Insurance: Transparency for risk assessment

Insurance: Transparency for risk assessment


One of the many lessons learned from the devastating Thai floods, was that the growth of emerging Asia brings additional exposures that were not sufficiently identified or analysed

Asia is developing rapidly, generating new exposures and more complex and higher-value risk scenarios. The 2011 floods in Thailand specifically was a wake-up call to the huge concentrations of values that have grown in Asia in recent decades. The scale of losses suffered by the insurance industry from the floods has raised awareness of the potential for similar losses elsewhere in the region. Unless insurers and reinsurers can track and assess these new exposures, they will continue to take risks onto their balance sheets which can cause shock losses.

The need for transparency has become clear, and the market is seeking more detailed data on which to base their underwriting decisions. Risk transparency, including geo-referenced locations of the risks, occupancies, business interruption plans and more, is therefore becoming more important. It is vital that all stakeholders along the insurance value chain ensure that exposures are assessed and managed professionally. This starts with physical risk mitigation, avoidance of underinsurance, adequate product design and pricing, and extends all the way to the government’s important role in the regulation of these perils to the economy. With the changing dynamics of risks, we have seen contingent business interruption (CBI) exposure around the world — originating from Asia. And after Thailand and Japan, many insurers and reinsurers have revised terms to limit exposure to contingent business interruption in supply chains.

Transparency of risk-exposed values is key
The Asian region is extremely prone to natural disasters. In the last 32 years alone, 42% of the global economic losses and 14% of insured losses were generated here. Weather-related catastrophes in Asia have more than tripled over the last 30 years.

Transparency regarding risk-exposed values is key for the future. In the past, the models underestimated loss potential, especially from Thailand, which created significant accumulation of losses from domestic business and from overseas cedants’ “interests abroad“.

Key industries with CBI exposure were affected, and the market was surprised by the clustering, ie the unidentified concentration of insured values in highly exposed regions. There was a deficiency of knowledge of the fastgrowing hot spots, like large industrial parks or development zones.

Clusters of industrial exposures
Some of the biggest recent losses occurred in the industrial parks which have materialised within the region over the last decade or so. These industrial parks contain many multinational companies, with a high number originating from the automobile and electronics industry. Such industrial exposures are “clustered” together side by side, generating billions of dollars of values within a small geographical area. The industry needs to better understand the issues:

  • Lack of clarity with regard to risk locations and their interdependency;
  • Value concentrations, especially in emerging markets,triggering new/unk nown exposures;
  • Identifying increased v ulnerability in supply chains;
  • Increasing losses from natural catastrophes;
  • Demands from regulators for increased risk transparency.

With the RiskMapper tool, risk managers can monitor, identify and assess their own exposures and protect their business against such shock losses as witnessed within the region.

Tool to identify ”hot spots”
Facultative and treaty exposures can be uploaded onto an interactive, flex ible and easyto-handle Web-based application, which allows the user to search and track key risk exposures as well as identify peak exposure concentrations or hot spots.

The tool contains many features to allow underwriters to search their data and display the results. Real-time results are possible using the geocoding of data, and spatial analyses such as surface profiles and area calculations can be made. This includes the distance of industrial parks to rivers or the ocean, the level of elevation of the specific site, critical infrastructures like nuclear power plants or dams, and business-relevant industries like semiconductors or automotive industries. To identify the extent to which the population may be affected by a catastrophe, a circle-based function calculates the number of people within a defined radius .

At the click of a button, a portfolio can be displayed down to street level, should such granularity be required. Event footprints and real-time catastrophes can be overlaid and assessed for a tailor-made analysis of the exposures. Munich Re’s global NATHAN natural hazard maps are also fully integrated.

Over 1,100 industrial parks or locations have already been identified in Asia, where the initial phase of the RiskMapper analysis is concentrated. The project is currently being expanded to cover other relevant markets.

Greater transparency is crucial
One of the main lessons learned from the 2011 Thai floods was the need for greater transparency. The output of this risk assessment tool can be used to make transparent and holistic decisions. The exposure accumulation analysis results in improved confidence in the primary insurer’s day-to-day underwriting decisions. In addition,the output can be taken into consideration in the pricing process.

Obtaining the necessary transparency is crucial to adequately assess the exposures in the models. Only then can a risk-commensurate price be determined. The more the transparency, the easier it is to acquire large (international) capacity. Continued cooperation between reinsurer, primary insurer and other stakeholders will be vital for assessing exposure for any given risk.