Thailand’s regulator the Office of Insurance Commission has announced that they are working with members of the re/insurance industry to establish a catastrophe fund which aims to bring more affordable natural catastrophe insurance coverage to households and businesses in the country. The need for a catastrophe fund has been raised since the extreme flood event at the end of 2011 which has resulted in multi-billion dollar losses but also raised the awareness that coverage needs to be more widely available.
The Commission is working with the General Insurance Association to devise a structure for the catastrophe fund that best suits the unique exposures and demographics within the country. This will not be easy given the differing risk profiles in the regions within the country, for example the north is far more exposed to the severe flooding events than the southern states of Thailand. Meetings between the Commission and re/insurers discussed the principle, purpose and structure of the fund as well as how zoning can be used to make coverage accessible to all.
The Commission aims to launch the Thailand catastrophe fund with an initial size of 50 billion baht (approximately $1.57 billion). The fund will provide cover for the three main natural catastrophes to which Thailand is exposed, floods, wind storms and earthquakes. Cover will be available to households, businesses and the industrial factory complexes which were so hard hit in the recent flood event.
Sub limits are being set for each type of target policyholder and the catastrophe fund is being structured using a tiered approach that will see insurance companies liable for the first 2 billion baht of catastrophe losses, the catastrophe fund will step in for losses between 2 billion and 30 billion baht while for losses above that (and according to the Commission up to a limit of 500 billion baht which is over $15 billion) the catastrophe fund will seek reinsurance in the global reinsurance markets.
The catastrophe fund may struggle to secure that level of reinsurance coverage in the current market at a reasonable cost as rates for Thai exposures have risen after the floods. This may lead the Commission to explore the use of the alternative risk transfer and capital markets to provide this funding either through some sort of risk pooling or even instruments such as catastrophe bonds.
If successful this catastrophe fund initiative will eventually result in a much larger amount of Thai catastrophe risk being ceded into the reinsurance markets, as it helps to raise insurance penetration in the country, than before which could bring new opportunities to reinsurers.