Labuan International Business and Financial Centre


Increased exposure to cat losses in Asia is encouraging firms to consider insurance to mitigate rising risk costs. Captives are set to form a key part of these efforts to contain risk exposures, writes Dwane Feehely.


by premiums, recently warned that, in response, there would be broad price increases. There have been steep price increases for catastrophe reinsurance, and these are in turn driving insurance costs, particularly in those regions most exposed to natural perils.


R Across the region we have seen events making the news almost daily


with dramatic human, societal, financial and economic consequences for its citizens. They include:


• Thailand’s floods, estimated by Thailand’s insurance commissioner to amount to more than $30 billion of insured losses. This is in addition to losses from the 2004 tsunami and 2010’s civil disturbances;


• Floods in Australia in December 2010 which resulted in $5.1 billion of insured losses;


• Floods in China in May 2010 which resulted in $18 billion of economic losses;


• The earthquake in Christchurch, New Zealand in February 2011 which resulted in $9 to $12 billion in insured losses; and


• The earthquake and tsunami in Japan that killed an estimated 18,500 people and caused upwards of $30 billion in insured losses.


These disasters will inevitably lead the insurance industry to reassess


weather and other natural disaster risks in Asia and the impact of increasingly urbanised populations, which often reside on flood- prone reclaimed land. In addition, there are huge exposures and risks associated with rapidly expanding industrial zones—areas that are often situated on land which is vulnerable to earthquakes, storms and flooding.


It is important to judge scenarios when considering insurance in the


face of natural disasters. The scenario approach must dive deep and look at multiple ‘what if’ situations.


With all of these challenges, what is a business to do to enable effective management and treatment of the risks the business faces? One vital


ecent natural disasters, both globally and regionally, have been serious enough to place severe pressure on an insurance market that was already under stress and on the cusp of hardening. Munich Re, the world’s biggest reinsurer


Look at Thailand and we can see the results of these changing


environments. The flooding in Thailand claimed some 562 lives and swamped around 960 factories in numerous industrial estates located north of Bangkok. This in turn disrupted the supply chains of international companies including Lenovo, Sony and Toyota. Globally it is estimated that personal computer shipments could be reduced by 20 percent during the first quarter of 2012 due to these events. This will compound the shortage of hard disk drives that was already evident prior to the floods, with Thailand accounting for around 45 percent of global hard disk production.


The climate is changing, and these developments will require us to


think differently about how we manage risk. This will inevitably lead us to assess how we prepare for the changes in our business operations. These challenges will be particularly acute in Asia, as we increasingly urbanise areas of land by, or close to, the sea and low-lying areas.


These challenges will require us to rethink our approach to the management of risk and alternate risk-financing strategies which will include inevitably insurance. These rethought strategies will include the use of specialised vehicles to assist the provision of insurance and reinsurance solutions.


Following these disasters many companies and individuals found


they were not insured for the risks they faced, or were underinsured, or were only partly covered for an array of contingent risks. They found themselves exposed to concerns such as business interruption, especially where the interruption was not caused by property damaged at the insured’s site. Typically this occurs following events that have an impact on access or suppliers.


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