Canadian Underwriter

Far East Under Water

May 1, 2012   by Sharon Ludlow

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While the human toll of last year’s Thailand floods was felt most acutely in the areas surrounding the banks of the Chao Phraya river, the economic ripples travelled much further afield and were felt around the world.

More so now than at any point in the past, our increasingly interconnected societies mean that the impacts of a disaster of this scale are no longer restricted to the country where the event occurs. The interruption of the global supply chain that results from events like this one means that contingent business interruption issues have gained visibility in practically all insurance markets around the world.

In Thailand the rainy season started in early May 2011. To compound this there was a tropical storm in June and then more heavy rain in July with a cumulative total of some 860mm having fallen by the end of July. By September, with the advent of tropical storms Haiteng and Nesat, the main Chao Phraya River running north to south in the country began to overflow in its northern reaches, causing massive flooding.

The floodwater affected a total of seven major industrial estates north of Bangkok. The northern most estates were taken by surprise but the estates further south that were affected in October had more time to prepare. However, despite this, the use of sandbags, the construction of mounds of earth, and even the building of surrounding walls as flood barriers, all failed to prevent widespread damage. The flood waters remained until mid December 2011 with an area about the size of Switzerland under two to three metres of water.


Most affected companies were household Japanese names—Sony, Panasonic, Hitachi and Honda—to name but a few. The biggest problem was damage to plant machinery and equipment which halted production for months and impacted the supply chains around the globe. These companies were largely insured by the three large insurance groups in Japan: MSI, Sompo and TMNF.

Total economic losses for the catastrophe are approximately US$30 billion while insured losses are estimated at US$10 billion.

Yet many of the factories didn’t have business interruption coverage. Furthermore, the maximum indemnity periods (interruption period limits) selected were largely one year or less—in some cases only three months. The BI element as a percentage of the overall claims is widely estimated to be relatively small at 15-20% of total claims.

Contingent business interruption (CBI) overseas is, however, entirely independent of the actual BI coverage locally. If a corporation in Canada insured its potential loss of gross profit from an accident occurring at the premises of a supplier or customer, then the requirement is that the damage occurring in Thailand (flood) must be one of the perils insured at the factory in Canada. In other words, damage in Thailand is deemed to be damage in Canada for the purposes of claim calculation.

This is where a broker or risk manager has a key role to play in making sure their client is aware of what their policy does, and does not, contain. The importance of adequate insurance against the consequences of business interference after property damage somewhere other than on the insured’s premises is growing fast, triggered by rapid technological and organizational changes. But it’s essential for underwriters to pay strict attention to the assessment of contingent business interruption exposure and to apply technical underwriting to the task.

CBI Challenges

CBI coverages to “protect” revenue stream generated by selling goods to third parties are used widely but often without much science or rigour built into the analysis. Insureds typically purchase as much as possible based on the level of sophistication of their in-house risk management team and that of the broker they use. The primary responsibility of the risk management professionals should be to protect the franchise value of the company.

Underwriting in the CBI line is a highly demanding task that requires an interdisciplinary approach and understanding. Apart from a thorough knowledge of indemnity insurance, sound business management skills are essential, particularly in the field of accounting (book keeping, cost and results accounting), as is pronounced underwriting expertise, since the property damage that triggers the cover is a key component of the basic risk. It’s vital that vulnerable companies install risk management tools to evaluate the most important risks within their critical manufacturers and customers.

What makes evaluating CBI risk so challenging is the ebb and flow of numerous contracts. Put simply, the playing field is always changing and evolving and it’s almost impossible for a risk manager to know the exact risk on his or her books at any given time.

While assessing CBI links between Thailand and Canada is difficult, there are economic indicators available that give some suggestion as to the scale of the relationship between the countries.

The Industry Canada website provides import and export figures between the two countries and with the exception of directly after the financial crisis in 2008, both figures have been steadily increasing over the past five years. Figures from 2011 have yet to be calculated but in 2010 Canada imported CDN$2.5 billion from Thailand while it exported over CDN$650 million to Thailand.

Some of the top exports from Thailand to Canada—computer and electronic products ($0.85 billion CAD), electrical equipment, appliances and component manufacturing ($76.5 million CAD), Transportation equipment management ($46 million CAD)—were among the industries significantly impacted by the flooding and therefore some degree of CBI would have resulted.

The good news is that it is becoming easier to assess CBI exposures as there is a growing field of business continuity firms that specialize in this area and offer the skills to measure a client’s business continuity needs through detailed processes like forensic accounting. When a client asks their broker or risk manager about the newest ways to protect themselves, it is vital they are cognizant of methods like this.

These specialists are able to review a firm’s book and operations and provide a report on potential exposure. In the past, clients regularly conducted post-claim analysis to determine their exposure. But now with the help of specialists they can conduct pre-claim analysis to better understand where they stand.

The value of this can be seen from the fact that companies are often surprised by the findings, allowing them to purchase CBI coverage in a more educated way, securing the type of limits that better suit their needs and exposure.

A broker can also assist a client by advising them to make sure they are fully aware of alternative suppliers in a variety of different locations should their main supplier experience difficulties. Being able to react quickly to events is vital.

In conclusion, best results can only be achieved through open dialogue between insureds and insurers and the sharing of information so as to identify needs, evaluate exposures, where possible mitigate through diversification and ultimately develop coverage strategies to satisfy all stake holders.

Sharon Ludlow is CEO of Swiss Re Canada.


Copyright 2012 Rogers Publishing Ltd. This article first appeared in the March 2012 edition of Canadian Insurance Top Broker magazine.

This story was originally published by Canadian Insurance Top Broker.