The warehouse explosions at the Chinese port of Tianjin on 12 August 2015 caused severe losses due in large part to risk accumulation. A tragedy with a death toll of 173 and injuring hundreds of others, the Chinese authorities said 304 buildings, over 12,000 vehicles and 7,500 containers were destroyed. As the insurance community gathers in Singapore for the Global Insurance Forum this month, we review what the lessons are for the industry from the disaster.
Provisional data from a recent Swiss Re sigma study showed that Tianjin’s losses could fall within the US$2.5-$3.5 billion range, while the International Union of Marine Insurance has estimated that insured losses could go up to $6 billion. Allianz Global Corporate & Specialty (AGCS)’s Safety & Shipping Review 2016 states that as of end 2015, confirmed industry losses were approximately $2 billion.
While claims processes are still ongoing and some insurers we spoke to are still not able to provide comments, what is certain is that the disaster is the costliest man-made event ever in Asia. The sigma study noted the sheer number of new vehicles damaged in the vicinity turned simple coverage issues into “one of the biggest challenges that the insurance industry has ever faced”.
Ports and container ships are getting bigger
One key point to note is that ports are getting larger to accommodate increased volume of cargo and vessels. There are over 4,000 shipping and container ports worldwide, of which 40% are in Asia.
Tianjin, the world’s third largest in terms of cargo volume, has an industrial and petrochemicals complex covering about 115 km2. In addition, container ships are getting bigger too. The world’s largest container ship, MSC Oscar, built in 2015, holds over 19,000 containers – in comparison, container ships 50 years ago held below 1,000.
With greater transport and trade among regions, one can imagine today the incredible concentrations of value in a major port with an attached infrastructure hub.
The need to improve understanding of risk accumulations
Mr Clarence Wong, Chief Economist of Swiss Re, whose reinsurance losses from the disaster were about $235 million, said the industry is well aware of the potential for large losses due to risk accumulation, but Tianjin has shown the need for more risk mapping in cargo aggregation points to better understand exposure accumulation.
“CAT modelling has traditionally focused on static risks, such as buildings and infrastructure including those within ports. Modelling mobile risks such as ships and cargo, and how risks accumulate in distribution centres has always been a challenge,” said Mr Wong. “Accumulation management for cargo usually involves coding the exposure as warehouse content using fixed location data. However ports are large and fragmented…Proper cargo modelling must correctly account for the geographic distribution of exposure. Advanced methods are required to address the complexity of these distributions.”
Dr Joachim ten Eicken, Board Member of HDI Global SE added that accumulation control must be channelled consistently into underwriting decisions.
“Indicators like annual turnover in terminals, average turnaround times and market share of an insurer can be obtained…this enables risk scenarios to be calculated in the relevant area and accumulations to be identified. At HDI, we use our ARGOS (Accumulation Risk Geospatial Online System) system in order to identify accumulations, particularly at infrastructure hotspots,” he said. Talanx Group, which is HDI Global SE’s parent company, suffered losses of about EUR154 million (US$174 million) in the disaster.
Infrastructure operators and governments need to improve risk management
Public sentiment about the tragedy, not limited to the industry, was that more robust checks by infrastructure operators could have improved safety. Dr ten Eicken also noted that this is not within the remit of insurers but “rather, they are the responsibility of the government agencies”.
He gave the example for problems such as incorrectly declared goods. “This incorrect declaration makes dealing with hazardous goods much more difficult. It also acts as an obstacle to risk prevention related to safety.” He added that this, even in the presence of more data, could lead to recurrent blind spots for safety issues and cause existing risk models to be inapplicable.
One wonders if the industry could play at least an advocacy or support role. In a recent address made at a conference of the Pan-Asia Risk and Insurance Management Association (PARIMA), Chairman Franck Baron said Tianjin had spotlighted the need for risk management by public authorities in the region.
One observation was that of the 173 deaths, most were first-responder firefighters ill-equipped to deal with the chemical fire. He proposed stronger enforcement of safety and regulations and a risk manager, or at least a risk management programme for regional authorities. The risk and insurance community could support these efforts, he said.
