INSURANCE & REINSURANCE Of FLOODS/STORMS As ACT OF GOD PERILS

 Introduction

Acts of God perils or Natural Catastrophe perils are ‘Insurable’ so far as they are “Reinsurable”. The incidences of increasing frequencies and severity of events of losses caused by Acts of God perils draw attention of all concerned in insurance and reinsurance industries world over. Let us relook at the analytical impacts of Acts of God perils whose events are defined by “Hours clauses” invented by  Mr. R.J.Kiln in the London hub of Global Markets.

 

(A) Natural CATA Perils are SEISMIC-N-STIF

Seismic Perils are caused by geological factors. They are mainly of following types:

 Volcanic Eruptions with Ash clouds, oozing out lava etc.

 Land Slides – Snow slides etc

 Seaquakes i.e. earthquakes in the sea-bed and incidence of Tsunamis

 Earthquakes on the surface of the earth which are measured by Richter Scale for Magnitude and by Modified Mercalli Scale for intensity.

 

As a result of earthquakes, seaquakes and tsunamis in a few moments vast scale of devastation is caused by destroying risks of property and lives of millions.

 

STIF Perils are weather related perils with greater climatic changes increasing frequency and severity of claims almost everywhere. However the continent of Africa has exposures of both kinds but experience is very positive. These perils are: Storm, Typhoon, Inundation and Floods, bushfire/ forest fire etc.

 

The incidence of floods is inclusive of water logging or inundation. Floods also occur along with storm, hurricane etc. However, velocity of winds and damage to properties are measured by Beaufort Scale and Saffir Simpson Scale to illustrate categories I to V of storms / hurricane as under.

 

Rainstorms and windstorms bring along floods and are measured by Beaufort Scale for velocity of winds and Saffir Simpson Scale which indicates damages to property according to categories as under:

 

Beaufort Scale:

This scare is used to define storms, Hurricanes and Tornado, Typhoons and Cyclones through Velocity of Winds Kms per Hour:

 

CategoryTypeVelocity of Winds

                               In Kms per hour

I Gale50-74

II Strong Gale75-88

III Storm89-102

IV Violent Storm103-117

V Hurricanes

 Tornados118 and more

 

Saffir Simpson Scale :

This scale rates damaging power of Hurricanes hitting coastal towns/cities.

CategoryWind speedDamage

In Km per hour

I 119-153Trees, Mobile homes, and unanchored  structure.

II 154-177Light coastal flooding with damage of roofs, trees fall down

III 178-209 Flooding, Inland,  Extensive damage increases in flooded areas

IV 210-249 Extensive damage to  buildings. Flooding  increases

V More than 249 Many buildings flattened by winds and lower floors flooded.

 

 Hurricane RITA (26.7.2005) was category V but reduced later for $ 45 billion insured losses.

 

 Hurricane KATRINA (26.7.2005) was category III- IV for $ 48 billion insured loss.

 

Losses were minimised as all On-Shore drilling rigs in the Gulf of Mexico were switched off as a precaution by prediction of speed and routes of both the hurricanes.

 

(B) CAT Events of Storms/Floods

 The years 2011-13 is the worst period of storm – floods – inundation – rainstorms and all of these to be exactly expressed as deluge i.e., Tsunamis of Japan, Thailand floods, Uttarkhand floods in India , floods in Canada, USA, China, Philippines etc are worth studying to assess the damaging impacts of all these resulting into floods!

 

 Now Global Reinsurers insist to have capping of Any one Event limits and/or in Annual aggregates i.e., all proportional treaties with Hours clause to define events and monetary limits as capping of limits. Any spill over of actual loss falls back on the Net A/c of the ceding company outside the Net A/c XL Treaty with Net Retained lines clause. The net retained lines clause excludes such spill over.

 

 Global Reinsurers also prefer insurance companies to switchover from Proportional to Non-Proportional Treaties as they can quote Reinsurance premiums of XL treaties with reinstatement premiums after a loss.

 

 Sometimes specific Proportional Treaties are created to protect natural CAT perils which are excluded in the main Proportional Treaty. This is very practical solution!

 

 Hurricanes causing floods or rainstorms causing floods are given names in Global Reinsurance. Hurricanes in the Pacific are given feminine names like Hurricane Betsy, Tracy, Rita, Katrina Wilma etc. Hurricanes in North Atlantic are given masculine names such as hurricanes Fedric, David, Andrew etc.

 

 The circum Pacific belt countries are very much prone to the seismic as well as STIF perils and frequency with severity of such events of losses in phenomena in this region.

 

 However except earthquakes and volcanic eruptions all other Acts of God Perils are predictable minimising loss of lives but loss of properties remains very high!

 

 Hurricane Betsy occurred in 1965 and a specific underwriting consideration of dwelling risks was a lesson learnt from the CAT losses. In that year Global non-life premium was $36.65 billion. Today in 2012 it is $ 4600 billion. 

