Industry responds as scope of disaster comes into focus.
Insurance Networking News, March 11, 2011
While it’s too early to estimate any potential insured losses, it’s clear that the magnitude 8.9 to 9.1 earthquake and subsequent tsunami that struck the eastern coast of Japan today will have implications for the insurance industry, especially reinsurers.
As the world’s third-largest economy and fourth-largest insurance market, many insurers have a stake in Japan with direct non-life premium income amounting to $104.9 billion in the year ended March 31, 2009. This perceived exposure was evident as the share prices of major reinsurers such as Swiss Re and Munich Re AG dipped in the stock market. A spokesperson for Swiss Re told Insurance Networking News that it’s still too early to make any statement about Swiss Re's exposure with regard to the Japan quake.
While not to minimize the suffering inflicted upon the coastal towns in Miyagi Prefecture, which bore the brunt of disaster, it’s apparent that location of the quake—the epicenter was approximately 231 miles northeast of Tokyo—may serve to limit insured losses. Indeed, with the epicenter of the earthquake offshore, it appears most of the damage was caused by the tsunami the quake generated, rather than from the shaking of buildings further inland. Nonetheless, Sendai, the capital of Miyagi Prefecture, and the surrounding region is a major industrial and manufacturing area.
Another mitigating factor, notes RMS, is that insurance penetration and density is very low in Japan when compared to leading western markets. According to RMS data, commercial and industrial lines are significantly under-insured, with many large corporations insuring their properties on an indemnity basis only, with no loss of profits or earthquake insurance. Moreover, many small businesses and households in Japan are completely uninsured.
“It is estimated over 50% of households have building insurance and 40% of vehicle owners hold motor damage policies,” RMS said in a press release. “Earthquake, including shock, fire, and tsunami, is available as an optional peril on properties covered by a basic household policy. In 2010, it is estimated less than 50% of policyholders insured through conventional insurance companies took this option.”
As was seen in the devastating earthquake that struck Chile last year, much of the loss from an insurance perspective will be incurred from secondary events, such as business interruption.
Indeed, a 2010 sigma report from Swiss Re noted that while death tolls from earthquakes are often higher in quakes that occur in the emerging markets, insured losses are by far the highest in the developed countries. For example, the costliest earthquake to date, the Northridge quake that struck California in 1994, caused $20 billion in insured losses and 61 deaths. By comparison, the insured losses incurred after the 2004 Christmas tsunami totaled roughly $2 billion while an estimated 220,000 people lost their lives.
Swiss Re notes that certain industries, such as pulp manufacturers, breweries and refineries are especially susceptible to business interruption. According to RMS, reactors at Hokuriku Electric Co.’s Onagawa nuclear facility in northern Japan shut down automatically after the quake, although no nuclear leaks were reported. Electric Power Development (J-Power) also suspended operations of its thermal power plant in Isogo, Yokohama. As a result, car manufacturing plants, electronics factories and oil refineries have suspended operations across large parts of Japan. Nissan and Toyota have closed several of their facilities. What’s more, Japan’s largest oil refinery has suspended operations at three refineries in Sendai, Kashima and Negashi.
Although tallying the damage from the quake will take some time, one insurer, Alpharetta, Ga.-based Aflac has already pledged 100 million yen to the International Red Cross to assist with their disaster relief efforts in Japan.
"Our thoughts and prayers go out to the Japanese people during this very difficult time," Aflac Chairman and CEO Dan Amos said. "We stand ready to assist in the healing process and are pledging these funds to ensure that basic needs are cared for during this crisis."