Massive explosions that rocked the Port of Tianjin, China, in August, killing an estimated 146 people, are likely to be one of the largest insured man-made losses to date in Asia, according to a report released by a global risk management firm specializing in the effects of catastrophes.
One month after the disaster, 27 people are still listed as missing. Initial analysis indicates that the two explosions will generate insured losses of between $1.6 billion and $3.3 billion.
“It will certainly be considered one of the most complex insurance and reinsurance losses in recent history,” said James Nash, CEO of Asia Pacific Operations for Guy Carpenter and Company.
The existence of toxic substances and the exclusion zone around the disaster have made access to the impacted area extremely difficult. The Guy Carpenter report provides initial loss estimates and outlines the many variables involved in assessing the losses emanating from the two initial explosions that occurred on August 12, 2015.
The fireball and shock wave from the explosions blasted shipping containers and incinerated vehicles in the port and on an adjacent highway overpass. It destroyed warehouses, production facilities and dormitories, impacted the nearby Donghai Road Railway Station and blew out windows within residential structures for several kilometers.
While access to the site is limited, CAT-VIEW SM (Guy Carpenter’s satellite-based catastrophe evaluation service), was able to utilize high resolution pre- and post-event satellite imagery to understand what exposures were present at the time of the blast and therefore could contribute to the loss.
The report outlines the complexity of the event from an insurance and reinsurance perspective and provides a preliminary estimate of insured losses from many classes including: containers, cargo in containers, property, automobiles and general aviation.
The larger of the two explosions had the greatest impact to Tianjin Port, 105 miles (170 km) southeast of Beijing, the fourth largest port globally (by throughput) as well as Tianjin Port Logistics Center, a large industrial park, which is home to both Chinese and international interests. In addition, local government sources indicated that 700 tons of sodium cyanide and other toxic substances were present at the time of the explosion. However, no conclusive information about resultant effects is available.
Two massive explosions at a warehouse in the port of Tianjin occurred around 23:30 (15:30GMT), about 30 minutes after firefighters responded to a fire at the location.
The China Earthquake Networks Center reported that the first explosion was equivalent to three tons of TNT, while the second was the equivalent of 21 tons of TNT and registered as a magnitude 2.9 earthquake.
The blasts emanated from unknown materials at a plant warehouse owned by Ruihai International Logistics in the Beijiang Port Area. This is one of three core port areas: Beijiang, Nanjiang and Dongjiang. Capacity has been increasing at a high rate, with 550-600 million tons of throughput expected in 2015.
According to news sources, authorities declared that the area held approximately 2,500 tons of toxic substances, including at least 700 tons of sodium cyanide and unknown quantities of toluene diisocyanate (TDI) and calcium carbide. It is unclear to what extent these substances are involved.
Aside from the obvious destruction of surrounding buildings, the blast caused widespread damage to infrastructure, a large industrial park that housed the operations of Ruihai Logistics and many other firms, and stored goods including tens of thousands of shipping containers and new vehicles. Surrounding residential areas were also impacted, and there were potential concerns over chemical contamination.
A three km (1.8 miles) exclusion zone around the blast site is reportedly in place as authorities inspect the area and remove hazardous materials. Several smaller explosions occurred and fires broke out in the area, some as late as 11 days after the largest explosion according to news reports.
Loss estimates exclude: business interruption; likely impact to public works; losses outside of the immediate area, such as glass damage that reportedly extended up to 10 km away; clean up and contamination losses. These estimates also assume that property and cargo within the exclusion zone of three km will not be confiscated or declared a total loss.
Tianjin authorities initially stated that approximately 18,000 containers may be affected. Based on satellite imagery analysis, Guy Carpenter believes there is a possibility this figure could exceed 20,000. Of the total area of containers within the port, 16 percent were within the one km blast zone, and 41 percent were within 3km.
Given that the immediate area around Ruihai Logistics included long-term storage, many of these containers could have been empty. However, the loss from containerized cargo may be substantial, potentially reaching $528 million.
Thousands of new vehicles were incinerated or otherwise damaged. Many of these vehicles are classified as cargo, but others are covered under property insurance policies. At this time, the split is unclear.
From analysis of the satellite imagery, the vehicles were concentrated in 11 areas surrounding the blast zone, of which three fall within the 1 km zone. An estimated vehicle count based upon the satellite imagery suggests 54,065 vehicles within these 11 sites.
Media sources, as of September 2, indicate possible damage to more than 22,700 vehicles from a range of auto companies. The discrepancy between the satellite inventory and manufacturers’ reports may be because a number of companies have been unable to access their facilities to provide a count. Also, it remains unclear if vehicles within the three km zone that did not sustain significant blast damage will be written off. As more information becomes available, it will be possible to match the 11 sites to the car manufacturers and reconcile the numbers.
Toyota reportedly suspended its two final assembly lines near Tianjin Port, partly to assess damage and partly due to the evacuation zone. Toyota reportedly made 432,340 cars at the plants in 2014, and may lose production of 2,200 vehicles per day due to the blasts, according to researcher IHS Automotive. The automaker has another line in a different part of the city which was unaffected and reportedly partially restarted operations near the port on August 27.
Notably, farm equipment maker John Deere suspended its operations in the Tianjin Economic Development Area, which is about three kilometers from the blast site, and reported minor damage to some of the buildings at its $50 million factory, including broken windows and water pipes.
There were injuries and broken windows in apartment buildings around the blast site. Online footage of damage to high-rise residential property less than two km from the blast epicenter shows damage to glass and other non-structural elements as well as damage to contents.
As with marine cargo losses, insured property losses will be split between domestic and international insurers and reinsurers. Warehouses and industrial premises surrounding the blast sustained a range of damage levels from complete destruction, to moderate damage that may be reparable, to straightforward reparable cosmetic damage.
