December 25th, 2008

Southeast Asia: Catastrophe Reinsurance Market 2008

Posted at 12:50 AM ET

Chris Hu
Contact

2008 Reinsurance Market Position

Reinsurance rates have declined for Southeast Asia since 2003. Low levels of insured losses are driving this trend. Average rates on line (ROLs) for property excess of loss cover vary by country, as do year-over-year changes.

The above rate reductions can be seen in relatively loss-free programs, but for Indonesia and Philippines, the increase in rates came from the significant increase in Natural Catastrophe Aggregates, even though the programs are relatively clean.

Capacity for non-proportional business remains plentiful; however, proportional remains tight, as some reinsurers have continued to exclude natural perils. Others have insisted on minimum rates for natural perils combined with cession or event limits. Minimum rates for earthquake and typhoon/flood are 0.15 percent and 0.05 percent, respectively. In some treaties, they could be as low as 0.08 percent for both combined. Event limits typically vary from 7 percent to 20 percent of key zone aggregates.

Singapore continues to develop as a reinsurance hub for Asia. Since 2007, several Lloyd’s syndicates-namely Amlin, Syndicate 1965, Kiln Marine, Newline Asia, Ascot, Beazley, Canopius, Markel, Chaucer, and Asia Capital Reinsurance Group (ACR began operating in Singapore) -have provided Southeast Asia with additional capacity of at least USD500 million. And, it is still growing. Currently there are 14 Lloyd’s syndicates in Singapore, and they have written USD120 million. The majority of the reinsurance capacity in Singapore is A-rated.

In Thailand, most cedents bought excess of loss protection up to 2 percent or 3 percent of their countrywide flood aggregates. Reinsurers have not yet insisted on cession limits for flood, since accumulation aggregates are not always available. Nevertheless, this may be a requirement in the near future as more data becomes available.

In Indonesia and the Philippines, there is a heavy reliance on national reinsurers that provide significant proportional treaty capacity to the majority of the smaller companies. Larger companies tend to rely on global capacity. The regional reinsurance markets, notably Singapore, provide the majority of required capacity in Southeast Asia. London and Bermuda continue to be small players in the region, due to the relatively small size of the non-proportional programs and their unwillingness to provide proportional capacity.

Modeling

In general, we have seen an increased use of (and reliance on) catastrophe models throughout the Asia/Pacific region. The increase in catastrophe losses has led cedents and reinsurers to better define and control not only the perils but the types of policies they have been issuing. Continued investment and attention to modeling is evident throughout the region. Earlier this year, Guy Carpenter released an Asian flood model. It focuses on one of the region’s main flood risk areas (Thailand’s Chao Phraya region) and provides clients with the information necessary to improve flood exposure management. The flood model, which allows for analysis from five-year to 1,000-year return periods, enables clients to better estimate their probable maximum losses (PMLs) at different return periods based on their commercial and industrial exposures.

Flooding in Thailand is the dominant natural hazard. In the last 10 years, there have been 33 recorded events. These events accounted for 55 percent of all natural disasters in Thailand, resulting in USD4.5 billion in damage, as well as 2,682 deaths and a further 30 million people affected.

Catastrophe Exposure

Southeast Asia consists of the countries south of China, east of India and north of Australia. Southeast Asia is divided into two regions, namely Mainland Southeast Asia (or, Indochina) and Maritime Southeast Asia (or, the Malay Archipelago). Mainland Southeast Asia includes Cambodia, Laos, Myanmar, Thailand, and Vietnam, while Maritime Southeast Asia includes Brunei, East Timor, Indonesia, Malaysia, Philippines, and Singapore.

The region lies on the intersection of geological plates, with heavy seismic and volcanic activity. Peninsular Southeast Asia is a rugged region traversed by many mountains and drained by great rivers, such as the Thanlwin, Ayeyarwady, Chao Phraya and Mekong. Insular Southeast Asia is made up of numerous volcanic islands. In particular, Indonesia and the Philippines are situated along the Pacific “Ring of Fire” - a zone of frequent earthquakes and volcanic eruptions that encircles the basin of the Pacific Ocean.

Increased Vulnerability of Southeast Asia to Natural Disasters

In 2007, Asia’s insured losses stood at USD3.5 billion, a shocking 94 percent increase from the 2006 figures. The table below shows the Top 10 Deadliest Natural Catastrophes in Southeast Asia during the past 10 years, with all 10 events happening within the last four years and five of them in 2006.

Cyclone Nargis: Myanmar’s worst Natural Disaster in Recorded History

Cyclone Nargis developed in the Bay of Bengal about 1150 kilometers off of the southeast coast of India in the last week of April 2008. It gathered strength over the next several days and made landfall in Myanmar on May 2, 2008, causing catastrophic destruction. Strong winds of up to 215 kilometers per hour, heavy rain, local flooding and a storm surge resulted in a death toll of at least 100,000 with more than 2 million people left homeless and without water, power, food or sanitary conditions.

The high rates of death and destruction caused by the storm were due only partially to its intensity. The Irrawaddy Delta is such a fertile area for rice growing that it was once known as the “rice bowl” of the British Empire. When the storm surge swept over the rice farms, it wiped out the current rice crop and ruined the area where much of the country’s food is produced. The resulting damage from the cyclone, combined with the government’s reluctance to accept immediate foreign aid, caused the death toll to increase exponentially.

The economic damage is estimated at above USD10 billion. Despite the scale of the humanitarian catastrophe, though, the insurance industry is unlikely to suffer a significant loss, due to the low insurance penetration in the country.

