Tianjin Blast Could Be Largest Marine Insurance Loss Ever
Claims related to the massive explosion at the port of Tianjin, China may grow to as much as $6 billion, says the International Union of Marine Insurance (IUMI). More than half of the claims reportedly fall within marine insurance or reinsurance lines – potentially making it the largest single marine disaster (by claim value) in history, surpassing Hurricane Sandy.
Initial cost estimates for insurance industry exposure were in the range of $1.5 to $3.3 billion, significantly less than the present forecasts. The cost creep is due to increased value estimates of affected assets, plus contamination and cleanup-related expenses that were not included in earlier tallies.
The exact cost of contamination has been difficult for adjusters to estimate. Access to the blast area has been restricted, and experts said that even outside of the immediate radius, chemicals released in the explosion may cause corrosion damage to an as-yet unknown total number of vehicles. An IUMI member at a recent panel reportedly suggested that as many as 70,000 cars could have been affected by the blast and its fallout. The initial estimate from Lloyd's was in the range of 10,000.
Additionally, the U.S. Food and Drug Administration (FDA) said in September that it was stepping up inspection of food, drugs and medical equipment shipped from Tianjin after the time of the blast. “Marine surveyors appointed by clients are stating that containerized goods from Tianjin are arriving at final destinations with tainted smells,” Nick Derrick, chairman of the IUMI’s cargo committee, told media. He said that the impact of dangerous chemicals would “add to the final loss figure.”
Whatever the final value, multiple classes of insurers are sure to be affected. “The very large losses will come out of the big Chinese commercial insurers, the second tier will come out of the Korean and Japanese interests abroad, and then losses will come out of the international commercial insurers who have insured the port facilities and physical property,” said John Butler, managing partner at specialist insurance fund manager Twelve Capital, speaking to Reuters.
Validus Holdings Chairman and Chief Executive Officer Ed Noonan blamed the marine insurance industry itself for underestimating the potential for losses from a port event like Tianjin. In statements last year, he said that after $3 billion in losses from Hurricane Sandy, it was “unacceptable” that the industry had not improved its modelling of risk in complex, ever-changing port environments – leaving insurers without the analytical tools to anticipate and price in a major catastrophe.
Chris Folkman, director of model product management for RMS, suggests that ports differ dramatically from other commercial installations for risk modelling, for several reasons: their insurable content (cargo) is mobile and changeable; cargo varies greatly in its resistance to damaging events like high wind or fire; and unlike a warehouse facility or factory, a port often sprawls for miles, with docks and storage facilities adjacent to multiple communities.
IUMI President Dieter Berg addressed the issue of risk accumulation at ports in statements last year. “[Tianjin] demonstrates the persistent growth of accumulation of values in port and storage areas, particularly in highly industrialized regions . . . To evaluate worst case scenarios we need to fully understand the value of the goods in the port and all potential exposures before we can calculate adequate premiums. This is becoming more of a challenge as these facilities continue to expand.”