It is possible to identify four broad damage classes from the satellite imagery. The graphic on page 12 maps damage severity for residential buildings and warehouses within the three km blast zone. The angle of the images taken on day four assisted with this process, as the sun glint caused shattered glass and debris to give a reflective white signal which could easily be detected on the images.
Transportation infrastructure has also been impacted, including the Donghai Road light rail station, which is approximately 650 meters (710 yards) away from the main blast site. A highway overpass (the S11 Binhai Highway) adjacent to the port and approximately 500 meters (546 yards) away from the epicenter also sustained damage.
The Tianjin Binhai Heliport is approximately 1.2 km from the blast epicenter. At the time of the blast three helicopters were stationary adjacent to the hangar complex. The fourth helicopter can clearly be seen within the damaged hangar.
Four helicopters of Eastern General Aviation Co., Ltd. are reported to have sustained damage. Initial reports indicate that the helicopters received varying degrees of damage from the shock wave and from parts of the hangar door/wall that buckled. The estimated 100 percent value for all four helicopters is up to $40 million.
MARINE CARGO LOSSES
The cargo interests affected by the Tianjin incident are unclear at present and it is likely to be some time before there is clarity. Using its exclusive International Trade Database2 (ITDB), Guy Carpenter has assessed the total cargo exposure at risk within the entire port area. The value of the exposure is based on customs values rather than insured values and is predicated on our assumption of the port lag time (i.e. the time cargo is held in port either prior to loading aboard or after discharge from overseas vessels).
Based on the following assumptions, the estimated total cargo exposure, excluding oil and bulk commodities, within the port was $3.9 billion.
● The database comprises every type of cargo from bulk oil and ore, to cars, to consumer goods and everything in between.
● Data is based upon customs’ valuations, which are likely to be lower than insured values. ● Data received was as at the end of June. The report compared the trend with 12 months ago and took into account the subsequent decline in China’s trade volume.
● Data is for Tianjin, which is assumed to be representative given the majority of the municipality’s shoreline comprises the Port of Tianjin.
● The analysis takes into account the number of days per month the port is working and an estimate of how long cargo remains in the port area, either before loading or after discharge. The report assumes the port works every day non-stop including public holidays.
● In consultation with industry experts, the report used an average time in the port area of four days for commodities, while for vehicles the report uses an average lag time of 35 days.
● The estimate is a mathematical average and the values could vary from this on a daily basis. For example, the estimate would not reflect the presence of a shipment of particularly highly-valued project cargoes in the port on the day of the blast. Based on land use and exposure estimates, the insured losses to containerized cargo and vehicles are estimated at: ● Containerized cargo: between $206 million and $528 million
● Vehicles (cargo and property coverage): between $790 million and $1.4 billion
The analysis takes an average cost approach to estimate cargo exposures. However, there is market speculation that there were some high value project cargo exposures within the vicinity at the time of loss, which may have a material impact on the quantum.
Similar to Superstorm Sandy in the U.S. (2012), the vehicle exposures will be a significant part of the overall loss in Tianjin, with losses split between marine and non-marine insurance policies and reinsurance coverage.
Cargo insurance specialists note that many of the shipping containers in the immediate blast site were empty. Post-event images of the most severely damaged containers support this observation. The estimate of insured losses to the actual containers is derived by taking an average insured value per container of $1,000 to $3,000.
Due to the existence of “brands clauses” in many international cargo policies, even though cargo may not appear superficially damaged nor to have been in the exclusion zone, the insured may be able to claim that its brand will suffer if they offer goods for sale which had been in Tianjin at the time of the explosion.
The Tianjin blast affected commercial, government, residential and industrial property in and around the area, including districts outside but adjacent to the port. Guy Carpenter’s analysis of the damage relied heavily on satellite imagery and visible identification of damage, as well as a specific blast case scenario.
At the heart of the blast zone was a large industrial park and surrounding housing and facilities for registered companies.
It is informative to compare this event to historical fire losses. The September 2001 explosion at the Azote Fertilisant (AZF) fertilizer plant in Toulouse, France involved chemicals, in that case ammonium nitrate.
This AZF explosion and loss provides a useful reference point and comparison to the Tianjin explosion. That blast was larger than the Tianjin explosion, reportedly equivalent to 20-40 tons of TNT, measuring 3.4 on the Richter scale. Ultimate damages paid by insurance exceeded 1.5 billion in Eurozone currency or $1.6 billion (in 2001 values), including liability for deaths, injuries and the approximately 4,000 residential properties in the surrounding area that were damaged or destroyed.
At present it is unclear what type of liability insurance, if any, was purchased and it is too early to make any calculation of expected claims.
It is reported that Ruihai International Logistics Co. Ltd may well face substantial losses, together with the owners of the cargo stored in the warehouse. Tianjin Port Development who owned the land where the warehouse was located may also face questions about Ruihai’s compliance with health and safety and lease/ licensing obligations.
It is unclear what types of chemicals have leaked, which may threaten the water supply. It is possible adjacent industrial facilities may become unsafe as a result of contamination, and basic utilities in the area will be affected. Other potential health issues which may manifest themselves as a result of direct contact or ingestion of the chemicals are unknown. However, local press have indicated that abatement measures are underway as authorities in Tianjin are building a 20,000-square meter ‘leak-proof’ tank to store contaminated soil from the scene .
Whilst the extent of property damage is evident the proliferation of bodily injury, exposure to air, soil and water contamination and where the liabilities for these rest - along with any associated insurance penetration - will take much longer to develop and assess.
The existence of toxic substances and the exclusion zone have made access to the impacted area extremely difficult.