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Nuclear Crisis in Japan Complicates Insured Loss Estimates

Source: A.M. Best

Posted on 29 Jun 2011

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The March 11 earthquake and subsequent tsunami and nuclear crisis in Japan have created loss-estimate and coverage complications, some of which point to a re-visitation of risk modeling and natural catastrophe risk management.

Calculating of losses has been truly hampered by the nuclear crisis and evacuation and resulting exposures, said Tom Larsen, senior vice president of product architect at risk modeler Eqecat. Accessing damaged properties in evacuated areas affected by the Fukushima nuclear plants for loss estimates has been difficult at best, according to Larsen.

It's caused power shortages and blackouts, with a loss of 20% of the electricity supply in the northeastern region -- another hurdle in tallying liability and business interruption estimates, noted Larsen.

Insurance losses for the March 11 earthquake may range from US$22 billion to US$39 billion including personal and commercial lines, according to Eqecat. The commercial lines such as automobile, marine and property are expected to account for US$15 billion to US$29 billion in losses.
Japan's nonlife insurance industry has paid over 1 trillion yen (US$12.4 billion) for insurance claims related to the March 11 earthquake and tsunami as of June 22, according to the General Insurance Association of Japan.

Nonlife insurers have received 686,299 claims enquires related to earthquake insurance on dwelling risks, with 634,966 claims already settled, according to the trade body representing 25 nonlife insurance companies in Japan.

Nonlife insurers have paid 668.3 billion yen for insurance claims in the northeastern region, with 323,153 settled claims as of June 22. In the eastern region including Tokyo, nonlife insurers paid 331.5 billion in claims with 310,492 settled claims. Hokkaido region reported 562 million yen in insurance claims.

Extensive damage took place in the prefectures of Fukushima, Miyagi, Ibaraki, Iwate, Tochigi and Chiba, which are agriculture and fishing areas in Japan.

The most problematic aspect of loss coverage could be nuclear radiation, disrupting the manufacturing of Japanese autos and electronics, according to a report by law firm Cozen O'Connor.

Property losses caused by the Fukushima nuclear power plants may include direct physical damage and loss of use of property contaminated by radiation. Claimants would include property owners unable to access or occupy their homes and businesses. For overseas policyholders, the report noted losses may include direct losses to factories and warehouses in Japan and products manufacturing or storing in the affected areas.

Also, power supply disruptions and supply chain problems will result from trouble securing transportation, water and raw materials. "There is likely to be considerable uncertainty over how severe, how lengthy, and how frequent these power outages and supply chain problems" causing local and overseas business, the report said.

Although the northeastern region generates about 6% of Japan's overall gross domestic production, the major issues are business interruption and supply chain problems for companies dependent on Japanese suppliers and customers.

The earthquake could lead to a re-visitation of risk modeling in Japan, because it's created so much information and insight about quakes and their damages, according to Larsen.

Larsen said there's a desire for a tsunami risk model, which has not been available and built for commercial application. Japan's system currently does not have the magnitude level of 9, which indicates the need for a review on the maximum magnitude in Japan.

Japan experienced more than 1,000 aftershocks after the March 11 earthquake. In commercial policies, there is a defined time period for identification of separate event with specified terms and conditions. Larsen noted claims management is one area for insurers to address this uncertainty.
Post-quake, global reinsurers are expected to raise rates. While domestic insurers in Japan appear to be well positioned to absorb net losses from the event, attention is being turned to the overall picture for global reinsurers, according to the 2011 Best's Briefing: Global Insurance Reinsurers

Anticipate Higher Rates in Wake of Tohoku.

In Japan, the report said three-month extensions were grated for some excess-of-loss renewals, as losses required more evaluation. Higher rates have been reported for some quota-share business, and more modest increase was applied to renewals of excess-of-loss contracts. More broadly beyond loss-affected regions, there has been less demand from cedants for rate reductions, said A.M. Best.