Huge losses from Chinese port catastrophe…

Conferences, Seminars, Forums, Insurance and Reinsurance, Marine Insurance, News, Ports & Terminals — By on February 3, 2016 at 1:19 PM
Frédéric Denèfle, Patrizia Kern-Ferretti and Dieter Berg.

Frédéric Denèfle, Patrizia Kern-Ferretti and Dieter Berg.

Huge losses from Chinese port catastrophe are making insurance history, says IUMI

By James Brewer

Global insurers are continuing to reel from the scale of the financial fall-out from the two massive explosions that in August 2015 ripped through warehouses at the super-port of Tianjin. The port zone, which serves the Chinese capital Beijing and many international markets, is always packed with containers, cars and other goods for onward transit.

Ongoing worries over the catastrophe, which killed 173 people and injured 800, and destroyed or damaged thousands of cars, were expressed during the winter meeting in London of the International Union of Marine Insurance.

Lloyd's: venue for IUMI winter 2016 meeting.

Lloyd’s: venue for IUMI winter 2016 meeting.

“This claim is going to write history, not only for the amounts involved, but for the challenges around it; and [because] we were never able to project many of them, ” Patrizia Kern-Ferretti, a leading member of IUMI said after the meeting, which was hosted by Lloyd’s.

IUMI president Dieter Berg said he had heard there might have been as many as 68, 000 cars in the affected area. “This is a new dimension of values with which we are confronted.”

More than five months after the incident there is still no clear picture of what will be the toll on the insurance and reinsurance sectors. Industry estimates are vague and in the region of $5bn to $6bn, with part of that sum expected to fall on marine policies and the rest on property cover – possibly 50-50.

“It is proving very frustrating that after five months we do not know where we stand, ” said Ms Kern-Ferretti, who is chairman of the IUMI facts and figures committee. “We still do not know how much will fall under property [cover], how much will fall under marine, and we have no idea about the value that will fall in containers, ” she said. Contents of the damaged boxes have yet to be assessed: some will have had high-value cargo, some will be empties.

There appears little doubt however that, as Ms Kern-Ferretti put it, the severity of the blasts coupled with the exceptional amount of insured goods stored on site has resulted in the biggest man-made insurance loss to occur in Asia, and the largest marine loss in history. This will far exceed the estimated $2.5bn to $3bn claims total following Superstorm Sandy in the New York area in 2012.

The disaster, said Ms Kern-Ferretti, has presented unprecedented challenges for claims assessment. Insurers and their adjusters were unable to gain early access to assess fully the extent of the damage and quantify claims.  Even when the entry ban was lifted, the clean-up operations eliminated the possibility of conducting a formal loss adjustment process.

Because of these obstacles, all insured assets including cars and containers in the “exclusion zone” were either considered to be a total loss or the extent of damage sustained was estimated based on forensic accounting. As claims were being filed, it became clear that the majority of the losses would include the thousands of new motor vehicles parked near the site.

Tianjin is the third biggest port in the world in terms of cargo volume and was 10th for container throughput, according to 2013 figures. It is a massive industrial and petrochemical complex and serves as a main logistics hub for the automotive industry.  The port accounts for 40% of all China’s car imports and exports.

Ms Kern-Ferretti and Mr Berg were speaking at a press conference accompanied by Frédéric Denèfle, chairman of the legal and liability committee, and Simon Williams, who leads the offshore and energy committee.

As annual global cargo insurance premium volume is in the region of $17bn, claims arising from this one tragedy are likely to be equivalent to around 20% of that. Even so, the market has failed to harden in response. “If it is not a big claim that makes the market change, I wonder what will, ” mused the facts and figures committee chairman.

Ms Kern-Ferretti said that insurers’ catastrophe models of a “worst case scenario” had failed to envisage what had happened in such a huge harbour area with high value goods going through daily, combined with lack of access for adjusters for four weeks, and a clean-up that militated against the possibility of a thorough assessment.

She characterised the Tianjin incident as a “last call” for marine underwriters to tackle the issue of accumulation of risk in this kind of huge port. “Ports, warehouses and cargo storage spaces are among the locations with the greatest accumulation potential. Adjusting the losses in Tianjin requires a good knowledge of the goods that were stored, but this is particularly challenging for cargo insurance, which is affected by large fluctuations in insured values.”

Marine insurers were well aware of the potential losses associated with cargo risk concentration, “but quantifying such risks is a challenge.” She added: Although marine is the oldest insurance sector, it lags other insurance lines in data capture and the tracking of cargo exposure during transit.”

Traditionally, catastrophe modelling had focused on static risks such as buildings and infrastructure, including those within ports. Losses resulting from mobile risks such as ships had yet to be fully modelled. “Proper cargo modelling must correctly account for geographic distribution, and advanced methods are required to address complex logistics systems in real time.”

Many marine insurers will be under pressure in the more challenging market because they have to persuade their capital providers to continue to stand behind their underwriting. Mr Berg announced that the IUMI 2016 conference theme will be, in part reflecting problems highlighted by the Tianjin problems, Effective Underwriting in a Changing Environment.

 

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