The impact on reinsurance pricing, which is already elevated, could make it too costly for some smaller companies. Offsetting factors include lower inflation in East Asia as compared with many other parts of the world, and supply chain normalization, which continues as the region recovers from the pandemic

The recent devastating flooding following Super Typhoon Saola in Hong Kong and other parts of China may further pressure upcoming reinsurance renewals, in what has already been a hard market the last few years, according to a new AM Best commentary.

Referenced as 1-in-500-year event, the storm dropped a quarter of Hong Kong’s annual rainfall total in 24 hours.

Typhoon Saola had made landfall in the southern Chinese province of Guangdong as violent winds lashed nearby Shenzhen, Hong Kong and Macau, leaving at least one dead and a trail of destruction and flooding in many areas.

The Asian financial hub of Hong Kong and China’s neighbouring populous province of Guangdong had cancelled hundreds of flights and shut businesses, schools and financial markets as Saola had edged closer.

Packing winds of more than 200 kph (125 mph) as a super typhoon, Saola was among the strongest storms to menace the southern province since 1949. It became a severe typhoon, Chinese authorities said, as it made landfall in Zhuhai city with winds slowing to around 160 kph.

In the Best’s Commentary, “Hong Kong 1-in-500 Year Flood Likely to Have an Earnings Impact,” states that AM Best expects that the gross losses on property and auto lines will not be quite as severe but could come close to rivaling the HKD 3.1 billion (USD 400 million) in losses wrought by Typhoon Mangkhut in 2018, but that the overall impact of the rainstorm is likely to be more of an earnings event for insurance companies than a material hit to capital adequacy.

However, the impact on reinsurance pricing, which is already elevated, could make it too costly for some smaller companies. Offsetting factors include lower inflation in East Asia as compared with many other parts of the world, and supply chain normalization, which continues as the region recovers from the pandemic.

Good risk management of the city’s drainage systems and contingency planning also should help minimise insurance losses.

The gross losses on property and auto lines will not be quite as severe but could come close to rivaling the HK$3.1 billion (US$400 million) in losses brought by Typhoon Mangkhut in 2018, the report confirmed.

Fifteen insurance companies account for roughly 51% of the HK$18.9 billion (US$2.4 billion) in gross premiums in the Hong Kong market for the two lines – property and motor – combined, said AM Best, adding that they account for 67% on a net basis based on provisional fourth quarter 2022 annual data from the Hong Kong Insurance Authority.

“Property damage accounts for 13% of total general insurance net premiums (21% on a gross basis), while motor damage constitutes over 10% on a net basis (8% gross).

Comprehensive motor coverage, which would cover the damage from flooding, accounts for a slight majority of motor premium over third party, which would not cover damages from flooding,” the report said.

The report noted that these losses could add further pressure during the upcoming reinsurance renewals, in what is already a hard market.

“Based on fourth-quarter 2022 provisional data, net premiums accounted for 40% of gross property damage premiums, which could increase if reinsurance pricing becomes too costly for some smaller companies or if some larger players decide to take on more risk.”