“In view of the earthquake in Japan in March and the floods in Thailand now, the loss potential arising from disrupted supply chains is clearly apparent,” stated Mr Jeworrek.

“At this point in time, Munich Re has identified several critical contingent business interruption scenarios where the combination of high loss intensity in severe cat events and BI/CBI losses may cause serious risk management problems for our industry,” he added.

Mr Jeworrek said that because of more ‘networked’ global supply chains, semiconductor production and the automotive supply industry in particular are critically exposed to CBI losses.

Industrial plants in the US Northwest and Midwest as well as in California have exposure especially to earthquakes, while production facilities in Japan and Taiwan are additionally exposed to typhoons, he continued.

“We see that CBI coverage is a very valid product from the insured’s perspective and that the demand is definitely high. But the failure of suppliers is a risk management rather than a reinsurance problem, which has to be solved at the front end,” he said.

“We will enter into dialogue with our largest industrial risk insurance companies to find out how we can bring more transparency into CBI coverage for the respective industries and regions. And we believe the most important outcome of this dialogue will be for insureds to look at the risks in their supply chains and see how they can replace key suppliers after a severe loss event,” he continued.

Mr Jeworrek said that Munich Re has already discussed this topic with its clients at the Monte Carlo and Baden-Baden industry meetings and added that, with only a limited response provided so far, CBI losses from the Japan earthquake may eventually be lower than initially expected.

But he repeated his statement issued last week that the Thailand floods are another ‘wake-up call’ that should convince the insurance industry as well as relevant manufacturers to tackle this issue now. “Namely to increase transparency and replacement scenarios for key suppliers, which will lead to improved risk management capabilities,” he explained.

“Over the next 18 months, we want to create a dialogue between reinsurers, insurers and insureds in order to identify the specific exposures in the portfolios of the insureds. We think this is an acceptable time period in view of the fact that most insurance treaties are renewed once in 12 months. After that we will be in a position to decide in specific cases if and to what extent we can provide the coverage,” said Mr Jeworrek.

“To make it very clear: this does not mean that each industrial company has to reveal each and every supplier. This is not possible. But insureds should identify each supplier from the respective regions that could be critical for their production,” he added.

“If after 18 months—starting from 1 January, 2012—there is no full transparency or plans for replacements of key suppliers of the insured available to make it possible for us to budget for these CBI exposures, we will limit or even exclude the coverage under the reinsurance treaties,” continued Mr Jeworrek.

The reinsurer added that Munich Re’s ‘strong ambition’ is to develop new covers to better satisfy the demand of the insureds while at the same time keep its risk accumulation ‘under control’.

There is a growing feeling in the market, however, that buyers of BI and CBI coverage in particular in regions with high catastrophe exposures will have to deal with limited capacity and higher prices sooner rather than later.

John D Dempsey, Managing Partner of US-based forensic accounting firm Dempsey Partners, spoke to CRE earlier this week from his Singapore base as he led his team’s efforts to evaluate losses for clients in Thailand.

He said that it remains a very difficult situation to properly assess because the water levels remain high.

But he said that it is a truly ‘astounding’ loss with at least 1,000 factories directly affected by flooding and some 10,000 or so related businesses affected by supply chain disruption as a result.

“I come from the manufacturing old school background and I would say that this is on the same scale as Katrina which affected so many factories, refineries, real estate concerns and service industries all at the same time,” said the experienced Mr Dempsey.

“This will be a very difficult loss to assess and will be an object lesson for a lot of companies doing business in this part of the world, many of which have acquired risks of which they had little awareness arising from the supply chain. It was the same issue in Japan but on a lower scale as many businesses were also affected that were not aware of the exposure,” he added.

Mr Dempsey said that he had read of the latest overall insured loss from Swiss Re that the figure could rise as high as $11bn for Thailand but said that he could estimate as high as $20bn in insured loss quite easily.

Mr Dempsey concurred with brokers who discussed the coverage impact at the Marsh UK client day last week in London (see last week’s newsletter) and believes that some of the broad-based coverages that included limits for CBI with limits up to $100m will rapidly evaporate, particularly if they are catastrophe exposed.

Mr Dempsey said that he does not see such problems for traditional fire policies without catastrophe exposures but to limit the cover offered for those with cat exposures ‘makes sense’ for the insurers and reinsurers.

The claims expert also said that he feels that the lack of modelling expertise for supply chain exposures as opposed to the underlying catastrophes offers a great business opportunity for experts because companies will have to model the risks properly in future if they hope to find reasonably priced coverage.

And reports in Thailand suggested this week that the Thai government may need to step in and share a portion of homeowners’ risk with insurers because insurers have already pulled coverage in flood exposed regions.

Lawaron Saengsanit, deputy Spokesman for the Fiscal Policy Office under the Finance Ministry, reportedly told local press that the Office of the Insurance Commission (OIC) would hold internal discussions on the matter this week.

Mr Lawaron is reported as adding that local insurers rely on international reinsurers for up to 90% of the risks covered and so will rely on support from the government in areas such as the development of new water management systems backed by flood models to keep the business viable.

Some reinsurers are reportedly waiting to hear what the government plans to do to improve the flood risk before offering to renew while others have simply renewed at much increased prices, according to reports in Thailand.

As with much of the CBI coverage bought by local and international companies the flood insurance bought by Thai homeowners tended to be only charged at a tiny proportion of the overall policy.

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