Thai catastrophe fund nears launch, policies could be parametric

Thailand’s new catastrophe fund, established in the wake of the catastrophic flooding the country experienced last year, is nearing launch as the Office of Insurance Commission and people responsible for the fund finalise the details  of the scheme. Thai Reinsurance Plc has been tipped to become the manager of the government sponsored cat fund, it transpires that Thai Re are the only company who expressed interest in managing the fund which will be named the Catastrophe Insurance Promotion Fund.

The 50 billion baht fund aims to improve access to disaster insurance for homeowners and businesses in the country, each home or business will have to pay an annual premium in return for which they will receive cover against flooding. The catastrophe fund in turn will tap the international reinsurance markets to underwrite itself.

The annual premium rate is expected to be between 0.5% and 1.25%, for customers from homeowners to large businesses, of the sum insured for coverage of not more than 100,000 baht. It’s said that claims will be based on the depth of flooding that impacts a property, with homeowners receiving 50,000 baht if their home is flooded by 50 centimetres of water, 75,000 baht for 75cm of flooding and 100,000 baht for one metre. For flooding of less than 30cm a flat payment of 30,000 baht will be made. There will be no deductible for homeowners but businesses will be subject to one.

So the policies promoted and sold by the catastrophe fund will be parametric or index-linked in nature but no details have emerged on the mechanism they will use for measurement of flood depth and how the policies will be assessed as to whether they have triggered or not. It would be impractical to visit every property and measure flood water depths, you could never guarantee that you saw the water at its deepest level and it’s likely that the claims process would be laborious and prone to complaints. However Thailand does not currently have an advanced river level measurement system which might offer a way to measure flood levels more accurately and without the need to visit every property to pay claims. So it seems that some kind of manual intervention would be required to assess claims. If Thailand experiences flooding of the magnitude of last years event the claims process could be extremely drawn out and difficult.

Claims process aside, it is encouraging to see the catastrophe fund attempt to use parametric or index-linked triggers for their policies as it will simplify their structure and make them easier for policy holders to understand. The Commission have discussed that once the local re/insurance industry has recovered from the recent flood events the catastrophe fund could become a microinsurance fund available only to those who can’t afford traditional coverage.

Thailand expects the catastrophe fund to grow the size of the local insurance market with total premiums in the country growing by 16%, this growth is because currently most homeowners don’t take out insurance due to cost and difficulty accessing products. The whole scheme will help to promote insurance coverage and increase insurance penetration rapidly in Thailand. This should increase the amount of premium which flows to the international reinsurance market over time and will increase the need for reinsurance cover for Thai insurers. Reports suggest the catastrophe fund could begin selling policies within two weeks.