Insurers Bracing for Thai Flood Claims at More Than $10B

Insurers are bracing themselves for claims in excess of $10 billion after floods in Thailand disabled major foreign-owned manufacturing operations there, adding to an already record-breaking natural catastrophe bill this year.

Analysts and industry executives say it is too soon to gauge the full impact of the floods, Thailand’s worst in 50 years, as the waters have only just started to recede more than three months after they first rose.

But Thailand’s Office of Insurance Commission, the industry regulator, has provisionally estimated an insured loss of about $6.5 billion, according to Standard & Poor’s, while insurers and brokers informally put the impact at closer to $10 billion.

“It sounds like it’s going to be that sort of magnitude, maybe even a little bit more,” said Execution Noble analyst Joy Ferneyhough. “It’s still ongoing, it’s still developing every day and I don’t think anyone can get there to assess what’s going on.”

Reinsurers such as Munich Re and Swiss Re are expected to pick up a proportion of the losses from Thai and Japanese primary insurers, heavily exposed because many of their domestic corporate customers have set up operations in Thailand to escape the strong yen.

Japanese insurers Mitsui and Tokio Marine said the floods could cost them 130 billion yen ($1.7 billion) and 100 billion yen [$1.3 billion] respectively.

Business interruption claims are likely to account for a big chunk of the costs to insurers, with companies worldwide hit by a shortage of components after the floods knocked out many foreign-owned makers of hi-tech gear.

Ripple Effect

“Thailand is such a critical cog in the global supply chain for some of these industries,” said Gary Lynch, head of supply chain risk at Marsh Risk Consulting, part of insurance broker Marsh.

“The concentration of organizations and support organizations affected is probably greater than we’ve seen in any other event.”

British TV decoder maker Pace issued a profit warning, blaming uncertainty over the cost of computer hard drives after the Thai operations of its main supplier, U.S. group Western Digital, succumbed to the floods.

Seven major Thai industrial estates have been affected, disrupting the operations of Japanese manufacturers including Nissan, Sony, Canon, Panasonic and Honda, while across the country, a total of 14,000 businesses have closed, according to reinsurance broker Guy Carpenter.

“Flood damage can be rather severe because Thailand is not really an emerging market when it comes to industrial facilities,” Ulrich Wallin, Chief Executive of reinsurer Hannover Re said, estimating the company’s own exposure at about Û100 million ($135 million).

The Thai floods come on top of a spate of catastrophes, including the March 11 Japanese earthquake, which inflicted a record $70 billion in losses on the insurance industry in the first half of 2011 alone, according to Swiss Re.

One consequence of the floods has been an unexpected increase in insurance claims related to the March earthquake from Japanese manufacturers who moved to Thailand to minimize disruption after the earth tremor, according to law firm Reynolds Porter Chamberlain (RPC).

“Moving production from Japan to Thailand was a ‘Plan B,'” said RPC Legal Director in Reinsurance Daniel Saville.

“The question now is whether those businesses have a ‘Plan C’.”