Achieving a viable approach to flood insurance in Thailand

Between July and November 2011, an early onset of monsoon rainfalls coupled with a large number of tropical depressions brought the highest rainfall rates to Thailand in over 50 years causing major flooding in an area approximately the size of Switzerland. The floods rank in the top 10 global insured losses by value with a total insured loss of USD 15.3 billion – more than 20 times Thailand's annual property premiums. 1)

The impact on the market has been significant.  Private flood coverage is now very hard to come by for insureds in more exposed locations, and, according to Mike Mitchell, Swiss Re's Head of Property Underwriting, Asia, urgent work is needed to bring exposures to sustainable levels.  ”The initial market response to the floods was very pronounced with the introduction of reduced sub-limits and increased deductibles, premium rate increases, and a stronger focus on risk selection", says Mike.   "We have started to see some more relaxed underwriting in the market, however, this is focused mostly on the less exposed risks.

"The Thai market cannot sustain these higher exposures and the physical risks must be reduced so that affordable coverage is available.  This would include better planning of site locations, improved physical infrastructure, and more active loss prevention and mitigation practices by risk owners. The public sector also plays an important role in enhancing the resilience of society.  For example, governments can help improve flood protection and landuse planning."

From an industry perspective, exposure data needs to be significantly improved, and work done to upgrade flood modelling capabilities.  There is also a need for more wet perils costing tools throughout Asia.

Without efforts to reduce risks and improve risk knowledge, Thailand – once considered a non-peak zone with relatively low cat pricing – may experience further structural pricing increases.  "The losses experienced in 2011 certainly exceeded the expectations of the market as reflected in pricing of catastrophe exposures prior to the loss.  The prospective view of the estimated loss potential needs to be factored into the pricing of exposures in the future.  The scale of loss exposure does impact the margins over expected loss that the market requires to fund the capital allocated to the scenario.

"Swiss Re has always made allowances for flood exposure when assessing Thai business", says Mike. "These allowances have now been adjusted to incorporate what we learned in 2011. We continue to have ample capacity to support the Thai market, and will allocate this to business that is generating an appropriate risk adjusted return.

"We are working with our clients to improve the quality of exposure data to enable us to provide coverage and solutions that are tailored to business profiles and needs.  As a start, we have created a zonal view of flood hazard in Thailand which enables us to differentiate levels of risks in client portfolios. This is also useful for our clients to discuss with their own clients."

Swiss Re has also launched Global Flood ZonesTM - a powerful tool for enabling flood solutions, providing selective underwriting, accurate pricing, flood exposure analysis of entire portfolio, and detection of flood hot spots worldwide.

1) Sigma 2/2013, Natural catastrophes and man-made disasters in 2012 (to be published 27 March 2013)


Updated March 2013

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