The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2011 / 2012

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For the third year in a row one of the defining features of the 2011 loss experience has been the absence of a major US windstorm hit during the official Atlantic hurricane season.

Yet as underwriters know all too well, just because you've been lucky enough to escape claims from one direction is no reason for complacency.

Looking in the other direction, towards Asia, it's clear to see why. A particularly nasty surprise in the form of one of the largest losses of the year has arrived late in the day from substantial flooding in Thailand.

Since initial reports started coming in of damage to Thai industrial facilities at the back end of September, a notable feature of the floods has been the alarming rate at which loss estimates have grown.

The Thai Office of Insurance Commission provided a loss estimate of 140bn Thai baht ($4.5bn) at the end of October, up from $3bn a week previously.

And Thailand's Permanent Secretary for Finance said the seven industrial estates submerged by floodwaters have insurance coverage of 600bn baht ($19.5bn), around 30 percent of which may pay out.

But talk of an ultimate insured loss of up to $15bn-$20bn is now being whispered in the London and Bermudian markets, albeit prefixed with caveats about the lack of substantive information coming out of the country.

But with floodwaters only beginning to show signs of receding in mid-November, loss adjusters have, for the most part, been unable to gain access to damaged assets until recently, and claims forecasts have been based upon applying damage ratios to aggregate limits.

A useful early guide to insured losses has come from the Japanese "big three", who have a substantial combined initial loss estimate of $3.4bn. This breaks down into $1.7bn for MS&AD, $1.3bn for Tokio Marine and $390mn for NKSJ.

Also, Australian-headquartered insurer IAG has said it expects to take a net A$50mn ($49mn) loss after drawing on A$25mn in reinsurance protection to help settle claims from the flooding.

The complex reinsurance arrangements of the Japanese big three make it difficult to get a clear picture of the scale of the losses to the international reinsurance market, as an array of proportional, per risk and excess of loss Japanese interests abroad cover interacts with a variety of local and regional reinsurance cover purchased by branches or subsidiaries.

However, French state reinsurer CCR has confirmed that it too is facing substantial losses from the Thai flooding, but has refused to comment on speculation that it is poised to withdraw from the country.

It is understood that CCR has now written to the Thai market to tell insurers it is withdrawing and will not be renewing business at 1 January. CCR's Thai market share is believed to be 15 percent. The reinsurer wouldn't be drawn on the potential size of its exposure to flood claims, however, and has said its decision to pull out of some (unnamed) territories was made before the Thai floods occurred.

Around EUR200mn (42 percent) of CCR's non-life treaty premium in 2010 came from Asia and Australasia - 15 percent of its overall income. It also drew EUR3.8mn (27 percent) of its non-life facultative premium from Asia.

What does seem clear is that the final hit to the (re)insurance market is going to be significantly higher than was expected during the initial stages of the flooding. Could we be talking about an event that is comparable to Hurricane Ike in 2008, which carriers widely estimated as a $20bn market-wide hit?

In November, Aspen Insurance CEO Chris O'Kane cited early indications from the Thai local insurance market for an estimated potential insured loss of $4bn to $10bn. Guy Carpenter CEO Alex Moczarski followed with a provisional market loss of $10bn.

However, even $10bn could be overly conservative once the full extent of property damage and business interruption losses are known.

As FM Global's Chris Johnson was ominously quoted as saying: "Nothing suggests luck is on our side on this one... I've talked to clients on the ground and the damage is of an order that's certainly beyond what many people expected."

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