Meranti a reminder of ILS potential in China, but unlikely a huge loss: RMS

Super typhoon Meranti’s impact on China today provides a timely reminder of the opportunity for the insurance-linked securities (ILS) market in China, although it is unlikely to cause any significant loss to exposed collateralised reinsurance contracts, according to Ben Brookes of RMS.

Super typhoon Meranti struck China today, although as a weakened Category 3 storm, delivering what risk modelling firm RMS termed “quite significant wind damage” as well as the more typical typhoon driven torrential rainfall, flooding and storm surge.

Super typhoon Meranti map from RMS

Robert Muir-Wood, Chief Research Officer at RMS, explained typhoon Meranti’s impacts; “Meranti, the strongest typhoon this year, has struck Taiwan and China with a triple-whammy of typhoon-related perils: a combination of wind, flood and storm surge. The storm has now moved inland and weakened, while continuing to produce high rainfall totals and flooding. We expect damage in China to be higher than Taiwan, due to the mainland’s higher concentrations of coastal exposures and population. While the storm at Cat 4 intensity skirted the southern end of Taiwan island, it made a direct hit at Cat 3 intensity on the mainland. Close to the point of landfall in the island port of Xiamen there has been quite significant wind damage, including to the windows of high rise buildings in addition to the more familiar rainfall related and storm surge flooding.

“Southeast Asia is disaster central for catastrophic events and suffers frequent typhoons, though Taiwan is generally well-equipped and prepared to deal with these storms and has good coastal defenses to mitigate against surge. Economic losses from typhoons in Taiwan tend to be limited since typhoons, including Meranti, approach from the east in this region while exposures are concentrated in the west of the island.

“For Meranti, high winds affected the port and industrial cities of in Kaohsiung and Tainan in southwest Taiwan. Here the industrial clusters are dominated by the light industrial electronic, semiconductor and the bio-tech sectors. The buildings in these sectors are generally designed to withstand typical extreme typhoon winds and from our field surveys we have found that buildings in industrial parks are sited on elevated ground to minimize flood risk, while the buildings themselves have stepped entrances, which further increases protection against flooding. While Meranti skirted past the east coast of Taiwan, early indications are that hurricane force winds toppled some cargo containers in the Kaohsiung port, while some ships have come unmoored. The industrial clusters may also have suffered peripheral impacts.

“For China the low take-up rates for wind and flood insurance will limit the insurance impacts of the storm. However, this was the strongest storm to hit Xiamen in more than sixty years and something like a ten-year return period storm for this section of the Southeast China coastline.”

Meanwhile, Ben Brookes, Vice President, capital markets at RMS, explained that the ILS market could have some exposure through collateralised property catastrophe reinsurance contracts, albeit small.

“Any ILS exposure to China Typhoon will probably be via the more global collateralised re contracts and in more diversified portfolios – but even then it’s likely to be in very small proportions so losses from Meranti are not going to be of much concern for ILS investors,” Brookes said.

The ILS market is becoming increasingly exposed to Chinese property catastrophe risks through the expansion of ILS funds participation in global reinsurance markets via collateralised products.

Additionally, some ILS investors may have low levels of exposure to Chinese catastrophe risks through ILS structures such as reinsurance sidecars, particularly those retrocessional sidecars from large global reinsurers.

Third-party and ILS capital backed retrocessional reinsurance funds could also see some slight exposure, or at least have assets at risk in China.

While any loss will be small from Meranti and the local insurance market plus global traditional reinsurance market is likely to take the bulk of the typhoon’s losses (although they won’t be huge given the low penetration of insurance still in China), such events are a reminder of the need for more disaster risk transfer in China and the opportunity for the ILS market to finance a portion of that as the market grows.

Brookes explained; “Meranti is, however, yet another reminder of the huge potential for ILS in the region. It would be relatively straightforward to put parametric protection in place for an event like this. Category 4 and 5 storms that have the potential to strike regions of high populations and exposures are exactly the type of event such protection can be designed for, particularly if issued by a state sponsor.”

Additional information on typhoon Meranti from RMS:

• Typhoon Meranti made landfall on Fujian Province, China, at around 20:00 UTC on Wednesday September 14 and is reported to be the equivalent of Category 3 strength on the Saffir-Simpson Hurricane Wind Scale (SSHWS) when it made landfall.
• Prior to making landfall on China, Meranti bypassed approximately 40 mi (65 km) southwest of Taiwan, bringing hurricane force winds to Pingtung County (pop. ~2.7m), Kaohsiung County (pop~ 2.7m), Tainan County (pop. ~1.8m) and most western parts of Taitung County (pop. ~3.5m)
• The storm caused around 650,000 power outages in Taiwan, prompted evacuations and caused disruption to transport and business, as well as toppling pylons, trees and vehicles
• Damage reports are still emerging from China, but reports indicate that streets have flooded in the city of Xiamen, 1.65 million people have lost power in Fujian Province, and tens of thousands of people have been evacuated. The city of Xiamen has a well-developed economy, including financial services and industrial zones (the latter of which are also present in Zhangzhou, slightly inland).
• Meranti is the Strongest typhoon to approach Taiwan since Typhoon Bilis in 2000. Bilis made landfall on the coast of southern Taiwan, the main area also impacted during Meranti.
• Bilis caused disruption across Taiwan, and caused approx. $186million in property damage. There were 14 fatalities and 400 homes were destroyed.
• Southern Taiwan was impacted in July by Typhoon Nepartak, but again damage was fairly limited.
• Typhoon Morakot (2009) was worst storm in Taiwan in terms of fatalities (650) and loss ($3 billion +) – no other recent events come close to these figures. Morakot was only Category 1 at landfall and most damage was due to flooding.
• There has been heavy rainfall from Meranti, but accumulations are much lower than has been historically seen in Taiwan (up to 1,600mm in 24 hours for typhoon Morakot in Pingtung county).
• During Typhoon Soudelor (2015), around 5 million households lost power – much higher than the estimated 260k for Meranti.
• China has already been affected by significant seasonal flooding earlier in the summer.
• The insured building stock in Taiwan principally consists of mid to high rise multi-family apartments, commercial buildings and industrial properties of all types. The predominant construction type of these structures is reinforced concrete with some properties made of steel and steel reinforced concrete. These structures are engineered and designed to withstand earthquake shaking as well as typhoons gusts given the proximity to active faults and its geo-location in the path of typhoons in the western Pacific. The seismic design ensures that the structure of the buildings have sufficient capacity to accommodate ground movements. This demands special attention in the design and construction and is also beneficial to wind resistance where the structural systems are unlikely to experience severe damage in a tropical cyclone. The non-structural components are also designed to withstand earthquake and wind loads to ensure that the likelihood of envelope breaching is low to avoid water ingress in moisture rich tropical cyclones.
• RMS research shows that it is generally expected that wind damage will remain confined to non-structural damage among multi-family, commercial properties while single family dwellings will suffer relatively more damage and industrial properties relatively less given their economic importance.