Earthquake recovery in Japan and Haiti offer lessons for development

The take away for South Africa as a developing country from recent natural disasters in Haiti, Chile, New Zealand and Japan is that where national and local authorities have disaster management plans, including insurance, in place, the more likely the country will be to sustain development regardless of natural disaster.

This, coupled with “a strong culture of personal insurance is what allows a country to bounce back quickly and effectively from disaster” says Tom Healy, Business Unit Manager, Knowledge Centre, Alexander Forbes Risk Services.

As such, it will be interesting to contrast Japan’s recovery, predicted to cost US$300 billion over the next five years, with Haiti’s very slow recovery process. 18 months after the magnitude 7.0 earthquake which hit the island in January 2010, many of Haiti’s structures are yet to be rebuilt.

Japan is the world’s third largest economy with huge exports. It is exceptionally well capitalised, including against disasters. It also has a very large national insurance industry in both direct insurance and reinsurance. It is the fifth largest insurance market world-wide after Germany, Switzerland, USA and UK. Several foreign insurers also participate in Japan both directly and through reinsurance.

As such, “the next big tsunami in Japan will be a paper one, of insurance claims from individuals, light industry and heavy industry, hitting direct insurers on a daily basis for months to come” says Healy. This will roll up to the reinsurance level at each month-end as these receive very large claims from insurers.

Once all the insurance claims have been processed and the valid ones agreed (now estimated in the region of US $30 billion), there will be another tsunami of insurance payments flowing strongly back from the reinsurers to the insurers - and then to the original insureds in the affected region. These must then decide what they will do with the indemnity or compensation money - either rebuild, move away, start over, close down, retire early etc.

The insurance money, plus other disaster funds (that could add another US $65 billion), are then likely to flow quite quickly into the post disaster Japanese economy via:

· site clearance contracts

· reconstruction contracts

· orders for new household and office contents or equipment, plant and machinery

· repair or purchase of new motor vehicles orders (since few will be recoverable if ever found)

· raw material stock orders

· imports

· business interruption payments to keep businesses and employees afloat ahead of being able to turn a profit again

These immediate reconstruction efforts contrasts strongly with Haiti, which by all accounts, had little if any disaster risk capital and very little insurance protection - forcing it to rely on foreign loans and charities for funds to reconstruct their island’s infrastructure, estimated at around US $14 billion in overall economic loss.

While a good deal of money was raised from abroad, corruption has seen much of it fail to reach those who need it. Many Haitians are today, more than a year after the earthquake, still living in survival tents with much key infrastructure yet to be rebuilt.

“The comparison between Japan, New Zealand and Chile on the one hand, and Haiti on the other reveals the critical importance of insurance in ensuring that countries recover from disaster” explains Healy. Insurance is the instrument which oils the wheels of the economy in both good and bad times. As such, the level of penetration of insurance into an economy has a marked effect on how effectively a country can respond to catastrophe of any nature.

For example, it is already know that Munich Re (Germany) and Swiss Re (Switzerland) will each be contributing US $2.1 billion and US $1.2 billion respectively to Japan’s recovery. Haiti, which arguably needed it more, was not able to call on foreign capital to this extent since it was extremely underinsured.

Ironically, developing countries with the least skills and resources to manage development, let alone launch and co-ordinate a nation-wide recovery programme, need disaster risk capital and insurance the most. Yet national and local authorities in developing countries are either unable to afford sufficient insurance or don’t rate it as a budget priority. Similarly, poor citizens battling to feed their families find it equally hard to prioritise insurance.

Yet without insurance any disaster recovery process can take an awfully long time to get off the ground as the very different experiences of Haiti on the one hand and Chile and New Zealand and now Japan on the other will illustrate.