Earthquakes: A Drastic Change in Pattern of Occurrences

An analysis of the historic and recent data shows a drastic change in the cumulative number of earthquakes occurring in Indonesia between 1964 and 2008. The number of events increased gradually until 2000, after which it jumped exponentially.

The earthquakes that shook Indonesia from 2005 to 2007 resulted in estimated economic losses of USD3.3 billion, and the actual figure is expected to be much higher than the estimated amount reported so far.

On September 12 and 13, 2007, Bengkulu was hit by a magnitude 8.2 earthquake, followed within hours by a magnitude 7.9 aftershock. It devastated thousands of dwellings in a narrow strip along Bengkulu’s coastline-from Lais up to Painan in West Sumatra. The aftershocks continued until the end of 2007, as the stress that caused the initial earthquake was transferred to other points along the plate boundary. There were 134 aftershocks that reached or exceeded magnitude 5-one of which was magnitude 6.9 and another magnitude 7.4.

Indonesia escaped being hit by a devastating tsunami after the earthquake because the wave triggered by the quake was forced away from the coast and out into the Indian Ocean. The earthquake created the opposite effect of the massive tremor in 2004, which resulted in the Indian Ocean-wide tsunami disaster. Nevertheless, the earthquake was enough to trigger a 3m-high wave which slammed into at least one village in Sumatra.

The economic and insured losses of the September 2007 earthquake are estimated at USD200 million and USD10 million, respectively. This earthquake was relatively less destructive than the Padang Earthquake in March 2007, because its epicenters were located far offshore from Bengkulu and far from Padang.

Typhoon Fengshen: One of the worst Tropical Cyclones to develop in the West Pacific Ocean

Typhoon Fengshen struck the Philippines on June 20, 2008, with winds of up to 205kph causing severe damage in the Philippines and China and resulted in at least 1,354 deaths.

At the height of the typhoon on June 21, 2008, a ferry, the Princess of the Stars, capsized near Sibuyan Island in San Fernando, Romblon. The ferry sent a distress signal at midday when its engines stalled in rough seas. The ferry had a hole in the hull and was partially submerged. However, the Philippine Coast Guard was unable to make a rescue attempt because of high waves caused by the typhoon. A rescue ship reached the ferry more than 24 hours after it lost radio contact, only to find several bodies nearby. Out of the 856 people on board the Princess of the Stars, 800 were killed when the ship capsized.

Typhoon Fengshen is estimated to have caused an economic loss of USD247 million.

Insurance Availability

Insurance rates in Southeast Asia continue to trend downward, and the market remains very competitive. Insured losses in Asia account for only a small percentage of worldwide losses, and thus have little impact on the Southeast Asia market cycle.

Indonesia

Indonesia is currently the only country in Southeast Asia with a catastrophe pool. The MAIPARK earthquake pool was formed in 2003, and all general insurance companies must join it-both as risk-takers and ceding companies. Tariff rates apply, varying from 0.104 percent to 0.33 percent, depending on the building category, construction class, and zones. Cession to the pool is on the following basis:

  • Five percent of total sum insured (TSI), or a maximum of USD2.5 million, for risks in West Java, Banten, and Jakarta
  • Twenty-five percent of TSI, or a maximum of USD2.5 million, for risks in all other Indonesian locations

Policies also cover flood, riot, strike, and malicious damage. In most cases, separate rates are not shown.

The Indonesian government acknowledges the important role that the insurance industry can play in helping to maintain a more predictable and accountable budget in times of a natural disaster. The government is now working closely with MAIPARK to implement a natural disaster risk program that will compensate every citizen who is affected by natural disasters. Further, the government plans to subsidize fully this basic natural catastrophe cover and is in the midst of deciding how much coverage each citizen should have. This is a massive and comprehensive project, and it may take a while to materialize, especially as the government ambitiously intends to offer cover against all kinds of natural disasters, such as flood, tsunami, landslide, forest fire, and inundation-not just earthquake.

Malaysia

Tariff rates apply in Malaysia for sums insured of less than MYR300 million (USD80 million). Common perils policies cover earthquake, volcanic eruption, storm, and flood. Insureds can choose not to buy these covers, as separate rates apply. Prices for large and specialized risks-or risks with sums insured for more than MYR300 million (USD80 million)-are non-tariff and depend on market forces. These all-risk policies are rated on a combined basis and would typically cover natural perils.

Earthquake exposure in Malaysia is low. Rates are 0.01 percent, and no deductible applies.
Flood exposure is more significant, and the rate charged is 0.086 percent with a deductible of 1 percent TSI or MYR2,500 for each loss, whichever is less. Nevertheless, flood cover is still purchased by almost all insureds.

Philippines

Named-perils policies cover earthquake and typhoon/flood. Volcanic eruption is not covered but can be purchased additionally. For industrial all-risk policies, volcanic eruption is covered unless specifically excluded. A 2 percent deductible applies for all natural perils losses.

In an effort to ensure that insurance companies charge premiums that are commensurate with the risk and to help curtail the declining rates on policies due to stiff competition, the Insurance Commission issued a circular calling for strict implementation of minimum rates for earthquake (0.1 percent) and typhoon/flood (0.05 percent) cover, which became effective August 1, 2006.

Thailand

Standard fire policies, covering fire, lightning and explosion, would not automatically include natural perils like earthquake and flood. Additional premium will be charged for such covers to be included. Deductibles are not mandatory and are more commonly seen in all-risk rather than named-perils policies.

[Source for all map images is National Oceanic and Atmospheric Administration]

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