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Losses from Tianjin port explosion still being calculated: A.M. Best


August 24, 2015   by Canadian Underwriter


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Various market sources have released insured loss estimates related to the massive explosion Aug. 12 at a toxic chemical warehouse in the Port at Tianjin, but A.M. Best Company cautions that the figures “are subject to uncertainty as residents within three kilometers of the blast site have been evacuated.”

In this Aug. 13, 2015 photo, a firefighter in protective overalls walks past smoke rising from the site of an explosion that destroyed large swathes of at a port warehouse in northeastern China's Tianjin municipality. The blasts that shook the major Chinese port and killed over a hundred people have cast a harsh spotlight on China’s woeful record on work safety, which has long been sidelined in the pursuit of profits and economic growth. (AP Photo/Ng Han Guan)

In a briefing issued Monday, Tianjin Losses Still Being Calculated; Risk Management Tools Come Into Play, a statement from the rating agency notes that with regard to estimated losses, “direct insurers and their policyholders are still not allowed to inspect on site the extent of loss damage.”

Property damage claims – including property and content losses at and near the blast site, arising from mostly commercial property policies – will form the major part of overall insured loss, as well as damage to thousands of new motor vehicles parked near the site, A.M. Best reports.

“Business interruption loss forms a large part of the uncertainty surrounding the ultimate loss for the insurance industry in this incident. On the marine cargo side, it will take time for claims arising from damaged shipping containers to be reported and inspected by insurance companies,” the statement notes.

Beyond property, motor and marine cargo losses, A.M. Best reports that to a lesser extent, the incident will result in some liability, personal accident and life claims. A.M. Best notes the explosion at the port, about 200 km from Beijing, has claimed the lives more than 100 people and the death toll is likely to rise further.

Related: Tianjin explosion insured losses could exceed US$1.5 billion, undermine financial performance of some regional players: Fitch Ratings

“Both direct and reinsurance premium rates will be hardened, and reinsurers will likely tighten their terms and conditions for large commercial risks,” A.M. Best anticipates. In addition to the impact on local insurers and reinsurers in China, “some regional insurers and reinsurers may also incur losses from this incident through inward reinsurance treaties and facultative placements.”

In SK Hynix’s semiconductor factory fire disaster in September 2013, A.M. Best points out that the event resulted in more than US$1 billion in insured losses (total loss is US$ 900 million).

Last week, a statement issued by the International Union of Marine Insurance (IUMI) noted the Tianjin explosion highlights the growth of accumulation risks. “Accumulation risks – when a single event causes an exceptionally large group of related losses – such as this, are continuing to grow,” IUMI, a professional body run by and for its members, reported at the time.

IUMI president Dieter Berg cites the persistent growth of accumulation of values in port and storage areas, particularly in highly industrialized regions. “In the marine sector, the continuous growth of this type of large-scale risk is being driven by the trend for bigger container ships and the construction of extensive freight handling and storage facilities,” the union statement notes.

“Although we are focusing on losses caused by natural hazards such as flooding or hail, it is human error that is often to blame, particularly around industrial facilities,” Berg says.

Man-made losses or damage caused by explosions are difficult to model, but they are comparable with acts of terrorism, IUMI notes.

Related: Explosion in China shows how Cats can have regional, even global, impact: Munich Re

“To evaluate worst-case scenarios,” Berg states, “we need to fully understand the value of the goods in the port and all potential exposures before we can calculate adequate premiums. This is becoming more of a challenge as these facilities continue to expand.”

Citing an estimate that 10,00 vehicles were destroyed at Tianjin – and applying an average retail value of US$30,000 per vehicle – Nick Derrick, chairman of IUMI’s Cargo Committee, says “this could result in a loss of $300 million for vehicles alone. Container losses are likely to be spread among many marine cargo insurers, but motor vehicle insurance is a specialist sector and so that market is likely to be hit hard.”

Fitch Ratings reported last week that insurance losses associated with a series of explosions at a chemical warehouse in the Port of Tianjin are likely to be material for Chinese insurance companies, estimating that losses could potentially exceed from US$1 billion to US$ 1.5 billion.

“The high insurance penetration rate in this area could make the blasts one of the most costly catastrophe claims for the Chinese insurance sector in the last few years,” Fitch Ratings noted.

The rating agency estimated that the “overall risk cession ratios of major non-life players active in the Tianjin region range from 10% to 15%,” the company added.