The reinsurer said this week that the latest increase in insured losses in Thailand will further sharpen its eye as it stated that the Thai events demonstrate once again the vulnerability of the ‘networked’ world economy.

"It is in the interests of companies to secure alternative key suppliers they can resort to in order to maintain the production process when extreme cases arise. As reinsurers, we will take this risk management aspect even more into account in our pricing of contingent business interruption covers in future,” said Torsten Jeworrek, board member for reinsurance at the Munich-based reinsurance giant.

Munich Re said this week that the floods in Thailand, which reached their highest point in October and November, are the costliest natural catastrophe in the country's history.

It said that the economic losses are ‘huge’ because key industries are concentrated in the region north of the capital, Bangkok, and its environs.

“The consequences of the floods clearly show that prevention measures need to be strengthened in view of the country's high natural catastrophe exposure,” stated the reinsurer.

Munich Re said that it now expects its claims burden to be ‘in the range of’ €500m net before tax, adding that this latest estimate is still ‘subject to uncertainty’ because the water is draining away very slowly and has still not fully receded in some areas.

It said that it therefore remains difficult to estimate losses in the worst affected industrial areas around Bangkok.

The reinsurer pointed out that the flood damage includes not only damage to buildings but also, and ‘more importantly’, to the often expensive production facilities housed within them.

"Thailand is a wake-up call. In emerging countries of growing significance to the interconnected global economy, the provisions made for and adaptation to such natural hazards need to be improved in order to contain the losses," said Mr Jeworrek.

"The insurance industry is willing and able to help in this respect, primarily of course by carrying risks at commensurate prices, terms and conditions," he added, hinting strongly that prices would have to rise to match the higher risk proven by the losses.

Munich Re said that the floods claimed the lives of some 600 people, destroyed hundreds of thousands of houses and flooded ‘vast expanses’ of farmland.

The scale of the impact for the wider global economy was shown by the fact that seven major industrial areas with production facilities belonging mainly to Japanese groups were also badly hit.

“A large number of electronic key component manufacturers were affected, leading to production delays and disruptions at client businesses. Approximately 25% of the world's supply of components for computer hard drives is manufactured in Thailand and was thus directly impacted by the floods. The events demonstrate once again how vulnerable the networked world economy is,” said the reinsurer.

The company said that the share of the CBI covers in the Thai losses is not yet clear.

Swiss Re estimates that its claims costs will be $600m net of retrocession and before tax, and currently estimates the total insured market loss to be ‘in the range of’ $8–11bn.

It also said, however, that estimates remain subject to ‘significant uncertainty’ because of the complexity of the loss assessment and difficulties faced by loss adjusters gaining access to the damaged facilities.

The Zurich-based reinsurer said that, since July, Thailand has experienced very strong monsoon rainfalls, exacerbated by the remnants of three typhoons – Nok-Ten, Nesat and Nalgae.

From July to October 2011, northern and central Thailand experienced their highest rainfall in 50 years, it added.

"In addition to the human cost, the impact of this flood on the Thai economy and the companies that operate there is likely to be significant and could last some time," said Swiss Re's Chief Underwriting Officer Brian Gray.

"The floods have forced the closure of several major industrial estates. For weeks, factories were under several metres of water and have been unable to produce and supply key parts to global carmakers or digital and electrical goods manufacturers," he added.

As well as the industrial facilities that belong to, and supply, Japanese companies it said that Western-based international companies are hit to a lesser extent.

“Thailand is a significant link in the global manufacturing industry supply chain and is the world's second largest producer of hard disk drives for computers. Total insured exposure in these industrial estates is estimated by the Thai Office of Insurance Commission at $20bn,” stated Swiss Re.

The reinsurer said that only about one percent of homeowners and small businesses in Thailand buy flood insurance. Flood losses for most industrial and large commercial risks are covered by all-risk insurance.

