In 2011, the insurance industry was left reeling as the flood waters around the banks of the Chao Phraya river basin, Thailand, finally ebbed away. 815 people died and a further 3.6 million people were affected, costing the insurance industry over $12 billion in claims. The event blindsided the industry and continues to linger long in the memory of most re/insurers. Since then, and despite challenging global conditions, several emerging markets in Asia Pacific have continued to expand. Buoyed by foreign investment, a new wave of dedicated industrial zones make attractive locations for multi-national corporations.
Vietnam is the perfect embodiment of this trend. Like Thailand though, Vietnam’s economic triumph comes with its own risk management headache; high value industrial exposures are located next to low lying flood plains. With reports of flooding in the region in the news once again, a question mark remains over whether insurers and reinsurers are fully prepared. Recent history provides us with a stark reminder of the ongoing risk. In the 2016 season, Severe Tropical Storms Mirinae and Nida caused combines losses of $300m in Vietnam (Business Standard 2016). More recently, Typhoon Sarika resulted in 35 fatalities, 120,000 homes damaged and 24-hour rainfall totals of over 500mm. Just days later, Vietnam narrowly missed the damaging effects of Typhoon Haima.
The combination of seasonal typhoon-derived heavy precipitation along with industrial developments encroaching onto historic flood plains makes for an increasing potential for extreme flood risk in Vietnam. In fact, JBA’s multi-peril CAT model, which covers tropical and non-tropical flooding, highlights a significant proportion of high value industry potentially exposed to river and surface water flood risk it Vietnam. It estimates that 60% of industrial sites in Vietnam are within the 1-in-50-year river flood extent. Moreover, it shows that 10% of the population (around 9.4 million people) live alongside rivers within the Mekong River basin. In this context, the 2016 Cyclone season has affected relatively few people. And it’s important for re/insurers to understand there is the potential for much more widespread losses.
Probabilistic models that capture all types of precipitation-based flooding are essential to ensure adequate pricing and capital allocation are met. Re/insurers relying purely on a deterministic approach could easily be caught out in their exposure management if they don’t fully understand the risks – especially as insurance is one of the fastest growing sectors in the Vietnamese economy. And no-one wants a repeat of the huge losses experienced in Thailand in 2011.