Andrew McBean
andrew.mcbean@gt-thai.com February 20, 2012 1:00 am
Recently Grant Thornton ran a workshop at our offices to help our clients get the most from their insurance after the flood. It was vastly oversubscribed and extremely interactive, revealing just how many companies have substantial concerns about their insurance claims less than three months after the floods. Questions relating to claims worth hundreds of millions of baht through to billions were raised.
Some existing claims were highly complex; others were being disputed by the insurance company; whilst others, despite being agreed, had not actually been paid out. Other customers were concerned over future policies - for good reason, as we will see.
In the Insurance Journal dated February 10, there is an overview of a briefing released by AM Best Co covering the floods in Thailand. "Overall, industry wide insurers' loss estimates from the floods have increased 50 per cent to US$15 billion [Bt462 billion] since Best's last briefing on this event, published 23 November, 2011. Such a loss would place the Thai floods in a tie for the fifth costliest insured loss event in the past 31 years," it said.
Most economists agree that once all the insurance claims are settled, the floods in Thailand will likely be the world's fourth-costliest insured loss ever, a fact supported by Lloyd's of London in a statement on February 14 estimating that claims may finally reach $20 billion, the third-biggest loss in the 324-year history of Lloyd's.
However, it could have been much worse for insurance companies. A study by Aon Benfield estimated that the floods in Thailand "have damaged or destroyed more than 4 million homes, businesses and manufacturing facilities." The amount of structural damage is actually "four times greater than what resulted from Japan's earthquake and tsunami in March 2011, but only half of the total insured loss due to a low rate of insurance adoption".
So what does this mean?
Short term, apart from a vast financial impact for many people and businesses due to under-insurance, it means that those with policies are generally wholly unprepared and inexperienced regarding claims of this size and type, and for how to deal with insurance companies. This has resulted in a tendency to rely too much on what the insurance company representatives have put forward as a settlement.
The claims expert who presented at our workshop was the CEO of Adjusters International Colorado, Patrick Bickford. He showed the audience how the first 60 per cent-plus of the money owed on your claim may be the more "obvious" baht that should be issued on your claim with little to no disagreement. The other monies to be paid are more subjective. The policy has so much language that seems to be in this grey area and the adjustment issues can be interpreted from different vantage points.
A key to the success of any claim is being able to interpret this grey area to your benefit. The more knowledge you have about the policy and the intent behind the language, the better position you'll be in to obtain favourable results. The Best briefing illustrates that even now these grey areas remain difficult in Thailand, even for insurance companies: "How to assess business interruption claims and contingent business interruption claims, which are based on supply chain interruption, rather than actual property losses, remains a conundrum."
The long-term implications concern future insurance policies with potentially prohibitive premiums and delays in returning to normal production.
By way of an illustration, last month, Dr Virabongsa Ramangura, head of the Strategic Formulation Committee for Reconstruction and Future Development, said: "I am confident Thailand will be able to prevent any [further] flood by at least 75 per cent."
If you were an insurance company, would you be pricing to the 75 per cent or the 25 per cent? The study was sobering when it considered the long-term impact on Thailand. "In conclusion Best underscored that the unprecedented flooding has forever changed the perception of risk in Thailand and brought about significant changes to the Thai insurance industry." They added "the Thai commercial insurance industry will likely begin facing sharply contracted capacity, higher pricing and tighter terms for coverage with the Asian and Japanese reinsurance renewals in April. In 2012, flood coverage will be separated from IAR [industrial all risks] policies."
This will have serious financial implications for hundreds of thousands of businesses and homeowners who now have to pay more attention to insurance, many for the first time. This is especially true for flood-related damages given the backdrop of dire warnings from the science and technology minister, who warned that in 2012 we may be "hit by 27 typhoons and four tropical storms in the coming months and sea levels will be higher than last year by 15cm." This will not inspire confidence among the insurers and underwriters.
Finally, why do we need insurance payments? We need these to return us to production. In the US, the Small Business Association conducted a study and found that over 50 per cent of companies go out of business in the 24 months that follow filing a major claim. There are two reasons for this. The first is that customers treat their insurance payment and operational readiness as a serial process rather than doing both in parallel. The second is not considering the disaster as an opportunity to improve processes and operations that have become dated. After all, this is probably the only legal way to actually make money out of an insurance claim.
Given the success of the previous workshops, Grant Thornton will be running more. The focus of these will be for customers who have any issues with existing claims, customers concerned over future insurance contracts, and customers who would like to learn more about how to make the insurance monies work better by returning to normal operations as fast as possible. For those wishing to know more about these workshops, please drop me an e-mail.
Andrew McBean is a partner at Grant Thornton Management Consulting, a unit of Grant Thornton Thailand. Follow his article every third Monday of the month. He may be contacted at andrew.mcbean@gt-thai.com
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