Know Thy Neighbour – Lessons From the Tianjin Explosion
The night of August 12, 2015 was like any other in and around the bustling port of Tianjin, the maritime gateway to China’s capital city Beijing located some 170kms to the north west. The port city of Tianjin, a dual core city comprising the old city and the new city of Binhai is a hub for advanced industry and financial activity. It has grown rapidly and is now China’s fourth largest city and also the world’s fourth largest port.
At about 23:30, as the city’s population wound down at the end of another summer’s day, two large explosions occurred that caused damage of dramatic and tragic proportions. The official report into this devastating event was released in early February 2016, providing sobering statistics of the event – 165 deaths; 8 people missing and 798 injured; 304 buildings, 12,500 vehicles and 7,500 containers either damaged or destroyed. The report also suggests a loss totalling almost 7 billion Yuan or about US $1.1 billion. This is lower than estimates previously provided by Swiss Re, Guy Carpenter, Allianz Global and International Union of Marine Insurance which ranged from US$2 to $6 billion.
Risk Accumulation & Exposure Uncertainty
The Tianjin event is a perfect example of how risks can be accumulated in a single location. The widespread property, infrastructure, marine, motor vehicle and injury claims arising from this event exposed many insurers and reinsurers to claims from multiple lines of business and involving multiple policy holders.
While it is easier to understand and model for the accumulation of static risks such as property and infrastructure, there is no question that with an event like Tianjin, most insurers and reinsurers would have been taken by surprise at the level of risk accumulation they experienced. If static risks posed challenges, what about non-static risks like marine hull and cargo? There were thousands of containers in Tianjin at the time of the event. This is not surprising when you consider the size of modern container ships, which can range in size from 3,000 TEUs (twenty-foot equivalent unit) to more than 19,000, meaning they can carry more than 19,000 twenty foot containers. In addition to the risk accumulation while at sea, there is massive risk accumulation at the major ports around the world. How do you assess and control this? The turnover of containers i.e. the average time they remain at a particular port or terminal can assist carriers in determining their market share in a particular location at any given time. The need to obtain and manage such crucial information has become so much clearer following Tianjin. Possessing this information would provide added certainty of potential exposure and avoid the potential for unintended risk accumulation.
Know Thy Neighbour
Before the Tianjin event, nobody knew what Ruihai International Logistics (Ruihai) stored in their warehouse. According to the official report into the incident, the explosion was caused by the flammable chemical nitrocellulose which self-ignited due to the hot weather. Investigators also found that 111 types of dangerous goods were stored in the warehouse with the amount of chemicals being far in excess of what Ruihai was permitted to store. To make matters worse, they were not stored in a safe manner. During the time of the explosion, the temperature was 36 degrees Celsius and the temperature within the containers in which these chemicals were stored was as high as 65 degrees Celsius. The lack of temperature control caused the wetting agents of the chemical cellulose nitrate (C12H16N4O18), of which 32.97 tonnes were stored on site, to evaporate leading to abrupt self-combustion.
Many of the risks insured in the port of Tianjin may have been put through very rigorous underwriting processes and satisfied strict underwriting guidelines. But without the knowledge of Ruihai and the dangers stored in the vicinity of the “good” risks, none of that matters. To accurately assess the other risks, underwriters needed to understand the risks presented by their proximity to Ruihai. What processes are there to detect such risks in the vicinity of the "good" risk you have chosen to insure? Is there sufficient information available to underwriters to evaluate these neighbouring risks? If not, should one take on the ‘good’ risks? For example, the carriers that provided insurance to the car makers and car yards would have priced these risks differently if they had known of the potential posed by the presence of Ruihai and its lethal chemicals.
Stay tuned for a follow up blog examining the implications of the Tianjin explosion on Business Interruption and Contingent Business Interruption. In the meantime, my colleague Pete Hakenen has done some great work on this topic. Please take a look at his presentation on Supply Chain Exposure, to learn more. You may also be interested in reading my colleague Tom Qiu's blog for additional background on the Tianjin Port Explosion.
- BBC News.
- Asia Insurance Review - Lessons from Tianjin - A wake-up call for risk accumulation awareness.
- Swiss Re Sigma Study.
- Allianz Global Corporate & Specialty (AGCS)’s Safety and Shipping Review 2016.
- How Many? A Dictionary of Units of Measurement, Russ Rowley, The University of North Carolina.
- SAS Analytics.
- Allianz Global Corporate & Specialty (AGCS) Managing Disruptions Nov. 2012.