OUR KNOWLEDGE / PUBLICATIONS / THE IMPACT OF THE THAILAND FLOODS ON REINSURANCE PROGRAMMES
Introduction
As the flood waters begin to recede in Thailand, thousands of commercial and residential properties still remain under water and many businesses are at a standstill. In addition to the human cost, estimates of the overall economic cost – and the insured loss to the international markets – continue to rise.
2011 has already sealed its position as a record year for the Asian insurance and reinsurance markets but for all the wrong reasons.
The proportional and XOL markets know how to deal with catastrophe losses and are familiar with the recurrent claims-handling themes. But each catastrophe loss has its own factual issues. As adjusting and survey teams work round the clock to assess the physical losses on the ground and the likely reinstatement period, what areas should reinsurers be focussing on?
Iain Anderson of Ince & Co and Ian Belcher of Cranmore Asia answer this question and highlight some technical issues that are about to test the market.
Underlying liability and quantum
It looks likely that the vast majority of direct policies will respond to the flood damage. But there are a number of potential concurrent causes – defective building work or maintenance, negligent acts in flood prevention, and executive orders from local authorities – for which the coverage terms may be less clear. Like the Bangkok riots in 2010, perhaps the Thai Courts will have their own views on whether the damage falls within the direct policy’s terms of cover. Reinsurers should seek clarification from their cedants as to the exact factual circumstances of their significant losses – especially if the underlying policies have anti-concurrent cause language. There may also be challenges on quantum – with issues of underinsurance, average adjustment and reinstatement likely to come into play. What if the original assured decides its does not want to re-build their operation in Thailand but want to move elsewhere?
BI/CBI
Look closely at the operative BI and CBI clauses on both the direct and the reinsurance covers, and any sub-limits. The “but for the insured damage” test considered in detail by the English Court in last year’s Orient-Express Hotels v Generali decision arose from an original assured who did not purchase enough CBI cover and then tried, without success, to push their wider area losses through the standard BI terms. Original assureds will be looking very closely at their current programmes and how best they can maximise that insurance asset to fit their current circumstances. The financial adjustment will also be a challenge. At the time of the flooding many Japanese assureds were using their Thailand operations to mitigate the BI/CBI losses from the Tohoku earthquake and tsunami in March 2011. It is not just about assureds or cedants in Thailand. Any original assureds that have Thai suppliers named in their CBI covers are also likely to be affected. Check any policy endorsements or extensions to make sure that the underlying cover responds to the relevant entities. What was this litigation about?
Technical reinsurance aspects
With a diverse range of causes contributing to the overall losses, aggregation language will be key. Check your “events”, “occurrences” and “originating causes”. Do not expect a uniform aggregation regime across all of your involvements. Where does your hours clause fit in and what reinstatements are available? What power does your cedant have to bind you to their settlements with original assureds? What about your cedants’ underwriting and claims record-keeping? At present, many reinsurers are very much in the loss assessment and information gathering stage – working with their cedants to get as full a picture as possible on the loss exposures so that co-ordinated claim response (and claim management) is achievable. Are you getting the information that you need from your cedants and, if not, what rights do you have under the reinsurance terms?
Even if you do not have an express inspection clause, a right of reasonable audit and inspection may still be implied. Reinsurers need to manage and preserve their inspection and claim control rights. Prudent exercise of those rights gives reinsurers the assurance that only valid underlying claims are being presented, and that these are covered by the reinsurance contract. It also allows reinsurers to respond to any questions from their own outwards protections and speed up their own collections.
Claims verification and handling
Because of the complex nature of the underlying losses, there is a danger of adverse upwards pressure on claim settlement values. In addition to the contractual issues, practical difficulties are likely to arise from the diverse involvement of loss adjusters risk of duplication of coverage – all stress the claims handling process. Having local linguistic and technical ability on the ground will be key to verifying the accuracy and integrity of submitted claims, and managing the claims-handling process.
Remote verification of cedant documentation is often possible. But, in many cases – and in particular with treaty business - this is unlikely to be practical or even possible. Efficient inspection of documents and computer records at the cedants’ offices (or those of their broker) will be required – which presents its own diplomatic and linguistic challenges.
For your inwards involvements and your outwards collections, it will be critical to ensure (i) all presented losses emanate from Thai Floods and not some other cause; (ii) the risks producing the losses were ceded correctly and premium paid; and (iii) the reinsurance terms provide cover for the presented losses and all subrogation and inuring reinsurance has been applied. This is where your local teams and specialist reinsurance adjusters can assist.
Our team
Ince & Co and Cranmore Asia are recognised international insurance and reinsurance experts - legal and technical. Combined we have offices across Asia in Thailand, Australia, Hong Kong, the People’s Republic of China and Singapore and strong local partners in all other Asian markets - as well as teams in the London, Bermuda, USA and Continental Europe markets. We provide assistance and add value at all stages of the insurance and reinsurance product life-cycle.
For further information please contact:
Iain Anderson
Partner, Ince & Co Singapore
iain.anderson@incelaw.com
Ian Belcher
Managing Director, Cranmore Asia
ian.belcher@cranmore-asia.com