In its Flood Losses Prompt Key Changes in Thai Insurance Industry briefing AM Best said that the flooding has 'forever changed the perception of risk in Thailand and brought about significant changes to the Thai insurance market'.

The latest insured loss estimate for the floods stands at between $15bn to $20bn, up 50% from initial estimates.  A $15bn loss would place the Thai floods in a tie for the fifth costliest insured loss event in the past 31 years.

Aon Benfield estimated the floods have damaged or destroyed more than four million homes, businesses and manufacturing facilities. This has generated structural damage four times greater than that which 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.

The four-month-long deluge of flooding in Thailand, labelled the costliest natural disaster in Southeast Asia, delivered a shocking and unexpected blow to the global insurance industry in the form of an un-modelled event. Reinsurers no longer will spare Thailand from consideration as a risk for natural catastrophes, resulting in significant changes to flood insurance policies, including increased pricing and decreased coverage,” said AM Best.

This event has shown that pricing of risk in Thailand has been inappropriate to date. In essence, flood coverage in Thailand was provided without premium payment. Flood coverage for most industrial and large commercial companies was automatically included in the industrial all risk (IAR) policies, with almost 100% of the sum covered,” continued the rating agency.

The fact that the risk transfer did not have a firm grasp on its exposures, as highlighted by inaccurate initial loss estimates, appears a severe oversight as Thai flooding on the scale seen in November is not uncommon.

As Fitch Ratings points out: “The Thai floods were not as rare as other natural catastrophes in the region and therefore it might have been expected that reinsurers would have had accurate estimates of the loss more quickly. The tsunami that hit the northeast coast of Japan is considered a once in a millennium event, whereas the Thai floods are thought to be a one in 50 year event.”

But the rating agency conceded that the event highlights the difficulty of assessing losses in often remote locations. “It also suggests that many reinsurance companies have a less detailed understanding of the potential scale and nature of losses that can arise in certain regions within Asia, compared with established western insurance markets,” added Fitch.

Policyholders and insurers are having difficulty accurately estimating income lost to production shutdowns, and incurred costs due to supply-chain disruptions and damage to property and equipment.

Given the floods’ impact on manufacturing in Thailand’s industrial estates, one of the major uncertainties will come from the difficulties in calculating CBI losses, noted AM Best.

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 and reinsurers that are involved.

With costs mounting AM Best has warned that 'most reinsurance firms are now hesitant to renew flood-related contracts for Thai companies until the government develops a clear flood-prevention plan'. Some insurers, worried by predictions of a heavy monsoon season, are considering pulling cover, it added.

The $9.4bn plan for water management and flood prevention announced recently by the Thai government was  reportedly met with scepticism.

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