Thai floods induce larger-than-expected losses

Thailand's flood-induced losses are higher than expected and could dampen Asian insurers' earnings and capitalisation, while raising catastrophe insurance premiums particularly in Thailand, said Standards & Poor's Ratings Services.


Expecting to know the full-extent losses at the end of second quarter as loss assessment remains underway, the rating agency estimates the current gross losses for insurers globally at about US$16-$18 billion, in line with the market’s estimate of ultimate losses of $15 billion to $20 billion.
S&P recently lowered the ratings on 7 subsidiaries of two Japanese insurance groups, MS&AD Insurance Group and NKSJ Group. The ’A-’ ratings on Dhipaya Insurance Plc, Bangkok Insurance Plc and Asia Capital Reinsurance Group Pte Ltd are still on CreditWatch with negative implications. Similarly, the ’BBB+’ rating on Thai Reinsurance Plc remains on CreditWatch with negative implications. Maintaining the negative outlook for the regional industry, it foresees negative rating actions on insurers.
"Insurance losses have been so high in the Thai insurance industry that it has changed our opinion on those markets being catastrophe-remote. We expect the terms and conditions on catastrophe reinsurance, which is mostly covered under a separate agreement from ordinary policies, to continue to tighten. We also anticipate that catastrophe reinsurance capacity will remain tight with reinsurance pricing on catastrophe perils increasing significantly," it said in a statement released on Feb 29.
The ultimate flood-related losses could be higher than the currently-reported losses, given insurers’ recent actions to revising loss estimates upwards after site visits, in some cases as much as upto three times the initial estimate. This will send some level of a spiral effect because of co-insurance contracts among local insurers in the Thai market and the associated reinsurance and retrocession to the local and international markets. It will take time for losses of these inter-linked contracts to emerge.
In its opinion, some local insurers in Thailand and regional reinsurers that were exposed to the floods did not have adequate reinsurance protection. We believe Thailand’s rapid industrial development in recent years and insurers’ use of less robust catastrophe models to determine protection levels may be some reasons why their reinsurance fell short. The risk premiums in the Thai insurance industry are much lower relative to its catastrophe risk exposure especially when compared to other countries. Catastrophe losses from the recent Thai flood losses were between 2-4 times the industry’s total premiums, and much higher compared with losses from some key natural disasters in other regions in the past. The comparatively lower premiums reflected the market’s earlier view that the Thai nonlife insurance market was not catastrophe prone.
The Thai insurance industry would take a while to recover lost capital and individual companies may need to raise more capital to remain viable, it said.
The absolute loss amounts for Japanese insurers are large, although manageable because of their strong financial profile, S&P said, adding that Japanese insurers’ flood losses constitute more than two-thirds of the whole market’s flood loss amount because key losses have been from industrial parks, which have significant Japanese investment.
The agency said that net losses from the Thai floods for Japanese insurers are considerably higher than those from the Great East Japan earthquake/tsunami in March 2011. Related losses amounted to ¥211 billion or $2.7 billion, excluding losses for residential earthquake insurance, which were covered by the government-sponsored residential earthquake reinsurance programme and by the Japan Earthquake Reinsurance Co.
"While regional insurers and reinsurers will bear most of the Thai flood-related losses, global reinsurers will inevitably pick up some of these losses through their exposure to regional players. Nevertheless, we expect that global reinsurers’ strong capitalisation and reinsurance or retrocessional cover will enable them to absorb these losses," it said, adding that the losses will be felt most by London-based reinsurers. Lloyd’s reported a $2.2 billion loss estimate.
S&P may downgrade insurers if their capital positions in 2012 are 10-20 per cent lower than at the beginning of 2011, and if insurers’ losses exceed their stated risk threshold and are a negative outlier compared with peers’. Reinsurers
and insurers that we view as having weak capitalisation may suffer downgrades of more than one notch, but a
possibility that the ratings may be affirmed also exists.

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