Chris Dineen, a partner with the consultant Dempsey Partners, traveled to Thailand last year to assess the damage to factories in the wake of a particularly severe monsoon season. Damage from flooding alone has been estimated at more than $15 billion. Damage related to business interruption practically assures that damages will rise even higher. In January, Risk & Insurance®
Managing Editor Cyril Tuohy emailed Dineen questions about his visit, and what he saw.
Q: What do you consider the most complex claims coming out of Thailand? (Property, business interruption, contingent business interruption?)
A: All of the above. Property damage has been challenging, especially at larger plants. With extensive flooding, virtually everything is in the water or underwater. You need a detailed list of all items damaged or destroyed. A fixed asset register generally includes only larger items. It's hard to get replacements in a timely manner, sometimes involving a 16 to 24 week lead time. When a plant is down for six to eight months it causes a wide range of problems.
Business interruption has unique issues, including the need to shift production from Thailand to another location, such as China, Japan or the U.S. There's freighting by air or boat. Complex cost calculations are needed for parts made in Thailand compared with those made elsewhere to mitigate the loss.
With contingent business interruption, some issues are outside the insured's control. When the damage is not to your facility, such as at a supplier or customer's site, you may not have access to the information needed for the insurer to verify the loss. And you may not know how long it will take the supplier or customer to resume operations.
Q: Which industries hit hardest by the Thailand floods have reported the most claims?
A: The industries hardest hit are electronics, technology and automotive. With 30,000 parts going into each automobile it's difficult to make sure every individual supplier is back on line. They use just-in-time inventory systems, so an outage can have an immediate and significant impact on production, revenue and earnings. The electronic and computer industries may have less tightly coordinated supply chains. However, with nearly 50 percent of all hard drives made in Thailand, shortages abound.
Q: How quickly are most of these claims being adjudicated?
A: Most damaged plants were inaccessible for six weeks ? from mid-October to early December.Since early December, scores of adjusters have been in Thailand. They typically visit insureds to check that they're moving in the right direction, and follow up frequently. Insureds seeking advance payments have challenges with the processes of local insurers.
Q: What are the "pain points" you are finding with such claims?
A: One pain point is the ability to coordinate among the different entities. Many U.S. firms have a local policy, a local adjuster, a local insurer, and in all likelihood, a local broker. They also have a U.S. policy with a different insurer, different set of adjusters, and so on. They have local management and U.S. management.
A second pain point involves communication.Keeping everyone informed of what's going on is critical, but challenging. If local plant management and the local adjuster come to an agreement, there may be conflicts with the U.S. master policy which might reduce the ultimate payout. Thus, the master policy adjuster must be brought in at an early stage and be part of all decisions.
A third pain point is advance payments. Many Thai insurers first have to collect from reinsurers to make advance payments, slowing the process.
Finally, insurers and their consultants can be a pain point. With so many complex claims, the adjuster who starts the claim may be reassigned and not complete it. And consultants brought in by insurers are reviewing hundreds of files. So, getting timely responses is difficult.
Q: Who exactly is examining the damage to the property hit by the flooding? Forensic accountants? Claims adjusters? Risk managers? Brokers?
A: Ultimately, it's a collective effort. There's the forensic accountant working for the insured. The claims adjuster pulls everything together from the insurer's perspective. The adjuster might identify damaged items and the insurer's forensic accountants confirm the quality or price. The insurer might use a salvage company, which may assist with the quantification. Meanwhile, claims preparers are helping assess property damages to determine what has and hasn't been officially accepted as the damage. Getting everyone to agree before damaged items are discarded is key. Afterward, it's too late.
Q: What has the industry learned about claims and the claims process since the flooding hit Thailand?
A: In a large-scale catastrophe, it's not business as usual. Local brokers, adjusters, and experts hired locally are accustomed to doing things a certain way. Yet, in a major disaster, you lose the ability to stay local. Experts come in from overseas. A local adjuster kept pushing for salvage of the insured's product and finished goods. However, the U.S. master policy had a "Control of Damaged Merchandise" clause. In effect, the local team was adjusting for one policy without realizing that a second policy sitting above it should dictate how to adjust the claim.
Q: What has the industry learned about corporate risk management since the flooding hit Thailand?
A: This illustrates the value of an effective risk manager in achieving a corporation's overall goals. The risk manager who purchased that master policy for the firm's Thailand locations ultimately may have saved the corporation; many underlying policies likely were underinsured. In the aftermath of the flooding, the ability of a company to manufacture in Thailand at lower labor rates and manufacturing costs may appear attractive. But if you can't insure that facility for flood or another peril, then it's an entirely different ballgame from a risk-reward perspective.
Q: Are there any similarities or differences between the kinds of claims you've been getting from Thailand and those that have come in from Japan?
A: Japan had more numerous coverage concerns with nuclear exclusions, flood and earthquake perils, and supply chain issues. Early on, insurers and their consultants approached claims in Japan cautiously, seeking to identify coverages available to an organization before doing more detailed claim valuations. In Thailand, everything began with the flood peril. From there, you had direct physical damage, contingent business interruption and supply chain issues. The peril, the proximate cause, wasn't an issue in Thailand as it was in Japan.
Q: When the damage hit, were companies prepared enough to respond? Or were they caught off-guard? If so, why?
A: The floods started in August in the Chiang Mai area in Northern Thailand. There was plenty of notice before the flooding spread across the country. Businesses had time to prepare, but there wasn't much they could do. You could save some parts and finished goods by moving them above the projected water. However, most people were caught off-guard during the six weeks of flooding when buildings were inaccessible.
Q: Are local insurance carriers bearing the brunt of the claims, as they did with the Japan tsunami, or are global U.S. and Europe-based underwriters mostly on the hook?
A: There are more global and European underwriters on the hook, along with a significant number of Japanese underwriters operating in Thailand. In Thailand, underlying coverages had sublimits, so there are more issues affecting U.S. and global underwriters.
Q: It's my understanding that some companies hit by the flooding have decided not to rebuild. Where have they moved their operations ? within other areas of Thailand or outside of the country?
A: Some companies won't rebuild on the same site, and are moving operations to China, Vietnam, or other areas in Thailand. A big issue is the availability of flood insurance in Thailand. Lack of coverage will affect the ability to rebuild. If businesses can repair and get back into production in the short term, they will. Long-term, they will examine alternatives.
Q: Is there anything you might like to add to shed light on what the industry has learned with regard to claims coming out of Thailand?
A: Thailand still poses myriad issues. There is the question of whether there is a FIRM (Flood Insurance Rate Map) or the equivalent of FEMA in Thailand. Can private enterprise step in and produce a flood map for Thailand or evaluate the flood zone? Is there a way to prevent this type of event from happening again?
Having a master policy with known wordings and understanding is vital. Locally, in Thailand, there was a tendency to be underinsured. And there are the nuances of adjusting claims in Thailand if you have a global or DIC policy to address local underinsurance issues.
Finally, supply chain looms large. Even if insurance is available for Thailand flooding, costs will be high. Effective quantification of supply chain risks is critical. You can't afford to be under- or over-insured.
CHRIS DINEEN, a partner of Dempsey Partners, has spent several months in Thailand managing claims for a dozen large corporations. He is based in the firm's Chicago office.
March 1, 2012
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