Insurers Economic Impact of Quake Begins to Crystallize
Reinsurers expected to sustain heavy losses in wake of Japanese tragedy.
Insurance Networking News, March 14, 2011
As events in disaster-stricken Japan remain fluid, the economic implications of the March 11 earthquake to the global insurance industry are beginning to solidify.
While it is far too early at this stage to issue a precise accounting of economic and insured losses and which market participants will bear what share of them, early estimates indicate that insurance and reinsurance companies, both in Japan and around the world, will sustain approximately $35 billion in losses.
A consensus has emerged that it will take modeling firms and local loss adjusters some time to accurately estimate insured losses. says James Eck, a VP and Senior Credit Officer in New York, and Kenji Kawada, a VP and Senior Analyst in Tokyo for Moody's Japan K.K. "The ultimate amount of insured losses from this event, as well as the, will depend on the types of coverage provided (residential earthquake risks are covered by a government reinsurance program, while commercial risks are not), the amount of reinsurance purchased, and the structure of reinsurance programs," the analysts state. "An additional wildcard is the potential for business-interruption losses, which are influenced by damage to power and transportation infrastructure. We believe that estimating claims will be a protracted process, as the size and scope of the event will place significant strain on insurers' claims adjustment resources.”
Eck and Kawada note that the Japanese non-life sector is highly concentrated, with three domestic groups MS&AD Insurance Group, Tokio Marine Group and NKSJ Group, accounting for nearly 90% of the Japanese market. Moreover, Japan Earthquake Reinsurance Co., Ltd (JER), joint-owned by private P&C insurance companies, assumes residential earthquake exposure from domestic insurers, and provides up to $66.9 billion in claims-paying capacity. The scope of the damage will result in negative credit implications for the Japanese insurance sector, Eck and Kawada predict.
Dr. Robert Hartwig, president of the Insurance Information Institute, agrees that the Japanese insurance market is likely to bear the brunt of the insured losses. “The Japanese nonlife insurance industry is very large—third only to the United States and Germany—with $107 billion in premiums written in 2009,” Hartwig said in a statement. “The implication is that a larger share of losses are likely to be retained by domestic Japanese insurers and reinsurers than was the case with recent earthquakes in Chile and New Zealand.”
Moreover, Japanese law also will also serve to mitigate losses to the insurance industry. In the case of JER, losses above $1.4 billion are shared with domestic insurers and the Japanese government at various levels of co-participation as loss levels increase beyond the JER's first layer retention. Also, the company's maximum exposure is approximately $7.4 billion.
Likewise, despite garnering a great deal of media attention, it is expected that any impacts due to major accidents in Japanese nuclear power plants will not significantly affect the private insurance industry. “Generally, coverage for nuclear facilities in Japan excludes earthquake shock, fire following earthquake and tsunami, both in terms of physical damage and liability,” Swiss Re noted in a press release. “Coverage for property policies excludes nuclear contamination. Overall, there is unlikely to be a significant impact on the property & casualty insurance industry as a result of this nuclear incident.”
Indeed, Chaucer Holdings PLC, a Lloyd's syndicate that insures the Japanese power companies that operate the three nuclear sites in the proximity of the affected area, said it doesn't expect any significant insured losses from the Japanese earthquake, noting the plant operators are not liable for any damage arising from a "grave natural disaster of an exceptional nature” under the Japanese Nuclear Act of 1961.
Nonetheless, Moody's expects a meaningful portion of losses will flow to the global reinsurance industry (including various Lloyd's syndicates), as catastrophe reinsurance covering Japanese earthquakes is a large market. This was reflected in the stock market Monday as German reinsurer Hannover Re shares fell 7.5%, Munich Re shares fell 4.3%, German insurer Allianz SE shares fell down 3.2% and Swiss Re shares fell 3.2%.
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