 

(C) Are Natural Cata Perils Insurable?

wNatural CAT Perils are seemingly uninsurable because Law of Average does not apply when natural CAT losses occur. However, reinsurance makes these perils insurable!

 

In the case of Flood losses, following lessons are learnt:

 In 2004 during such period of consecutive 168 hours, floods occurred in Gujarat, Orissa and Maharashtra. The 168 hours clause applied on all the three regions affected by the floods as one event of flood loss.

 

In the recent past i.e. second half of September 2013 severe floods occurred in various parts of South Gujarat as well as Saurashtra in Gujarat. Are these to be taken as one event of loss from each 168 consecutive hours phase? The answer seems to be ‘Yes’

 

In Thailand since July 2011 water logging or inundation continued for more than two months with almost 14 to 15 events of floods each for seven days or 168 consecutive hours.

 

But CAT XL Treaties do not provide for more than one reinstatement value. Hence then there were many events when XL treaty had become ‘dead’.

 

Looking at inadequacy of 168 consecutive hours i.e. seven days there was a move to make 504 consecutive hours or 21 days as one event of floods when large part of country is impacted by floods. However this is not implemented so far.

 

Water logging in various parts of Bangkok also caused inaccessibility for workers to go to the factories and also the owners could do nothing. Hence then more losses i.e. ‘Loss of Profit’ due to inaccessibility!

 

However Global Reinsurance remained flexible and not ‘rigid’ to deal with handling such claims!

 

Thailand was considered as natural cata-free country and hence there was an almost unknown-uncontrolled and unlimited accumulation for all reinsurers

 

The Japanese Tsunamis of 11th March 2011 caused floods which wiped out factories, parks and homes. Tsunamis caused flood losses and tsunamis were caused by Seaquake! Out of $ 309 BLNS, $ 35 BLN was the Insured loss of Japanese market. Nuclear power plant of Fukusima Daichi was also damaged with radioactive impacts on lives, eatables, sea-water, supplies of daily necessities etc. However, the deluge of tsunamis is horrifying to watch on T.V footages!

 

In case of Uttarakhand FLOODS uninsured losses are more than 85%. Out of 15% some power plants losses are of  a few billions of Rs.! However, the power plants policies do not cover accumulated debris making power plant inoperative! Only damage to dams is covered and there is no such cause of power plant losses!

 

Sometimes a wrong move to exclude flood coverages creates a situation of retained losses. Reliance Petrochemical of Patalganga project had excluded flood cover from insurance policies in 1998 and July rains and floods caused losses of more than Rs. 600 millions. Floods were covered in reinsurance but flood was excluded in insurance. Hence, reinsurers “follow the fortune”. High tide in nearby Panvel creek, non-stop rains for 7 days and Patalganga rivulet became a source of floods as overflowing and enlarged river! Soon after this event flood cover was provided and so far there is no flood in the area upto 2013. 

 

Essentially flood cover in insurance and reinsurance is a necessity where no compromise is to be made.

 

Acts of God Perils cause large losses and reinsurance of these perils is becoming restrictive as well as prohibitive.

 

Conclusion

Hope For The Best

But Be Prepared For The Worst !

 

Think of Insurance and Reinsurance as Disaster management solutions with loss minimisation and /or prevention techniques.

 

As due to climatic changes floods are increasing both in frequencies and severities, the flood covers become difficult for insurers who suffer. There is a school of thought who suggests protection of properties and people against floods as a responsibility of State Governments and not of Insurance Industry. 

 

Creating of a Market pool for Act of God Perils and protecting the Pool by XL Reinsurance seems to be the best way out!

 

We live in a world where Philosophy and Morality are replaced by Politics! Let Polity cover Natural catastrophes or let the Government undertake Disaster Management to prevent Management Disaster in the face of the fury of Storms/ floods by nature.

 

Acts of God Perils are a lesser threat in the face of Terrorism as Acts of Men Perils. By far 11th September 2001 WTC Attack losses of New York remain the highest insured losses of US $ 82.50 BLNs plus US $ 6 BLNs for Health Hazards of workers clearing debris on the Ground Zero! Men destroy intelligently  and mercilessly!

 

Nature is considerate in  destruction and creative also in destruction. Sweet Water Pools were formed in the desert of Kutch after Bhuj Earthquake of 26th January 2001. After big Earthquake in Pakistan in the last week of September 2013 an island has emerged out of the Arabian Sea on Karachi coast!

 

The incidence in Thailand and Uttarkhand is really speaking deluge or horrifying magnitude of sweeping floods! Deluge is becoming not insurable or reinsurable in future!

 

Reinsurers and Insurers have to reconcile with realities and become restrictive as well as prohibitive while granting the Cover!

 

Such analytical studies are essential for everyone in Insurance and Reinsurance. It educates everyone and education is progressive discovery of our own ignorance in the past. Let us ‘ Learn from Yesterday, Live for Today and Hope for Tomorrow’.

 

Author-K. L. Naik