Thai Floods the turning point for understanding risk

David Masters, director at S&P Global Ratings, traces the increasing regionalisation of pricing back to the Thai floods of 2011.

In 2011 there were considerable losses in Asia, especially Japan, New Zealand and Australia, noted Masters. “But the most disappointing event, the one that caused most embarrassment for the insurance industry, was the flooding in Thailand,” he said.

“That event laid bare the scale of the misunderstanding of the risk. The industry had not appreciated the implications such an event could have, especially the impact on supply chains. Thailand is a huge manufacturing base for Japanese industry.”

The lessons learned from that event, along with the exponential growth in data year on year, has led to the improvement in modelling that has driven the increasing regionalisation in pricing in recent years, said Masters.

Masters added: “Improvements in modelling have been led by property catastrophe, to much better reflect the impact of globalisation on economic exposures.”

But he conceded that it is easier to understand the complex and interconnected relationships between countries and businesses after events have played themselves out. “Everyone is a genius in hindsight,” he said.

The same is true in the aftermath of the wildfires that have ravaged the US in the last two years. In retrospect it seems obvious that increased population density in the affected areas, as well as hotter summers, increased the potential losses from wildfires. But catching that before the losses occurred was much harder.

The increasing regionalisation of pricing is making rate increases more severe in loss affected areas, while easing price increases in areas that have not experienced such severe losses.

In the past, if a severe hurricane or typhoon hit in the US or Japan, prices would increase across the board, including in Europe, where the risk of those kinds of catastrophes is much lower. Today price increases are more localised.

Masters said: “Insurers now have to have more difficult conversations in loss affected markets, but at the same time their conversations in areas that have not been affected by losses are easier.”

S&P expects on average mid single digit rating increases for reinsurers next year, Masters said.

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