Nat cat and politics top troubles for Thai risk managers

Thailand’s top risk managers have met with the StrategicRISK team, local brokers and Zurich’s regional representatives to examine the country’s major risks and opportunities.

Held at the Metropolitan Bangkok last week, the Thailand Risk and Insurance Management roundtable event provided a forum for a discussion that ranged far and wide across Thailand’s risk landscape – a landscape irrevocably altered by the 2011 Thai floods.

When asked to nominate the primary risks faced by organisations operating in Thailand, most participants said that natural catastrophe and environmental risks made their top five.

All agreed this would not have been the case even five years ago, when the myth that Thailand was not a nat-cat-prone area was still widely subscribed to.

Global trends

The other big risks highlighted during the roundtable discussion were political uncertainty, supply chain disruption and, in line with world trends, regulatory change and challenging economic conditions.

However, nat cat risk was definitely top of the agenda, as participants explained that the 2011 floods were generally seen as a wake-up call to the market and that risk was best viewed on a national scale.

Flooding had clearly reframed the view of risk across all industries, for a variety of not necessarily predicable reasons.

Geographical positioning

Issues such as geographical positioning of assets and logistical relationships with suppliers are front of mind. Prevailing attitudes about the location of warehouses, factories and head offices are being challenged, with a wider geographical spread now preferred as a risk-mitigation strategy.

Business continuity measures, such as identifying back-up component suppliers, are now commonplace’

Business continuity management measures, such as identifying back-up component suppliers based in the region, are now commonplace. Thailand’s reliance on its sometimes less resilient neighbours for integral elements of supply chains was also flagged as a potential threat.

It was pointed out that the extent of the flooding in Bangkok was not wholly unexpected, as the city is situated on the low alluvial plain of the Chao Phraya River.

There have been huge floods in the past, notably in 1942, 1983 and 1995, but the 2011 flooding had a much greater impact on the country because of a combination of increased population, rapid economic development and the sheer interconnectedness of regions.

Living with water

“We have been living with water for ages,” said one participant. “Look at traditional Thai houses, which are all about living high. Floods are nothing new, but the impacts are new and bigger.”

It was generally agreed that the insurance industry was largely unprepared for the scale of the disaster, and that the sheer volume of significant exposures would ensure that lessons would be learned.

Everyone was aware that they needed business interruption coverage, but questions were asked about the enormous cost of catastrophic loss cover and whether there was sufficient capacity available.

Executive focus

Increased board engagement was reported as being on the rise following the floods. For many, the C-suite had moved on from an “issues first, risk second” outlook to focus more on risk mitigation.

Insurance buyers reported that the extent and complexity of the claims that rose from the floodwaters ensured that executives in their organisations “now remembered our names”.

Discussion about how providers of essential goods and services looked at protecting their means of production following the floods led to an observation that the size of the average Thai consumer’s grocery basket had fallen in the past 12 months.

This was attributed to the rising prices of most staple foods. Local spending was certainly going down, it was agreed, although it was hard to judge the magnitude of the fall as 2011 and 2012 were so severely affected by the floods as to be useless for comparative purposes.

World affairs

Uncertainty about world affairs and the global slowdown had affected risk outlooks in Thailand, many said, although all agreed that there was little that could be done about this.

What could be addressed were the effects of big-spending government programmes, such as the first-car tax rebate scheme and the price guarantee for local rice farmers. These controversial schemes were expensive and had far-reaching ramifications that were hard to predict, the roundtable was told.

The future of commodity prices was seen as integral to the Thailand’s social and business stability’

The future of commodity prices was seen as integral to the Thailand’s social and business stability, as were regulatory issues such as the government’s controversial new minimum-wage policy. Dealing with the impacts of local and international regulations tackling money laundering and corruption was seen as one of the biggest challenges facing organisations operating in Thailand.

Cyber concerns

No discussion of risks faced by businesses anywhere in the world would be complete without at least touching on cyber and intellectual-property risks.

While there were no country-specific issues raised, it was generally accepted that, as it was an extremely difficult area to underwrite (and it could be equally hard to substantiate loss), insurance was probably not the key risk treatment in this increasingly problematic area.

Insurance was seen as central to protecting companies and their directors in an increasingly litigious environment. There had been a great increase in interest in liability insurance in recent years, it was said.

One participant lamented: “We are no longer living as neighbours; we are living as industry side by side and if you cause any damage to my factory, I’m going to sue you. Now we can’t get away with a smile and a sorry.”

Firms were now ‘exposed to more severe types of losses that can have widespread effects on our neighbours’

It was suggested that this was a result of Thailand’s rapid industrialisation and that firms were now “exposed to more severe types of losses that can have widespread effects on our neighbours”.

Talk eventually turned to the quality of risk management in Thailand. Risk awareness was seen to be on the increase. As one attendee put it: “Before the flood, people took insurance as something they had to do. Now, brokers don’t need to sell it as people understand how you can use insurance to reduce the eventual loss to business”.

Risk mitigation boost

It was agreed that insurers would benefit from improved risk mitigation strategies in Thai organisations, as they would presumably result in less risk to underwrite.

The roundtable, along with the discussions and interviews, will form the basis of StrategicRISK’s upcoming Asia Risk Report on Thailand. This will join a series of country-focused risk reports and culminate in a pan-Asia risk sentiment study launched at the end of 2013. Click here to visit the Asia Risk Report website.