CEO Joe Plumeri, Willis Group, said Tuesday that the earthquake that struck Japan March 11 won’t cause enough insured losses for industry-wide prices to rise. He did, however, warn that there could be great deal of business interruption claims from companies, like Toyota that have shut factories and seen supply chains disrupted.
Insurers and reinsurers could suffer losses of $20 billion to $30 billion from the Japan quake, according to catastrophe-modeling firm AIR Worldwide.
The disaster sparked speculation that insurance prices may begin rising again, after several years of decline. Read about the outlook for rates here.
When the insurance industry is hit with a big loss, it cuts the amount of capital available to back risk. Meanwhile, demand for coverage usually rises.
This combination can trigger big increases in the cost of coverage, especially in the reinsurance business, which reacts more quickly than the primary insurance market. That’s known as a hard market, while an environment of falling prices is called a soft market.
However, Willis’s Plumeri said Tuesday that such speculation has ended.
“Very early when Japan occurred everybody thought that the rates were going to spike up and it would be a great excuse for the insurance companies to raise rates,” Plumeri said during a presentation to investors. “That’s abated by now.”
“We’re running this business like it’s still soft,” he added later in the presentation.
During the first couple of days after the disaster, Willis was contacted by people looking to start so-called sidecars, but those efforts have stopped, Plumeri added.
Sidecars are usually private reinsurance firms backed by a small group of investors that underwrite specific parts of insurance contracts and often cover losses from big events like hurricanes. Read about one sidecar that crashed here.
Others considered setting up a new Bermuda company to take on risks, but “that seems to have gone away,” Plumeri also said.
The Willis CEO said it’s still not clear how much the insurance industry will end up paying in claims from the Japan quake.
“You’re not going to know for a long time how much of an effect business interruption has had because of supply chain issues coming out of Japan,” Plumeri said, adding that’s a “big, big deal.”
Toyota told its U.S. dealers that they face a shortage some replacement parts due to production disruptions, the Wall Street Journal reported Tuesday.
Toyota said in a memo on Monday that about 180 replacement parts are made by suppliers that sustained significant damage to their facilities from the March 11 earthquake and tsunami, the newspaper said.
Production is not expected to resume for “at least 30 days” and the number of affected parts and length of production disruption may increase, according to the Journal.
”I still think the whole thing has got to unfold,” Plumeri said. “Business interruption plays a part in the Japan thing and especially the supply chain stuff.