JBA Launches First Flood Model for Thailand

JBA Risk Management has launched the first nationwide flood model for Thailand to enable insurers and reinsurers to quantify their exposures on a probabilistic basis.

"The previous lack of commercial probabilistic models for this significant peril has led to a lack of recognition of flood exposures in Thailand," said Jane Toothill, director of risk modeler JBA Risk Management in a statement. Companies can now access the likely severity and frequency of losses to their portfolio, she said.

U.K.-based JBA said its "new model is not limited to the area inundated in 2011, but covers all major river systems across Thailand, including Chao Phraya and Mekong catchments." This model's release follows devastating floods with significant insurance losses in Thailand involving a number of major industrial parks.

Thailand, which was not previously considered a peak risk area, was hit by severe flooding last year with estimated insured losses of US$15 billion. Many regional and international reinsurers reported significant losses related to the floods, with significant impacts on 2011 earnings.

"Such a loss would place the Thai floods in a tie for the fifth-costliest insured loss event in the past 31 years," said A.M. Best Co. in a market briefing (Best's News Service, Feb. 10, 2012).

One lesson from last year's catastrophe events, including the Thailand floods, was the lack of transparency for exposure limits and adequacy of programs and pricing. The floods' subsequent business interruption impact on global supply chains revealed a vast range of risks not previously considered. Reinsurance capacity has left the Thailand market and pricing has increased after the event (Best's News Service, Feb. 14, 2012).

Jan. 1 reinsurance renewals saw strong increases in reinsurance prices in Thailand against as flood risks were significantly underpriced in the past, said Clarence Wong, chief economist of Asia at Swiss Re. For April 1 reinsurance renewals, Wong said the market will take note of heavy losses from the Thailand floods in relation to unmodeled risk areas and impact of secondary agents such as business interruption.

The model is also used to analyze the likely exposure of Thailand's proposed catastrophe insurance fund.

Thailand'sOffice of Insurance Commission is planning to set up a 50 billion baht (US$1.6 billion) catastrophe fund to provide insurance coverage for floods, windstorms and earthquakes. The catastrophe fund will offer protection for households, small and medium enterprises and industrial factories. Insurance rates will vary depending on risk levels of various areas. Insurance companies will be responsible for at least 1% of the risk, while the rest of risk will be absorbed by the fund, said the OIC in a statement.

(By Iris Lai, Hong Kong bureau manager: [email protected])