Overseas Insurance Coverage | Overseas Locations and Contingency Business Interruptions

Is your company providing coverage extension for overseas location? What about extension for Customers’ premises and Suppliers’ premises in respect of Business Interruption or Consequential Loss Insurance cover?

The recent massive flooding in Thailand has caused havoc to reinsurers operating within the region. Expected insurable losses amounted to some USD19.5 billion (Thailand’s Office of Insurance Commission).

Issues relating to Solvency Margin and Inadequacy Capital

Many Thai insurers are already facing solvency problem with shares prices tumbling. Some of the major reinsurers are also facing capital adequacy ratio (CAR) issues, at least two of those reinsurers licensed under the Malaysian Insurance Act were required by the authority to top up their paid-up capital in order to meet the SCAR and ICAR. CCR, a French reinsurer has officially issued circular pulling out from the Thai New Zealand and the Australian markets.

Approximately 2/3 of Bangkok was submerged under water for more than a month
An Overview Of 2011 – A Massive Thailand Flooding

Flood cover is no longer an automatic inclusion in any of the Thai insurers’ insurance policy…. as of now. 

Reinsurers are now putting flood extension under scrutiny as they do not want to have any event relapse subsequent to the recent one. Many commented that this flooding event was really a country problem that the Thai government must make significant efforts to resolve. “It is going to happen again if there are inadequate or no significant government resolve….”

“Reinsurers are now finding ways to recoup losses and limiting future exposure to any catastrophic event. Even if the ways mean recouping from neigbouring markets that they are operating in. Malaysian is no exception in this loss recoupment exercise….”

Malaysian Insurers Making Sense Of Such Development?

Malaysian Insurers’ Perception of Cat Losses were never real…. and would not affect their underwriting portfolio….

We always like to believe catastrophic events that occur around the region were non-threatening events to our industry. But with 2/3 of Bangkok submerged under water for more than a month such understanding is merely a misconception; we can expect the same to happen in Klang Valley as well (they don’t call it a “Muddy Valley” for no obvious reason if you think about Kuala Lumpur as such….).

Treaty Renewal: Reinsurers have taken note of this…. In Malaysia reinsurers are now quoting 1st December 2011 (usually termed as 1-12 renewal) treaty renewal with an event cap for all proportional cover – this is likely to be a norm going into 2012. As at posting time the cap has been established to be two times that of existing treaty capacity.

“The current focus is to recoup losses…. placing long term relationship with cedants abit on the sidelines….”

Risks Aggregator and Mapping

Reinsurers are now expecting cedants (or Insurers) to start building RISKS AGGREGATE MAPS (at least for Malaysian risks) in order to better appreciate those highly susceptible locations and the extent of their exposure to flooding, windstorm….

It is foreseeable that reinsurers would require such a risk map or similar statistical profiling before they quote competitively for any treaty renewal in 2012.

“Insurers are therefore required to prepare their databases for this purpose. This exercise is going to be a real handful for most – considering the need to extract data based on area post codes, street names, states territories and so on.”

The Contingency Business Interruptions or Consequential Loss Insurance Factor – Extension Cover Frequently Made Available, A Courtesy of Malaysian Insurers in Customers and Suppliers Extension Cover  

As many would have known by now, the massive flooding has not only caused actual damages but also losses due to suspended business. This SUSPENDED business related losses to Malaysian Insurers could be in the form of Contingency Business Interruptions related losses, i.e. the common ones identified to date would be CUSTOMERS and SUPPLIERS EXTENSION. It is not uncommon for insurers writing Malaysian Large & Specialised Risks (LSRs) to provide such extensional coverage, covering suppliers premises in Thailand. If the suppliers’ premises is affected by any of the perils insured in the policy issued to the Malaysian risks, losses in the form of Business Interruption to the Malaysian risks would trigger.   

