November 6th, 2012

Global Perils

Posted at 1:00 AM ET

David Flandro, Global Head of Business Intelligence, Julian Alovisi, Assistant Vice President and Lucy Dalimonte, Senior Vice President

As Table 1 shows, the three perils of wind, earthquake and flood have caused the heaviest losses to (re)insurers. While hurricanes in the United States have unsurprisingly generated the biggest wind losses, the most expensive earthquakes and floods have a more international flavor. Indeed, the most expensive earthquake loss and flood loss on record occurred last year in Japan and Thailand, respectively. Moreover, both the Tohoku earthquake/tsunami and the Thai floods revealed risks that (re)insurers had not previously considered, with CBI claims - resulting from supply chain failure - accounting for a large share of insured losses. High impact, low frequency events (such as earthquakes and tropical cyclones) and perils that typically are more regular (such as floods) are widespread in several developing markets, raising the prospect of more hidden loss potential.

Table 1



Over the last two years, several powerful earthquakes have caused widespread damage, leading to significant losses for (re)insurers. Indeed, four out of the five most costly earthquakes on record have occurred since the start of 2010, and all four of these events were located outside the United States (see Table 2).

Table 2


This trend can be explained in part by the distribution of seismic risk across the globe. Earthquake risks along the U.S. and Canadian West Coasts and in Japan have been well documented. However, as illustrated by Figure 1, (re)insurers are also exposed to high seismic activity elsewhere in South America, Europe and Asia-Pacific. The widespread seismic activity in these regions puts millions of people and buildings at risk.

Figure 1


Earthquake insurance coverage in developed and emerging economies varies widely, and earthquake coverage can be low, even in certain established markets. Of all the earthquakes that have caused economic losses over USD1 billion over the last three years, only events in New Zealand and Chile saw the (re)insurance sector contribute more than 25 percent of the overall cost (see Table 3).

Table 3


These countries have not historically been considered peak zones for earthquake losses by (re)insurers. By taking a look at the ten biggest earthquakes that have struck since 1900, it is clear that similar events in the future could leave (re)insurers exposed to unexpectedly heavy losses since many of these high risk countries are in regions now considered emerging markets (see Table 4).

Table 4



Floods in developing economies are also a growing concern for (re)insurers. The high losses from the Thai floods in 2011 in particular took (re)insurers by surprise due to the extreme loss accumulations in their portfolios. As illustrated by Table 5, industry losses for previous big flooding events were less than USD3 billion. Many countries with high exposure to flood operate insurance pools to mitigate the financial risk, but Thailand does not presently have a domestic flood pool. As a result, the 2011 floods in that country represent the largest open market insured flood event ever. 

Table 5


The size of the insured loss in Thailand was unprecedented, totaling in the range of 1,800 percent of Thailand’s property premiums. Several factors contributed to the high loss, including prolonged flooding, the inundation for several weeks of a high number of commercial properties in industrial parks and insufficient protection and preparedness. Another key lesson to emerge from the Thai floods was the fragility of global supply chains. Thailand is a major hub for auto and hard disk drive manufacturing, and the floods forced the closure of hundreds of factories. Moreover, following the Tohoku earthquake and tsunami, several Japanese manufacturers had transferred production to Thailand. This had a massive knock-on effect on global manufacturing and an unforeseen impact on global supply chains, resulting in a wave of business interruption claims around the world.

The implications of the Thai floods are likely to reverberate through the (re)insurance sector for some time to come. The event demonstrated that insured losses from flooding could spiral to unanticipated levels in countries not considered peak risk areas, especially where there are concentrations of value such as industrial parks. Furthermore, as explained in later posts, flooding is a regular occurrence in practically every developing economy. Despite this, there are few modeling solutions available for flood, raising the prospect that there may be hidden flood loss potential in other emerging territories.


Wind on the other hand is well modeled. As noted earlier in the report, the majority of significant financial losses from wind have occurred in the United States. Hurricane Katrina remains the largest insured loss ever at an inflation-adjusted USD75 billion. Hurricanes Andrew, Ike, Ivan, Wilma and Rita also rank among the largest insured losses.

Europe too has suffered big windstorm losses, particularly in the western and central regions, while several countries in Asia are also exposed. Big payouts have occurred in Japan following landfalling typhoons. Indeed, Typhoon Mireille (1991) is the biggest wind loss to occur outside of the United States after it incurred an inflation-adjusted insured loss of USD9.3 billion, according to Swiss Re.

Several other countries in Asia are vulnerable to wind losses. (Re)insurers have recently paid out significant wind-related claims in South Korea, while China, Taiwan, the Philippines and Vietnam are all frequently hit by tropical storms and typhoons. The Philippines is hit annually by multiple deadly typhoons, and the country is projected to endure as many as 31 landfalls during 2012. Cyclones are also common in the Indian Ocean, as demonstrated by Cyclone Nargis in 2008. Nargis remains one of the deadliest cyclones on record after killing some 140,000 people in Myanmar. As the economies of these countries continue to develop, the (re)insurance sector can expect to see increasing wind-related losses in Asia.

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