Insurance managers with European and international companies that have exposures in Thailand, Japan and indeed worldwide are clearly going to find it more difficult to find cheap and broad-based coverage for their BI exposures.

It seems very likely that they will be increasingly challenged to back up their renewal pitches with far more detail about their supply chains and proof that they are adequately risk managed.

During broker Marsh’s annual UK client conference in London Tim Pritchard, UK placement leader, said that the losses in Thailand and elsewhere will have a ‘major impact’ for global programme buyers.

“The property market clearly picks up the catastrophe losses experienced this year,” said Mr Pritchard. “Catastrophe modelling has failed again in Japan, New Zealand and Thailand and an awful lot of that [exposure] is contingent business interruption (CBI) because of unspecified suppliers. This will have a major impact especially for global programmes. Giving out $100m in limits in Thailand when there is limited control of aggregates will not happen. A lot of underwriters will ask: ‘Can I do that anymore especially on the basis of $100m per loss?’” continued Mr Pritchard.

The broker said that he also expects there to be an increase in facultative reinsurance costs because of the losses.

“The losses are falling into this area so [primary] carriers will find it more expensive and will not be able to buy limits as low as they would like,” added Mr Pritchard.

In a survey carried out with over 100 risk managers during the Ferma Forum in Stockholm in October specialty insurer Torus found that over 80% of its respondents believe there is growing demand for CBI policies with companies increasingly focused on business continuity planning. Some 31% think there will be a significant increase in demand (see separate story on survey below).

Dermot O’Donohoe, Chief Executive Officer of Torus International, commented: “Contingent business interruption cover is a growing concern for risk managers following the impact of natural disasters in the first half of 2011. The challenge for the market is not just to deploy capacity but to provide the relevant expertise and work with clients to understand the nature of these exposures.”

But, as the recent events have shown so clearly, this is a very difficult coverage to underwrite, understand the exposures and rate accordingly, added Mr O’Donohoe.

“Some people are suggesting that you should not be there at all but it can be covered so long as it is rated correctly. The only way to do it is to analyse it and properly understand the counterparties and the major dependencies. You have to understand what they are and where they are located. If an insurer is giving blanket exposure it is going to be caught because they are not rating the risk,” he said.

“The reinsurers are one step beyond and this was discussed at Monte Carlo and Baden-Baden. They need to understand the risk too. Perhaps the named perils route is the way to go. We will have to see what the reinsurers do at the 1/1 renewals, this will be the key indicator. If there is reduced or no reinsurance capacity for broad-based BI coverage of this type then this will drive the primary market response and this would not necessarily be a bad thing if that were to happen,” continued Mr O’Donohoe.

Meanwhile only this morning, Lloyd’s agency Kiln announced that its syndicate 1880 would incur roughly $700m of the total $1.3bn losses estimated by Japanese parent company Tokio Marine Holdings for the Thai floods.

Kiln explained that the parent company’s Thai operations are reinsured on a proportional basis with a ‘significant’ share retained through intra-group reinsurance arrangements while the balance is placed in the open market.

The retained share of the proportional treaty is roughly 50% of the group's estimated net claims and is reinsured with Tokio Marine Kiln Syndicate 1880 as part of a programme of intra-group reinsurances. Thus the Kiln share is $700m.

From Kiln’s perspective the good news is that the claims incurred by syndicate 1880 have been fully funded in cash by Tokio Marine. The syndicate has not third party backers. The group added that the syndicate has a full parental guarantee which supports its funds at Lloyd’s.

Charles Franks, Chief Executive of Kiln Group, said: “Syndicate 1880 is doing the job it was created for. Acting as a retention centre for Tokio Marine’s intra group reinsurances means that it will experience significant claims from Thailand. The estimated $700m claims incurred by Syndicate 1880 form a part of Tokio Marine’s overall $1.3bn net loss for the Thai floods. As would be expected for a group of this size, Tokio Marine leads the insurance programmes of many clients with manufacturing exposure in Thailand.”

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