Thailand Mulls Catastrophe Fund to Restore Confidence: A.M. Best

NU Online News Service, Feb. 14, 10:52 a.m. EST

The government in Thailand is looking to establish what would be the largest excess-of-loss property catastrophe treaty in the world—a catastrophe fund equipped to cover losses of up to $16.2 billion.

A briefing from insurance rating agency A.M. Best Co. says the country’s government is attempting to keep flood insurance available and affordable in the wake of four months of flooding in 2011 that “delivered a shocking and unexpected blow to the global insurance industry in the form of an un-modeled event.”

The catastrophe fund is “expected to be criticized because of Thailand’s small reinsurance premium base, but it is a step in the right direction to restore confidence in the Thai market,” A.M. Best says.

Details of the fund will take some time to negotiate, as reinsurers could be asked to cover it. That could be a lot to ask for, as industry-wide losses from the flooding are now estimated to be $15 billion and it will be decades before reinsurers recover losses, according to A.M. Best. Many reinsurers are now skittish to renew flood policies in Thailand.

“Reinsurers will no longer spare Thailand from consideration as a risk for natural catastrophes,” the briefing states.

The market will undoubtedly change as a result of the disaster. The rating agency says. Flood coverage was included in many all-risk policies and few policies required deductibles. In some contracts, event limits aren’t specified and policy language pertaining to contingent business interruption claims will take time to assess.

As the industry continues to truly grasp the impact of the floods, losses from the event could be seen throughout 2012, evidenced by insurers increasing fourth-quarter reserves for events earlier in 2011, A.M. Best predicts.

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