Saturday, July 22, 2017

Protecting against Hong Kong’s typhoon signal 8

When tropical cyclone Haima brought Hong Kong to a standstill in October last year, most businesses in the city reacted as they have done for the past 100 years—they shuttered their premises, sent workers home and put their losses down to bad luck.

But the folk at Swiss Re Corporate Solutions, which had launched its Hong Kong branch just one month earlier, saw an opportunity. “We started to realise that it’s actually quite disruptive and asked ourselves: ‘Is there something we can do as insurers to help mitigate that?’,” said Dylan Bryant, head of north Asia and manager of the Hong Kong branch, at the launch of the city’s first insurance product to indemnify businesses against earnings volatility and additional operating costs that stem from typhoon days.

It is somewhat surprising that nobody has done it before. After all, the Hong Kong Observatory’s tropical cyclone signals, which were first introduced in 1917, are basically a parametric trigger—the T8 signal is hoisted when the centre of a tropical cyclone is approaching and wind speeds of more than 63km/h are expected within the following 12 hours, and there is a rich database of historical data freely available from the Observatory.

There is also no doubt that there is a large, unprotected exposure. When the T8 signal goes up, it results in flight cancellations, suspension of trading on the stock exchange and the forced shutdown of most businesses and public transport.

However, the physical damage from such events is insignificant. Even in the worst year in recent memory for typhoon damage, when tropical cyclone York struck in 1999, there was just US$40 million of economic losses. Yet Swiss Re researchers estimate economic losses of around US$550 million for each day the T8 signal is hoisted, with an average of 1.4 such shutdowns each year.

“That is a big protection gap,” said Bryant. “At the moment, that loss to the economy occurs every time there is a typhoon. It’s uninsured, so with that knowledge in mind we thought we were on to something.”

The Insur8 product allows businesses to buy protection against this exposure, promising to pay out within 30 days of a T8 signal without any need to qualify the loss. If the T8 is hoisted, the policy will pay out.

Swiss Re sees many potential applications for the product, ranging from simple business interruption protection for the construction industry, for example, to more innovative solutions such as hotels offering free nights to guests who are stuck in the city by a typhoon.

Protection can also be structured flexibly to meet specific exposures—such as a policy that provides protection only against a T8 that is hoisted at a particular time of day or on a certain day of the week, or perhaps only on the second or third such occurrence in any given year. It can even be structured per hour

Typhoon signals do not only cause interruption. Some businesses stay open regardless and need to pay overtime to staff, meaning that they incur additional expenses during a T8.

It is yet to be seen how the product will be received by the market when it is launched at the end of this month, but Swiss Re says that it was developed in close cooperation with brokers who helped to validate the idea.

The main attraction is likely to be that it pays out cash relatively quickly, therefore appealing to smaller businesses that may suffer in the short term from an unexpected loss of earnings.

For now, the product is unique to Hong Kong, due to its unusual signalling system, but Swiss Re is looking at expanding it to Macau, which has an almost identical system.

 

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