Risk Focus: Asia

Assessing Tianjin’s Damage

The insurance industry faces a long and arduous claims process for last year’s devastating Tianjin Port disaster.
By: | February 22, 2016 • 6 min read

The insurance fallout from last year’s Tianjin Port explosions, which caused nearly 200 deaths and insurance losses that could exceed $3.25 billion, appears as sprawling as the gargantuan Chinese port itself.

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Primary liability for the disaster currently sits with Rui Hai International Logistics Co. — the warehouse operator that allegedly stored 3,000 tons of hazardous goods, including 70 times the legal quantity of sodium cyanide in its warehouse, resulting in an explosion equivalent to a 2.9 magnitude earthquake.

However, the chances of affected companies across a multitude of sectors winning compensation from Rui Hai are very slim indeed. One source described the operator’s liability policy as “not worth the paper it’s written on.”

Craig Neame, partner, Holman Fenwick Willan

Craig Neame, partner, Holman Fenwick Willan

Not only would the policy be of insufficient value to recover the hundreds of millions of dollars of liabilities unfolding from the event, but the policy is very unlikely to be honored by the insurer if Rui Hai is proved to have flagrantly breached regulations on the storage of dangerous goods.

Rui Hai may not, however, be the only company on the hook.

“There will be a Chinese investigation, and if that concludes there was widespread knowledge and the willful turning of blind eyes, parties who didn’t inform customers their cargo was at risk or take the necessary steps to protect their cargo could potentially be liable,” said Craig Neame, a partner at Holman Fenwick Willan. Class action lawsuits could not be ruled out down the line.

But, said Lincoln Pan, CEO of Willis China, “We’re advising our clients that seeking liability-based damages is going to be tough as it will be very difficult to prove liability and successfully claim against the individuals who may have been at fault.”

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Meanwhile, Peregrine Storrs-Fox, risk management director of TT Club (the biggest insurer of containers and cargo at Tianjin) said that Chinese maritime courts are unlikely to accept proceedings until the Chinese government concludes its investigations. “If there is no recovery, due to a lack of recoverable assets or difficulty enforcing a foreign judgment in China, the loss will rest wherever it fell,” he said.

It is more realistic, then, that companies affected by the disaster will have to rely solely on their own insurance policies to recoup any losses — with property, cargo and business interruption policies taking the brunt of the claims. According to Pan, Willis Towers Watson has several clients that suffered losses exceeding $100 million as result of explosion. “These cases will require real advocacy and negotiation to get the fullest type of recovery back from insurers,” he said.

Key Policies Triggered

Damage to buildings in the vicinity of the blast will trigger property and business interruption policies worth up to $1.2 billion, according to Guy Carpenter. The majority are being handled by Chinese insurers, which are reportedly being encouraged by the Insurance Association of China to pay claims promptly and with minimal dispute. Damage to specialist equipment may also trigger covers provided by London and international underwriters, with Swiss Re ($250 million), Hannover Re ($104 million) and XL Group — now XL Catlin — ($100 million) among the highest pre-Christmas loss projections.

Peregrine Storrs-Fox, risk management director, TT Club

Peregrine Storrs-Fox, risk management director, TT Club

Zurich projects $275 million in property and marine losses, but told Risk & Insurance®: “The nature of many of the losses and the extended remediation period to complete repairs mean that uncertainty as to the final cost remains.”

A Lloyd’s market spokesperson said: “We are not clear what the quantum looks like, so it is too soon to tell what the impact on the Lloyd’s market will be. In the coming weeks, we hope to have greater clarity.”

Guy Carpenter estimates that container losses could reach $60 million, while lost or damaged cargo stored at the port could be worth more than $500 million. As many of the manufacturers and importers are international firms, much of these losses will be shouldered in the global insurance markets.

“When car insurers were doing their modelling, I don’t think they considered the risk of an adjacent warehouse storing chemicals in a huge breach of government-imposed regulations.” — Craig Neame, partner, Holman Fenwick Willan

However, Neame said cargo losses may be lower than projected. “There’s been very little reporting into the insurance market of substantial cargo losses, which suggests a lot of the containers were empty — the big loss is the cars,” he said.

According to Guy Carpenter, more than 22,700 cars were destroyed or damaged in the blasts, with a potential loss value of up to $1.5 billion, with many major car firms affected.

While these losses would trigger either cargo or property losses depending on who had ownership of the vehicles in the supply chain at the time, sources believe several manufacturers were inadequately insured.

Lincoln Pan, CEO, Willis China

Lincoln Pan, CEO, Willis China

It is rumored that because of limits on the number of vehicles that can be insured at one location, some manufacturers may not have declared all of their exposed vehicles, and may have to absorb the loss of their unprotected excess assets.

Pan added that certain local importers may also find themselves underinsured, having insured their assets using book value rather than market value.

“Some parties insured just for the manufacturing cost of the inventory, and are now seeking claims on the commercial value. Most insurers are rejecting or contesting these claims.

“Risk managers should analyze the value of their assets as they move through the supply chain, and insurance should be procured according to the maximum potential value of the asset rather than the financial value of an asset in any one point in the supply chain,” he added.

Throw in some large deductibles on the policies that are in place, and it appears that with so many companies having to absorb uninsured losses, the insurance industry may not come out of the event as scathed as it perhaps could have.

The biggest unknown is the impact on supply chain. The port system is now diminished and struggling to cope with the relentless demands of economic trade through China, with logistical disruptions and delays permeating throughout the regional economy.