As most major industrial estates in Thailand were hit by flooding resulting in more than a month-long halt in production, it is imminent Malaysian companies would be affected by the dwindling supplies as most were dependant on Thailand for their major components; especially where motor-vehicles and computers assemblers in Malaysia are concerned. Major vehicles manufacturers in Malaysia are likely affected as the dip in the supply of important vehicle components would mean a total halt in production. Unless these Malaysian companies are able to source for alternative supplies soon, their business would be affected, which means a business interruption claim would be triggered.

“At least we know the major manufacturing concerns in Japan are already affected when they shifted their production to Thailand to mitigate the drop in production caused by the recent Japanese earthquake.”  

Notwithstanding, Malaysian insurers could count their blessings simply because all Tariff-controlled policies can only be extended in respect of Customers and Suppliers premises risks to premises located within Malaysia, Singapore and Brunei only. Thailand was never part of the Revised Fire Tariff inclusion….

“Only those LSRs provided the leakages….and the extent of these are yet to be ascertained….

Reinsurers would not stop at this, eventhough the Fire Tariff has no provision for countries other than Malaysia, Singapore and Brunei. They will still want to put such extensional cover under a microscopic view, scrutinising cedants’ extended overseas coverage in detailed before granting those “incidental” overseas covers.


Summing Up The Thais’ Misery….

Damage estimates of at least 185 billion Baht by the latest estimation by Federation of Thai Industry (Central region section) which includes 95 billion Baht damage on Thai industry, 25 billion Baht damage on Thai Agriculture and 65 billion Baht damage on the housing in the communities and suburb villages. A large part of the damage stems from the effect on the manufacturing industry, with 930 factories in 28 provinces affected, including multiple industrial estates in Ayutthaya and Pathum Thani Provinces which have been flooded. The flooding has been estimated to result in decrease 0.6 to 0.9 percent in economic growth. Schools, 1,053 of which have been affected as of 19 September, were forced to end the term early.



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7 comments for “Overseas Insurance Coverage | Overseas Locations and Contingency Business Interruptions

  1. Ken
    December 9, 2012 at 23:42

    Looks like very tough renewal come this January 2013. Our company is having difficulties with those reinsurers and those bastards are squeezing our balls, really hard though!

  2. February 1, 2012 at 23:03

    Can you comment on the few reinsurers that have pulled out from doing business in this region, in particularly Thailand, Australia and NZ?

    • February 11, 2012 at 23:20

      We only knew of CCR pulling out from those markets. One or two Lloyds syndicates stopped doing business as a result of the Thai flood but not for reasons of insolvency, just a matter of discontinuing from such nature of business…. Toa Re did pulled out from writing Japanese related business in this part of the region. Most reinsurers are still writing as they used to do over the many years. The markets are hardening, ie. rates and terms are going up in favour of reinsurers thus it is an opportunity rather than for other reasons….

  3. stan
    December 13, 2011 at 08:40

    First of all insurers and reinsurers alike should impose a sub-limit to overseas incidental locations as well as risks involving contingent business interruption (or CBI) to curb exposure. At least that’s the easiest of way to deal with runaway capacity in times like the Japan earthquake and Thai flood.

    • December 17, 2011 at 13:19

      Very true, at least some limits help allevaiate losses in any event occurrences

  4. capax s.
    November 29, 2011 at 09:08

    I would like to think, putting a cap or limit to such extension would make sense. Nowadays flooding can happen anywhere, it can happen in Thailand, it can also occur in a big way in Singapore and even major cities in Malaysia. At this moment it is not about building any appropriate modeling for flood but knowing first those statistics concerning flood exposures.

    • December 11, 2011 at 22:08

      Flood, Earthquarke, Windstorm, etc are happening everywhere…. thus it is more appropriate for any insurers or even reinsurers to be more aware of their exposure be it within Malaysia or overseas. Exposure is really the key in underwriting, but whether intentionally or otherwise a big part of this understanding had been lost over the years….

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