Introduction 

Over the past decade, Asia has suffered some of the world’s worst natural catastrophes (Nat Cats). The effects of such events are devastating. The humanitarian costs can be high in terms of losses of life, communities and livelihoods. The economic costs are significant for national governments and businesses. Whilst it lies principally in the hands of national governments, NGOs and financial institutions such as the World Bank and the Asian Development Bank (ADB) to reduce the region’s vulnerability to natural hazards, businesses should learn the lessons of the past decade and ensure that they are adequately insured in the event that they sustain losses as a result of future Nat Cats. 

The Risk Is Real

In the past ten years, Asia has experienced the Indian Ocean Tsunami (2004), Cyclone Nargis (2008), the Tōhoku Earthquake (2011), the Thailand Floods (2011), and Supertyphoons Haiyan (2013) and Neoguri (July 2014). 

The Risk Is Getting Greater

Munich Re’s NatCatService 2014 notes that the average number of Nat Cat events has increased from 630 a year (over the thirty-year period between 1983 and 2012), to 920 events in 2012 and 880 events in 2013. The ADB reports that Asia Pacific bore the brunt in 2011 with a record 77% of global Nat Cat losses occurring in this region resulting in economic losses of approximately USD 260bn. 

Whilst the number of events has significantly increased over the past thirty years, the percentage of those losses which are insured has not and remains static at a global average of only 25%.

However, the news is even worse for Asia. Munich Re records that overall damage sustained in Asia in 2013 from Nat Cats topped the global charts with approximately USD 60bn of losses. North America was in second place with USD 37.5bn of losses, followed by Europe (USD 22.5bn), Australia/Oceana (USD 3.5bn) and South America and Africa (USD 1.3bn and USD 210m respectively). Whilst the losses sustained in Asia were far greater than elsewhere in the world, the percentage of those which were insured was only 5% compared with 46% in America, 41% in Europe and 54% in Australia/Oceana.

The ADB has recently referenced research undertaken by Lloyds of London which has concluded that eight of the world’s 17 most underinsured countries are in Asia. The ADB cites China as being the most underinsured Asian country in monetary terms with US$79.6 billion worth of uninsured non-life losses in 2011. The ADB tacitly calls upon the insurance market and businesses to help combat the risk of underinsurance and the potential resulting impact on Asian countries’ economic growth. 

Be Prepared

Why does this matter? Whilst businesses are powerless to prevent Nat Cats from occurring, they can prevent or minimise any future uninsured losses. 

Know What Risks Are Covered

This is self-explanatory. Given the statistics discussed above and the greater propensity for damage in this region, it is important that businesses should purchase adequate cover in respect of all perils which could occur as a result of likely Nat Cats in the countries in which they operate. 

Know What You Are Insuring

Insurance policies insure a policyholder’s financial interest in its assets. The level of cover and the premium are set according to an Insured’s declared value of that interest. Therefore, it is imperative that an Insured knows at the inception of the policy the true value of its financial interest. Any under declaration may result in future loss settlement being reduced. The importance is highlighted by the following example. At the inception of its policy, an Insured declares the total value of its property as UD 100. The Insured sustains non-life losses amounting to UD 50. Insurers, as part of the loss adjustment process, will assess the total current value of the Insured’s property, regardless of whether all of that property is damaged and forms part of the claim. Insurers assess the true value of that property at UD 150. The Insured is therefore uninsured by 33.33% (declared value of USD 100 divided by the true current value of UD 150 multiplied by 100). Accordingly, in most jurisdictions (New Zealand being the notable exception in this region) the Insured is held to have self-insured 33% of its losses and Insurers will make a settlement payment of USD 33.33 against an adjusted loss of USD 50, leaving the Insured with a shortfall of USD 16.66. 

Understand The Basis Of Your Indemnity 

As at what date should insured property be valued? This depends upon the level of cover, which can be purchased on either an ‘indemnity’ or ‘replacement’ basis. The former will provide an Insured in the event of a loss with a settlement equal to the value of its damaged property as at the date of that loss. Subject to any particular policy wording, this is calculated as the cost as at the date of the inception of the policy of a new equivalent asset less: (i) betterment in respect of the equivalent asset; and (ii) depreciation in respect of the damaged asset.

Subject to particular policy wording, cover on a replacement basis will provide an Insured in the event of a loss with a settlement equal to the value of the cost of: (i) repair; and/or (ii) new assets equivalent to those which were destroyed less any betterment. If insuring on a replacement value basis, an Insured must assess and declare the expected value of its property as at the date of replacement, the date of which is unknown at the inception of the policy. Insureds could consider assessing the expected value of their property as at a date, for example, of six months to one year after the expiration of the policy on the basis that damage could occur on the final day of the policy and replacement may not be effected until such future date. To better assess the expected long-stop date of any potential replacement, businesses should consider the potential lead-in times for new replacement assets and the quantity and quality of contractors who would be able to undertake repair or replacement in the event of damage. 

Consider Special Clauses 

Underinsurance can be prevented by correctly valuing the insured property in accordance with policy cover at each policy renewal and not just at the first time the policy is underwritten. This should result in the correct level of cover and premium. Businesses could also consider the purchase of additional cover which would have the effect of ignoring a specified percentage of any underinsurance, for example, the first 20%. 

If policies include business interruption cover, it is likely that an Insured will be obliged to provide to Insurers its audited accounts for the period of insurance within, say, six months of the end of the policy period. This often entitles, subject to policy wording, Insurers to readjust the value of the financial interest insured and increase or decrease the premium payable. Insureds should note any premium adjustment clause(s) in their policies and seek professional advice if their obligations are unclear. 

Summary

Careful consideration of your business’ risks, possibly in multiple countries each at risk of different potential Nat Cat events, should be evaluated at each and every policy renewal. An understanding of these risks and the correct declared financial interest which you are seeking to protect should alleviate the possibility of any underinsurance and provide appropriate cover should the unfortunate occur. 

Your insurance broker would be able to advise on applicable policy wordings and recommend specialist valuation companies to assess in accordance with policy cover the value of the property to be insured.

Justyn Jagger, Director, Stamford Law
[email protected]

Nicholas Sykes, Director, Stamford Law
[email protected]