Best Analyzes Impact of Flood Losses on Thai Insurance Industry

A.M. Best Co. has released a briefing that provides updated estimates of insurers’ losses from the Thailand floods. The overall industry wide insurers’ loss estimates from the floods have increased 50 percent to $15 billion since Best’s last briefing on this event, published Nov. 23, 2011. “Such a loss would place the Thai floods in a tie for the fifth costliest insured loss event in the past 31 years,” Best said.

But the insured losses are only part of the story. Best cited a study from Aon Benfield, which estimates that the floods in Thailand “have damaged or destroyed more than 4 million homes, businesses and manufacturing facilities.” The amount of structural damage is actually “four times greater than what resulted from Japan’s earthquake and tsunami in March 2011, but only half of the total insured loss due to a low rate of insurance adoption.”

How to assess business interruption (BI) claims and contingent business interruption (CBI) claims, which are based on supply chain interruption, rather than actual property losses, remains a conundrum.

Best explained: “Insured parties have several limitations on their ability to make CBI claims. If property insurance does not cover a certain peril, then related CBI claims will not be covered. Insurers could encounter reinstatement issues and face problems on first-loss limits from firms with multiple locations, as dates of damage vary for different industrial estates. Event limits were not always specified in Thai insurance contracts. Classifying the floods as multiple events could increase costs for the insurers/reinsurers that are involved. Many impacted companies moved to Thailand to mitigate losses from the March 2011 earthquake and tsunami in Japan. As a result there are increasingly complex “causation and adjustment issues.”

Best noted that until recently “flood coverage for most industrial and large commercial companies was automatically included in the industrial all risk (IAR) policies, with almost
100 percent of the sum covered.”

That is in the process of being changed drastically. Guy Carpenter noted that at January renewals there “was widespread interest in imposing limits on proportional treaties.” Willis Re stated that “besides capping proportional treaties, there were no immediate significant changes to underwriting.”

However, Best said the Thai commercial insurance industry “will likely begin facing sharply contracted capacity, higher pricing and tighter terms for coverage with the Asian and Japanese reinsurance renewals in April. In 2012, flood coverage will be separated from IAR policies.

“Flood policy premiums are expected to double or triple from previous levels, while the renewal and expansion of excess-of-loss protection has driven rate increases ranging from 500 percent to 1,000 percent.” Policy limitations on coverage amounts available for specific types of loss are likely to be cut by between 10 and 20 percent of the sum insured. Deductibles of 10 percent are likely to follow.

In conclusion best underscored that the “unprecedented flooding has forever changed the perception of risk in Thailand and brought about significant changes to the Thai insurance industry.” The rating agency foresees more “mergers, acquisitions and deals,” as companies look for ways to offset heavy losses.

In addition Best said that “given the overall uncertainties and previous experience with other significant, un-modeled losses,” it expects to see additional upward revisions to initial loss estimates and feels that the amount of the total insured loss could change – “a situation that it will be closely monitoring.”

Source: A.M. Best