Flood recovery: Reinsurance flows half done - The Nation

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Danny Suwanapruti March 13, 2012 1:00 am

The feedback we received from our meetings with investors, banks, insurance companies and regulators suggests that around $3 billion to $4 billion of that exposure is with Japanese insurers. The remaining $8 billion to $9 billion is with Thai insurance companies; as much as 90 per cent of their risk is reinsured offshore, mostly with European reinsurers.

Around 60-80 per cent of Japanese insurance payments appear to have been completed, and the remainder should be completed by the end of March, which is Japan's fiscal year-end. However, for non-Japanese insurance pay-outs ($8 billion to $9 billion), some insurance companies informed us that they have not yet received even half of the insured amount from their offshore reinsurance counterparts (via cash calls). We estimate that roughly half of the expected $10 billion to $12 billion of insurance-related flows have already come through to Thailand, while the other half will be paid between now and June (or possibly in Q3 of 2012).

We heard on several occasions during our meetings that there is a shortage of surveyors to appraise the damage to factories. Surveyors are required to be registered with the Office of Insurance Commission, and there is a limited number of accredited/licensed surveyors. Demand for this profession is currently extremely high, resulting in a bottleneck in the insurance appraisal and pay-out process.

Given media coverage of cars being inundated by the floods, the market perception was that pay-outs to car owners by auto insurance companies would be very large. However, following our meetings, it appears that insurance liabilities for automobiles may be very small. For example, one insurer said its expected pay-out will be just 5 per cent of the total insured amount. This is because the majority of vehicle owners sought refuge for their cars by parking them on expressways, bridges and in department store parking lots, which protected them from flooding. Thus, the actual damage versus the total amount insured will be much lower than initial expectations.

Thai insurance companies can typically make cash calls on their reinsurers in an event such as the recent flooding, allowing them to obtain a certain percentage (say, 50 per cent) of their reinsured limit immediately, even before all of their claims are received. This is to help with cash management; they then settle the difference later, once all the claims and invoices come through.

However, reinsurance companies that are active in the Asia-Pacific region were hit hard by the New Zealand earthquake in February 2011, followed by the Japan earthquake in March 2011. Thus, they were slightly more cautious in making cash call pay-outs following the Thai flooding. Given this situation, we expect further payments to trickle in more slowly than they have over the past few months.

Danny Suwanapruti is senior rates strategist for Standard Chartered Bank.

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