Posted on 11 Apr 2011
The terrible human cost and the financial impact of the devastating March 11 earthquake and tsunami that hit Japan are still being assessed, with further concerns raised over Fukushima and other nuclear facilities prompted by reports of a powerful new magnitude 7.1 aftershock on April 7. But it appears that, while economic losses are substantial and are expected to rise further, insurers’ exposure will be limited. Towers Watson estimates that total insured losses from the disaster will be between US$20 billion and US$45 billion.
This estimate includes damages to residential and commercial properties (including business interruption), marine, auto and life, but is exclusive of nuclear losses. Any potential liabilities associated with the nuclear exposure from the event are not significantly insured by the private market and have not been included in our assessment.
Insurers’ exposure will be limited because of the way that risk mitigation is structured in Japan:
• Residential earthquake coverage take-up rates are low, limiting insurers’ exposure to this risk.
• Residential property losses are shared in an arrangement that incorporates risk taking by insurers, a pooling vehicle on behalf of insurers, and the Japanese government.
• Commercial property is largely covered by local insurers offering selected large corporations coverage through an ordinary fire policy.
Life insurance claims are handled in a straightforward way. But an exception being made in this case will allow families of victims to collect an accidental death benefit rider in addition to the death benefit. The terms of the rider exclude death resulting from an earthquake, but the life insurance industry has waived that stipulation.
The extent of the ultimate costs will have to incorporate uncertainties associated with liability for time element coverages such as business interruption losses. But what is fairly certain is that because Japan has retained most of the risk rather than turn to the international reinsurance market, the disaster is unlikely to result in global price hardening.
Japan’s localized risk retention framework would benefit from a reassessment. Looking ahead, Japan and its insurance market may want to explore ways of spreading more of the risk internationally, as countries in the Pacific Rim such as New Zealand have done.