NU Online News Service, Feb. 7, 11:31 a.m. EST
Beyond just the dollar figure of Thailand-flood losses, the event exposed risk-management challenges for reinsurers' management teams, according to a Moody's Special Comment.
The Thailand floods, which began last summer and peaked in the 2011 fourth quarter, are expected to cause between $10 billion and $20 billion in losses for insurers and reinsurers, Moody's says. "Similar to the 2011 Tohoku, Japan earthquake and the 2011 Christchurch, New Zealand earthquakes, reinsurers will shoulder much of the loss," Moody's adds.
But the risks for reinsurers extend beyond the numbers. Moody's explains that the floods stopped production at more than 400 Japanese firms in six industrial parks north of Bangkok. "Moreover, at the time of flooding, many of these Japanese firms were using their Thailand operations to mitigate business-interruption losses from the March Tohoku earthquake," Moody's says.
These firms, the ratings agency continues, were largely insured by Japanese domestic insurers, which in turn pass on a significant portion of the risk to reinsurers.
On top of the hit from Japanese insurers, global reinsurers will see multiple sets of losses from Australian insurers from two Christchurch quakes in February and June, and again from the Thailand floods, as Australian insurers maintain a meaningful presence there, Moody's says.
Another challenge for reinsurers is in modeling for Thailand floods. "None of the third-party model vendors—RMS, AIR nor Eqecat—offer a model for Thailand flooding," Moody's explains. "As a result, reinsurers either model Thailand flood using ad hoc methods or don't model the coverage at all, especially if cover is included as part of broader reinsurance programs.
Moody's also notes that reinsurers may have a difficult time recouping losses after the Thailand flood. Moody's says that when loss events are significant enough to depress economic activity, individuals and companies buy less insurance. Additionally, insurers and reinsurers may reduce their exposures in the affected market, constraining their ability to recoup losses.
Finally, Moody's says reinsurers face the risk of rule changes in Thailand, which would see them taking on a large portion of risk for smaller premium dollars. "Just as the U.S. batted around the idea of a national-catastrophe fund after Hurricane Katrina, the Thai government is entertaining a similar option in the wake of the floods," Moody's says.
Under this fund, Moody's says foreign reinsurers would assume losses at the highest layers, which are the most difficult to price and garner the smallest premium dollars.
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