Tianjin insurance losses could reach US$1.5bn
Written by Deborah Ritchie
The insured losses from a series of explosions at a chemical warehouse in Tianjin last week are likely to be material for Chinese insurance companies, potentially exceeding US$1bn-1.5bn, according to analysts at Fitch. The high insurance penetration rate in this area could make the blasts one of the most costly catastrophe claims for the Chinese insurance sector in the last few years.
Fitch believes that claims from the blasts are likely to undermine the financial performance of some regional players and those property and casualty insurers with high risk accumulation in the affected areas, though it is too early to determine the exact impact that this incident will have on the credit strength of the Chinese insurance sector as a whole.
According to the China Insurance Regulatory Commission, non-life insurance premiums from Tianjin city amounted to CNY11bn (US$1.7bn) in 2014. As such, should insured losses come in at the high end of the initial US$1-1.5bn estimate, they would represent about 88% of total direct premiums written in Tianjin or roughly 5.4% of aggregated shareholder capital for the six most active issuers at end-2014.
PICC Property and Casualty Company, Ping An Property & Casualty Insurance Company of China, China Pacific Property Insurance, China Continent Property & Casualty Insurance, Sunshine Property & Casualty Insurance and Taiping General Insurance are the most active insurers in the region, accounting for more than 77% of the non-life segment (measured by direct premiums written).
Claims from the blasts could be shared with both local and international reinsurers, which could mitigate the direct impact on the Chinese insurance sector. While insurers could recover a portion of their property claims from their reinsurers, their exposure, the amount of retention and the number of reinstatements under the catastrophe reinsurance programme are likely to determine the degree of severity to which they are affected. Fitch estimates that the overall risk cession ratios of major non-life players active in the Tianjin region range from 10% to 15%.
Chinese media have reported that more than 8,000 vehicles were destroyed by the explosions. Claims from motor insurance could impair insurers' margins and capital if their reinsurance protection is marginal and the degree of risk accumulation within the affected region is significant. Aside from motor excess of loss treaties, in which the reinsurers indemnify the ceding companies for losses that exceed a specified limit, it is common for Chinese insurers to use quota share reinsurance treaties to mitigate their solvency strain due to the strong growth in recent years from the motor insurance book of business.
The majority of claims will come from motor, cargo, liability and property insurance. However, medical and life insurance claims are also likely to be substantial. Victims of death and injuries are covered by a government-supported accident insurance plan for the Tianjin region, in addition to their own medical and life insurance policies. Each injured person who is insured by the government plan can claim compensation of between CNY20,000 and CNY35,000, depending on the extent of injuries while compensation of CNY50,000 will be paid in the event of death.
While the incident is still developing, Fitch expects the number of reported insurance claims cases to surge further in the coming few weeks.
Tianjin, the port gateway to Beijing, is a major base for petrochemicals, refining and other industries. As at 18th August, restrictions have been placed on the handling of vessels carrying hazardous substances at Tianjin Port. Inchcape Shipping Services is advising that Tianjin Municipal Transport Commission has issued notice to Tianjin Port to cease handling tankers and container ships carrying hazardous substances, resulting in the halting of most tanker operations in the port. Container ships with hazardous goods on board are currently unable to berth and discharge.
The Transport Commission has not indicated when port operations for vessels carrying hazardous substances may resume.