Chinese Explosions Could Shape Coverage Requirements and Cost

In a statement, James Nash, CEO of Asia Pacific Operations for Guy Carpenter, said of the disaster, “The explosions that occurred in Tianjin, China are likely to constitute one of the largest insured man-made losses to date in Asia and will certainly be considered one of the most complex insurance and reinsurance losses in recent history.”

This single disaster took many lives and caused numerous injuries, not just in the Tianjin business district but also in residential areas. It also affected shipping companies, both on land and at sea; container companies; manufacturers with facilities in and near the port; rail facilities and roads; logistics firms; private individuals and property owners; and businesses across the globe who may have ordered or shipped goods that had the misfortune to be stored at or passing through Tianjin at the time of the event.

While it’s expected that compensation for the various losses will be spread among insurers and reinsurers, it’s also expected that rates will rise for coverage. Jeff Yeung, associate director of analytics at A.M. Best Asia-Pacific Ltd., said in an email that A.M. Best expects some increase in premium rates for large commercial risks, but that they “are unlikely to be substantial.” He added that “some reinsurers may tighten their underwriting for large commercial risks in China, and part of the increased reinsurance cost will be transferred to policyholders.”

In addition, many companies will not have enough coverage in place for, say, business interruption. Something as simple as a shipment of goods scheduled to come through Tianjin for delivery in time for the Christmas shopping season may be affected by the blasts, whether because the goods themselves were destroyed or because the shipment must be rerouted via a longer or slower route.

A.M. Best’s Yeung said: “A.M. Best believes the industry needs to look for tougher safety standards and increased inspection requirements going forward. The Tianjin warehouse explosions come less than two years after the SK Hynix’s semiconductor factory fire disaster […]. These incidents demonstrate that insurance should not be treated as just a risk transfer tool, but also an important risk management tool, especially for fast developing economies like China. Professional insurers and reinsurers for large commercial risks can provide risk management advice, for example, with the identification of risk exposures or potential hazards, loss mitigation or loss prevention measures that will, in turn, help to reduce potential insured and economic loss.”