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While this should trigger a host of business interruption (BI) and contingent business interruption (CBI) policies — particularly among international companies — Neame believes there will be substantial uninsured losses when it comes to business interruption as a result of logistical delays rather than physical loss, as this is unlikely to trigger most BI policies. “I suspect the majority of Chinese manufacturers don’t buy CBI,” he added, “though there’s no guarantee CBI would respond either.”

Nick Derreck, chairman of the International Union of Marine Insurers, said in the wake of the event that the accumulation of related risks from the disaster served as a “wake-up call to all cargo insurers,” and called for new technology to help underwriters handle this kind of aggregated risk. Meanwhile, Neame suggests the insurance industry may put tighter limitations on how much stock can be stored in certain locations without the policyholder obtaining assurances on site safety, particularly in developing markets.

Mark Thompson, CEO, Cunningham Lindsey International

Mark Thompson, CEO, Cunningham Lindsey International

“When car insurers were doing their modelling, I don’t think they considered the risk of an adjacent warehouse storing chemicals in a huge breach of government-imposed regulations — this has opened up their eyes to a new type of risk,” he said.

But loss adjuster Mark Thompson, CEO of Cunningham Lindsey International, noted that while some insurers are now coming to terms with “much bigger exposures than they thought,” he doesn’t believe this event will be as damaging to the insurance market’s coffers as recent catastrophes in Thailand or Japan.

While Storrs-Fox said the event is unlikely to lead to any material changes in insurance terms, he advises insurance buyers to ensure they have a “force majeur” clause in their cargo contracts, and also to maintain high levels of due diligence over the practices and procedures of counterparties, including ensuring subcontractors are adequately insured, and operating in compliance with regulations.

It is unlikely the unscrupulous activities at Tianjin are isolated. Both insurers and insureds must learn their lessons from the disaster quickly if they are to avoid similarly complex settlement challenges in the future.

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Antony Ireland is a London-based financial journalist. He can be reached at [email protected]

More from Risk & Insurance

More from Risk & Insurance

4 Companies That Rocked It by Treating Injured Workers as Equals; Not Adversaries

The 2018 Teddy Award winners built their programs around people, not claims, and offer proof that a worker-centric approach is a smarter way to operate.
By: | October 30, 2018 • 3 min read

Across the workers’ compensation industry, the concept of a worker advocacy model has been around for a while, but has only seen notable adoption in recent years.

Even among those not adopting a formal advocacy approach, mindsets are shifting. Formerly claims-centric programs are becoming worker-centric and it’s a win all around: better outcomes; greater productivity; safer, healthier employees and a stronger bottom line.

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That’s what you’ll see in this month’s issue of Risk & Insurance® when you read the profiles of the four recipients of the 2018 Theodore Roosevelt Workers’ Compensation and Disability Management Award, sponsored by PMA Companies. These four programs put workers front and center in everything they do.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top,” said Steve Legg, director of risk management for Starbucks.

Starbucks put claims reporting in the hands of its partners, an exemplary act of trust. The coffee company also put itself in workers’ shoes to identify and remove points of friction.

That led to a call center run by Starbucks’ TPA and a dedicated telephonic case management team so that partners can speak to a live person without the frustration of ‘phone tag’ and unanswered questions.

“We were focused on building up a program with an eye on our partner experience. Cost was at the bottom of the list. Doing a better job by our partners was at the top.” — Steve Legg, director of risk management, Starbucks

Starbucks also implemented direct deposit for lost-time pay, eliminating stressful wait times for injured partners, and allowing them to focus on healing.

For Starbucks, as for all of the 2018 Teddy Award winners, the approach is netting measurable results. With higher partner satisfaction, it has seen a 50 percent decrease in litigation.

Teddy winner Main Line Health (MLH) adopted worker advocacy in a way that goes far beyond claims.

Employees who identify and report safety hazards can take credit for their actions by sending out a formal “Employee Safety Message” to nearly 11,000 mailboxes across the organization.

“The recognition is pretty cool,” said Steve Besack, system director, claims management and workers’ compensation for the health system.

MLH also takes a non-adversarial approach to workers with repeat injuries, seeing them as a resource for identifying areas of improvement.

“When you look at ‘repeat offenders’ in an unconventional way, they’re a great asset to the program, not a liability,” said Mike Miller, manager, workers’ compensation and employee safety for MLH.

Teddy winner Monmouth County, N.J. utilizes high-tech motion capture technology to reduce the chance of placing new hires in jobs that are likely to hurt them.

Monmouth County also adopted numerous wellness initiatives that help workers manage their weight and improve their wellbeing overall.

“You should see the looks on their faces when their cholesterol is down, they’ve lost weight and their blood sugar is better. We’ve had people lose 30 and 40 pounds,” said William McGuane, the county’s manager of benefits and workers’ compensation.

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Do these sound like minor program elements? The math says otherwise: Claims severity has plunged from $5.5 million in 2009 to $1.3 million in 2017.

At the University of Pennsylvania, putting workers first means getting out from behind the desk and finding out what each one of them is tasked with, day in, day out — and looking for ways to make each of those tasks safer.

Regular observations across the sprawling campus have resulted in a phenomenal number of process and equipment changes that seem simple on their own, but in combination have created a substantially safer, healthier campus and improved employee morale.

UPenn’s workers’ comp costs, in the seven-digit figures in 2009, have been virtually cut in half.

Risk & Insurance® is proud to honor the work of these four organizations. We hope their stories inspire other organizations to be true partners with the employees they depend on. &

Michelle Kerr is associate editor of Risk & Insurance. She can be reached at [email protected]