Business interruption and supply chain claims on the rise
According to Mr Damien Pang, Head of Short-Tail Claims at AGCS Asia, Tianjin is a sign of how the erstwhile benign claims environment in Asia is coming to an end – this can be attributed to the migration of manufacturing and outsourced services to China, India and high-growth markets in Southeast Asia.
He warned that with the increasing concentration of production sites and logistics hubs in exposed areas, the disruptive effects of a disaster like Tianjin can quickly multiply, resulting in contingent business interruption losses worldwide. The industry has room for further improvement in business interruption (BI) and supply chain risk management, even though it is rapidly maturing in Asia.
In the 2013 SK Hynix factory explosion and fire in Wuxi, China, supply chain disruptions played a part in the $1.3 billion loss. The cost of the claim reflected the time and expenses for specialists to restore the clean rooms needed to produce semi-conductors as well as contingent business interruption losses suffered by many electronic equipment manufacturers in North America.
“The increasing interconnectivity of global supply chains drives business interruption risk and losses. As production continues to shift to Asia, so have large claims,” said Mr Pang, noting that the increasing BI claims are more from human error or technical failure rather than from Nat CATs.
“The rise of interdependencies have resulted in the vast majority of claims coming from companies located elsewhere, and were not directly impacted by the disaster but their manufacturing was affected by the damages to their suppliers through the event.”
He added that companies should increase their supply chains’ resilience by mapping them, identifying critical suppliers and their locations, get back-up suppliers and increase stocks. These “redundancies”, once considered “cost-blocks”, are now instead viewed as investments in reliability and safety.
New technologies are valuable tools
The Tianjin disaster was also a consummate example of drone use by insurers. According to Chinese insurer Ping An, it set up an emergency response mechanism right after the explosion, deploying staff from neighbouring provinces, including claims assessment experts who were on call to support its Tianjin branch.
Having launched a “Fast Claim Channel”, Ping An Property & Casualty leveraged unmanned aerial vehicles (UAVs) to overcome the investigation challenges posed by the large explosion area and severe site contamination to settle the first claim in a week, from filing to settlement.
PICC, another Chinese insurer, also turned to drones to analyse the damages. With satellite photographs of the site taken before the blast and images later taken by drones after the explosion, it was able to determine how many vehicles had been destroyed and the losses for German automaker Volkswagen.
Deputy general manager of PICC Property and Casualty Lin Changqing told Reuters that with the government maintaining an exclusion zone around the site, an accurate loss assessment would have been “mission impossible” without UAVs.
Mr Wong said that not only can aerial and digital technologies be used, expensive goods and cargo containers can also be equipped with active sensors could track exposure. In addition, Big Data and smart analytics could make marine data more accessible, enabling better assessment of cargo risk accumulations and create greater scope for modelling.
They can also be used to build a knowledge profile of an area or specific property, including proximity to Nat CAT risks. “The shipping industry and insurers should use the Tianjin experience as an opportunity to promote more robust understanding of how exposures accumulate and how to manage these exposures and risks using technology,” he said.
After Tianjin, what then?
Over the past year, the insurance market has taken stock of lessons from the Tianjin disaster, but according to HDI’s assessment, there remains work to be done and not all insurers have implemented them in every day practice.
“Hazard prevention has not been sustainably improved at infrastructure hot spots and we can still see the need to introduce further measures. Against this background, a watershed in the insurance market between ‘before and after Tianjin’ is not yet discernible,” said Dr ten Eicken .
More information and data will help now and in the future. “A higher level of transparency of information about good flows and supply chains certainly continues to be desirable. This also relates to exchange between policyholders and risk carriers. The best possible risk prevention can only be guaranteed with high-quality information about supply chains,” he concluded.
We second that, and perhaps with the added support of public authorities and risk managers in facilitating this flow of information, a definitive “post-Tianjin” era could soon be reached.