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Chinese Explosions Could Shape Coverage Requirements and Cost

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The August disaster in Tianjin, China, where explosions killed 150 people, injured thousands and caused billions of dollars in damage, provides an object lesson on the issue of insurance. Not only do businesses need to have both appropriate and adequate coverage, they need to be able to afford it.

In protecting their business-owning clients’ assets, advisors must consider those insurance needs, and if they have clients invested in insurers, they should keep an eye on industry changes that arise out of the disaster.

Whether it’s to cover goods destroyed at an outside facility, business interruptions due to a gap in the supply chain or possible liabilities connected with failure to research partners or vendors, your clients need to be sure that immediate losses are covered as well as possible downstream problems.

Damages from the explosion cover as broad a base as many natural disasters, but what makes the Tianjin event so significant, for both insurers and business owners, is the potential for liability issues. Amid charges of corruption, questions have arisen about how Rui Hai International Logistics handled the hazardous materials in its care.

There’s also the high cost of claims. Estimates from sources like Fitch Ratings and Credit Suisse immediately after the event put possible claims totals between $1 billion and $1.5 billion, but as more became known about the extent of the damage, reinsurer Guy Carpenter set the high end at more than double that amount: $3.3 billion.

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.”

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