Reshaping the Reinsurance Market as the Thailand Floods Recede

The Thailand flood waters have receded, leaving billions of dollars in insured losses and an altered landscape punished by the deluge. The post-flood insurance and reinsurance market in Thailand and the region will also be a different place, with reinsurers reassessing risks, according to Mark Morley, regional director of APMETA, Willis Re South East Asia.

Part of this risk reassessment will come in the form of new catastrophe models introduced to the market and the refinement of existing models, Morley said in an email. "Nonmodeled perils are now being priced and increasing efforts made to understand and evaluate the underlying exposure," he said. "This applies to non-cat exposures as well (contingent business interruption, incidental exposures etc.). We understand that the major cat-modeling vendors are showing a heightened interest in the region and, of course, in particular some of the nonmodeled perils."

Short-term, Morley said there will be a significant pricing impact and the continuation of limitations imposed on original coverage. Limitations would apply to the scale and breadth of coverage, he said, such as the limits or sub-limits applying to natural perils or ongoing restrictions on contingent business interruption terms.

"Increasingly, we are seeing an upsurge in volatility-type loadings being applied throughout the region for nonmodeled perils, but pricing impact is far from uniform," he noted. Loading is the amount an insurer adds to the basic premium to cover the expense of securing and maintaining the business. "[The] nature of coverage has been impacted, as reinsurers are increasingly wary of providing proportional coverage for natural peril exposures where original rating continues to be viewed as suspect. Again, this is not yet a uniform approach, but the introduction of event limits has become (almost) universal across the region."

In Thailand, insurers have been raising rates by up to 30%, according to Marsh (Best's News Service, Dec. 23, 2011).

The floods brought nationwide damage to residential, farming and industrial properties. In total, more than 9.4 million people were affected by the floods in at least 64 of the country's 77 provinces. Factories were swamped and more than 10% of Thailand's rice farms were destroyed, according to a report by reinsurance intermediary Aon Benfield. More than 14,800 industrial and manufacturing plants were damaged by floods in 20 provinces. Estimated industry insured losses stand at US$15 billion (Best's News Service, Jan. 20, 2012).

Most commercial properties such as factories have industrial all-risk policies with flood cover, according to the General Insurance Association. Production or business interruption cover is separate from industrial all-risk policies.

Long-term, the floods' impact will lead the reinsurance market to become increasingly segmented in their approach, Morley said. "Cedants that are perceived to be actively managing their portfolio will achieve better terms," he said. "Capacity will be impacted by adjustments in the appetite of certain markets toward the region but just as likely is the introduction of new and/or opportunistic markets to fill any capacity void."

He said issues surrounding capital adequacy within local markets "ought to lead to a renewed focus on local market regulation and the need for expert advice on capital solutions and in the execution of increasingly complicated transactions."

A number of reinsurers have recently released estimated losses from the floods, which reached their peaks in October and early November.

The Thailand floods are estimated to have left Everest Re Group Ltd. (NYSE: RE) with $145 million in losses, after reinstatement premiums and taxes. This is up from a previously estimated $100 million and $125 million and implies a market loss in excess of $15 billion. Everest Re said it expects to incur net catastrophe losses of approximately $245 million, after reinstatement premiums and taxes, for the fourth quarter, including the Thailand losses.

"2011 catastrophe losses have generated meaningful market price corrections, which continued through January renewals," Joseph V. Taranto, Everest Re chairman and chief executive officer, said in a statement. "In order to fully realize these benefits in 2012, we have taken a cautious approach to reserving for these events as we close the year."

Zurich Financial Services expects losses related to the floods to be between $250 million and $300 million; RenaissanceRe Holdings Ltd. (NYSE: RNR) expects about $45 million in flood losses; Allied World Assurance Company Holdings AG (NYSE: AWH) expects $40 million to $50 million; Argo Group International Holdings Ltd. (NASDAQ: AGII) expects $25 million to $35 million; and HCC Insurance Holdings Inc. (NYSE: HCC) expects $10 million pretax ($6.5 million after-tax).

The flood losses have also impacted at least two reinsurers' financial strength ratings. Partner Reinsurance Co. Ltd. recently had its Best's Financial Strength Rating of A+ (Superior) and its issuer credit ratings of aa- placed under review with negative implication by A.M. Best Co. (Best's News Service, Jan. 24, 2012). This came after PartnerRe's estimate of its Thailand flood losses. The under review status reflects A.M. Best's concern with the aggregation of catastrophe losses that PartnerRe has experienced on an absolute and relative basis. The accumulation of catastrophe losses experienced by PartnerRe in 2011 has strained average historical measures, according to A.M. Best.

Taiping Reinsurance Co. Ltd. also had its rating outlook revised from positive to stable by A.M. Best (Best's News Service, Jan. 20, 2012). The revised outlook follows the company's deteriorated risk-adjusted capitalization and exposure to worldwide catastrophic events. Taiping Re estimates a net loss of HK$480 million ($23.2 million) from the Thailand floods.

(By Rick Cornejo, managing editor, BestWeek: [email protected])