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Life After the Flood: Impact and Opportunities Non-Life Insurance Forum 2012 Bangkok, Thailand

Pang Chye Principal & Consulting Actuary

16 November 2012

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

Contents

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Impact and Aftermath of the Thailand Floods in 2011

Is Flood Insurable?

Opportunities

Non-Life Insurance Forum 2012 - Bangkok, Thailand

Impact of the Thailand Floods in 2011

Between July and December 2011, heavy rain fall during the monsoon season has affected provinces northern, northern eastern and central of Thailand along the Mekong and Chao Phraya rivers basin Timeline and Location Affected

July Northern & Northern Eastern Provinces

Damages

September Lower-Central Provinces (Uthai Thani, Chai Nat, Sing Buri, Ang Thong, Suphan Buri, Ayutthaya, Pathum Thani and Nonthaburi)

August Upper-Central (Phichit, Phitsanulok, Sukhothai) trillion or USD45.7

November Flood water start to subside

October Bangkok

• THB1.4 billion with over 90% borne by private owners, of which the worse hit are manufacturers with losses estimated to be around USD32 billion. Tourism is expected to take approximately USD3 billion • Insured loss initially estimated to be in the range of USD8 billion to USD12 billion. More recent estimate from rating agencies around USD15 to USD20 billion.

• The world bank estimated this disaster to be 4th costliest surpassed by 2011 Japan earthquake, 1995 Kobe earthquake and 2005 Hurricane Katrina Source: various

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

Impact of the Flood – Insurer and Reinsurer Actions in 2012 Direct Insurer

• IAR most affected. General property and Motor much less affected. Business interruption cover not widely purchased by local Thai businesses. Otherwise, insured losses would be significantly higher than.

• Most insurers increased commercial property premium rates by 10%-50% • Flood sub-limits reduced materially • Deductibles increased • Some insurers stop flood cover altogether except for accommodation business (key accounts, shareholder business) but with much smaller limit.

• Tight control on accumulation

Reinsurer

• Overall rates have increased dramatically and reinsurance commissions reduced; 3-4 times increase is not uncommon for Treaty XOL • Lower sub-limits on flood or cover written separately

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

Is Flood Insurable?

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

Is Flood Insurable?

Low probability?

Can appropriate premium rates be sustained?

Should flood-prone areas be developed?

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

Commercial Realities Market rates vs. actuarial/technical rate for Cat cover over time • Can insurers / reinsurers recoup their losses?

• Are the winners and losers the same companies?

• Is the private market the right solution?

Actuarial Rate Commercial Rate

10 yr

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50 yr

Non-Life Insurance Forum 2012 - Bangkok, Thailand

Flood Cover is Expensive Top 10 largest insured fresh water flood losses

Source: Sigma Report (16 Feb 2012), Swiss Re

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

National Flood Insurance Program (US) Objective

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Established in US back in 1968 as standard homeowners’ policies did not cover all flood losses

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Flood Only. Homeowners, small-to-medium retailers or business owners Mainly adopted by property owners in Texas and Florida

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Self-financing soon after establishment in 1965.

But borrowed USD 17bn from the US government in 2006 to pay for Hurricane Katrina claims

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Financially infeasible - limited participation of private sector When program revenues do not cover catastrophic losses, federal taxpayers have to pay for the losses.

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5.6 million in-force policies USD1.2 trillion worth of property covered USD3.35 billion in premium paid in 2011 USD 17.8 billion in debt to Federal government

Coverage

Financing

Challenges

Financial Status

Source: Congressional Research Service (www.crs.gov)

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

National Catastrophe Insurance Fund (1)

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

National Catastrophe Insurance Fund (2) Coverage • • •

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Insurers can reinsure against the fund under a quota-share treaty However, the catastrophe insurance policy is only a supplement to the Insurance All Risk policy.

Insured type ranges from homeowners, small-to-medium enterprises to the industrial sector Insured Type

Coverage

Annual Premium

Household

Automatic coverage to catastrophe with a sublimit of 100,000 baht

0.5%

SME (Sum Insured not exceeding 50 million THB)

Entitled to buy catastrophe’s protection with a sublimit of 30% of the sum insured

1%

Industrial Sector

Entitled to buy catastrophe’s protection with a sublimit of 30% of the sum insured

1.25%

Non-Life Insurance Forum 2012 - Bangkok, Thailand

Opportunities

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

Opportunities Stronger rates and terms Enforce stronger technical underwriting and rating Research, research, research: develop an informed view on the coming five years

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

A statistical flood model A variety of information is available to insurers about the flood risk. This includes some publicly available flood maps and some insurer funded flood maps Finity Consulting, Milliman’s affiliate and premier consulting firm in Australia have developed a “statistical” flood model for Australia

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Uses the characteristics of flood prone properties to identify which other properties may be flood prone

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Can be applied to areas where flood mapping has not been undertaken

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May be possible to calibrate the model to other countries

Non-Life Insurance Forum 2012 - Bangkok, Thailand Slide 14

Statistical Flood Study - What are the key risk drivers?

Proximity to water source

Height of property above water source

How often the river floods

Various interactions

Type of water source

Source: Finity Consulting

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

Levees, etc

Topography of the area

Proximity to coast

Soil type

Population density

Statistical Flood Study – Comparison to actual flood (Rocklea Queensland, Australia)

Source: Proprietary Flood Model by Finity Consulting

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

Thailand Government’s Response (1) Political importance to the government

Government is taking active steps to address this issue and heavy political importance to the new government.

Strategic committee for Water Resources is chaired by the Prime Minister to prepare both short and long term strategic plan on water management including: • Review current water management policy • Pin point current bottleneck and possible solution both in short and long term • Prepare investment package on water management

Source: Office of National Economic and Social Development Board (www.tni.ac.th)

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

Source: Office of National Economic and Social Development Board (www.tni.ac.th)

Thailand Government’s Response (2)

Government plans to spend a lot of resource investing into this development plan with a total estimated cost of THB 2.69 trillion

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Non-Life Insurance Forum 2012 - Bangkok, Thailand

The La Nina Effect There appears to be an observable pattern between Thailand rainfall and La Nina.

Figure 1: Thailand Annual Rainfall (mm) since 1950

Figure 2: La Nina Occurrence since 1950 Source:

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Thai Meteorological Dept., Climate Prediction Center NOAA

Non-Life Insurance Forum 2012 - Bangkok, Thailand

Ingredients for Sustainability Water management Strong technical baseline Sustained government involvement in the National Catastrophe Insurance Fund Review of geographical development plans More study and transparency on flood maps and risks

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Non-Life Insurance Forum 2012 - Bangkok, Thailand Slide 20