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EQECAT Looks at Specific Insurance Exposures of Japan's Quake, Tsumani

Source: EQECAT

Posted on 15 Mar 2011

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EQECAT released a report summarizing the various impact of the earthquake and tsunami on Japan's insurance market with its inclusions and exclusions. Following is the catastrophe modeling's report:

Earthquake Shaking (EQ Shake)

This is the biggest exposure in direct sums insured. EQ Shake policies have two primary forms – high deductibles with insurance covering a proportion of the damage excess deductible, and first loss policies that have minimal deductibles but also sub-limits that are a small fraction of the fire insurance value of a property.

The ground motions in Japan were at a level that generates the expectation of widespread, moderate damage (as opposed to an expectation of the destruction seen in the Christchurch CBD, NZ). There are reports of 6,000-10,000 houses destroyed in this event, representing a very small fraction of the housing stock affected. Most damage is expected to be below the level of deductibles. EQECAT believes this initial report of 6,000-10,000 is low due to a damaged communications infrastructure that prevents timely reporting, but this bias does not significantly alter the conclusion of widespread moderate damage.

First loss policies are very likely to trigger losses to insurers in this event, especially first loss policies that apply to schedules of locations distributed throughout the area. Aggregated first loss insurance payouts are expected to be a fairly high percentage of the damage incurred by first loss policy holders.

Day 4 Perspective – Economic Losses to Japan

Economic losses from this event are likely to exceed $100B USD. The 1995 Great Hanshin Earthquake (Kobe, Japan) was reported to have economic losses in excess of this value. The Great Hanshin event was a M6.8 earthquake located in the heart of the port of Osaka. It occurred in a larger industrial center, but was more concentrated geographically. Insured losses from the 1995 event were estimated at $6 Billion USD (a ratio of insured losses to economic losses of 6%). The relatively low ratio was due to the low propensity to buy earthquake insurance coverage in this area of perceived low risk.  Last week’s Tohoku Pacific Offshore Earthquake affected an area that has a much higher rate of insurance purchase. A $100 Billion USD loss represents about 2% of Japan’s Gross Domestic Product. This ratio allows a comparison of the severity of this event with other recent catastrophes.

The 2010 Maule Earthquake (Chile) caused an estimated $30 Billion USD in economic damages. With a GDP approximately $300 Billion USD, the 2010 Maule earthquake was a far more direct hit although about 25% of the economic losses were covered by insurance. The aggregate economic losses from the two recent Christchurch, NZ earthquakes may approach $20 Billion USD on a GDP of approximately $120 Billion USD.  Current estimates note that approximately 75% of the Christchurch losses will be covered by insurance. In 2004, Hurricane Katrina caused an estimated $125 Billion USD in economic losses to an economy with a GDP of $13 Trillion USD, or about 1%, with approximately 25% of the losses covered by insurance.
Economic losses will continue to rise as significant earthquake-related events develop; serious concerns grow as officials struggle to control damage at three nuclear power plants.

EQECAT will continue to monitor this event and will issue an update as information becomes available.

Fire Following Earthquake 

As demonstrated by many events in Japan, fire following earthquake represents a significant risk. Despite there being several very large fires from this event, there have been no uncontrolled urban conflagrations. Payouts to the EFEI (Earthquake Fire Expense Insurance) are not expected to be significant; the individual payouts are very limited on a policy basis.

Fire losses are not expected to be a large portion of the insured losses for this event; the small number and size of fires has limited the number of houses affected and the insurance limits are a small fraction of the overall fire losses.

Many fires have been identified within the rubble piles caused by the tsunami. It is not clear how these policies will be settled, but the initial cause of these rubble piles was likely the tsunami not fire. The largest fires have been within industrial facilities, primarily refineries and power production facilities.

Flood and Tsunami  

Indemnification from flooding and tsunami is an optional coverage for most policies in Japan, and take-up rates are fairly low.  It is currently expected that much of the losses from flooding are not insured.

The University of Tokyo (ERI) has posted a ground motion summary from the National Research Institute for Earth Science and Disaster Prevention based on data captured by networks of strong-ground-motion instruments in Japan (K-Net and KiK-Net data). The data includes many recordings closer to the fault where peak ground acceleration exceeded 0.5 g (quite strong) in some cases. Therefore, the shaking damage along the coast might have been significant in some regions; however, these same regions (especially the lowlands where the strongest shaking would have been) were overrun by the tsunami, thus, erasing any evidence of possible shaking damage.

Nuclear Contamination, Evacuation 

Most insurance policies contain exclusions for nuclear contamination. The experience from past earthquakes has been that there is not a lot of business interruption coverage that could be triggered by the large-scale evacuations now in