIG and some Bermuda-based security likely to have more.

Compared to hurricanes

The loss has been nothing like the four hurricanes that raked the Caribbean and Florida in 2004 when insurance paid over $42 billion for the costliest natural disaster year on record.

Most U.S. insurers were not heavy participants in the Asian markets and the insurance effect on them is likely to be modest. Some experts have cautioned that if a “killer tsunami” were to hit the Western states of California, Oregon, Washington, Alaska and Hawaii the cost could be in the trillions of dollars.

United States’ spending on insurance is over 100 times many Asian counterparts and such levels have become integral to this country’s interlinked social and financial systems.

Multiple insurance lines, such as homeowners, commercial auto, medical, life, business interruption, and workers’ compensation would all be at risk from a tsunami – not to mention some of the priciest real estate in the world. So it is no small concern to note that, according to Carolyn Bell of the U.S. Geological Survey, “scientifically the event has around a 5 percent chance of occurrence in the next 30 or 40 years.”

And what might be the implications for long suffering marine cargo underwriters following the American expansion into and reliance on Asian manufacturing?

For openers, now might be the time to take advantage of the same principle of “clash” cover used by hull underwriters against the catastrophe of several ships under the same cover being in the same port and struck by the same single catastrophic loss.

When applied to the marine cargo lines, such marine reinsurance would address the “stacking” risk of finished goods on order from overseas suppliers – plus the raw materials sold to overseas buyers – from the coincidence of several household name retailers all being impacted by the same killer tsunami that will eventually toll in the Pacific.

From personal experience, it is humbling to comprehend the higher values of inventories positioned dockside both pre- and post-shipment on either side of what has become our all important Asian trading “conveyor belt.”

If only it were so easy to restore normality to the regions’ estimated 500,000 people humbled and displaced by the last tsunami.

Rekerdres & Sons Insurance Agency, Inc. in

Dallas, Tex. is an international and independ-
ent insurance agency specializing in customized

ocean marine and commodity cargo insurance.

More information can be found at

https://www.reksons.com.

Topics Trends Catastrophe USA Natural Disasters Profit Loss Market