Japan disaster update - Facts, figures and insurance implications

Friday 11 March’s graphic images on Sky, CNN and other TV channels brought the terrifying destruction of Japan’s earthquake and tsunami into our homes and offices.

Assessing the full scale, cost and future implications of this tragedy for Japan and the rest of the world is the first step that will need to be taken on the journey to recovery.

Despite the horror of this tragedy, Japan, as the world’s leading nation in risk management and disaster planning was better prepared than most for a disaster of this nature. Certainly, it is an outstanding credit to Japan’s foresight that many buildings withstood the prolonged earthquake shocks (a full minute) and the over one hundred strong aftershocks.

In fact, there were probably no deaths that resulted directly from the earthquake.

While Japan is also prepared for tsunamis, the scale of Friday’s wave which arrived just 20 minutes after the quake was too vast for even the very best precautions and the most efficient warning system.

Despite the many deaths that resulted and the state of emergency declared throughout Japan the people have responded in an orderly and civil fashion.

The events

The initial earthquake fault-line (magnitude 8.9) was about 500 kilometers long beneath the sea.

The resulting widespread (and probably the world’s largest recorded) tsunami waves were up to 10 meters high at shore level and travelled at up to 60 kmph resulting in severe and extensive flooding, water ingress, immediate widespread fires and explosions. The strong retreating tsunami waves then took debris, including people, up to 15 kilometers out to sea.

Numerous earthquake aftershocks followed (over 100 with many over magnitude 6.5), with subsequent smaller tsunamis, distant tsunamis and the later escape of nuclear radiation (up to 20% above the norm) from four over-heating Nuclear Power Reactors affected by the quake and/or tsunami.

The region involved

The north east coast of Japan’s Honshu Island, for over 1000 kilometers north to south and for up to ten kilometers inland, was most affected.

Western, northern, central and southern Japan were unaffected by the tsunami. These regions are providing food, water, shelter and facilities for the survivors. International aid has also arrived.

Death toll

Substantial fear and disruption, along with inability to communicate within the affected region is being experienced.

Many people have sustained serious injuries, thousands are still missing and the official death toll currently stands at around 2 500.

While the recovery and burial of the dead needs to take place as soon as possible, many bodies are under rubble and many have washed far out to sea. The final death toll is expected to be well over 10 000.

Over 600 000 people within 20 kilometers of the Fukuchima and Onagawa nuclear power stations have been evacuated to escape possible radiation.

Very cold weather has also blown in from Russia and snow is expected.

The undamaged towns and cities elsewhere in Japan, along with international aid teams, are helping the authorities and those affected, around the clock.

Emergency services

These are fully stretched with immediate and urgent activities focusing on rescue and recovery operations.

Disaster recovery process

The debris removal, water and property clearance requirement is huge along the coastal and inland regions affected. Several large ships and trains have been deposited on inland farms.

Limited power and water supplies need to be restored to the region as soon as possible. A power load-shedding programme has been initiated over the whole of Japan while the affected region is being addressed.

Rebuilding of homes, offices and factories must be planned and implemented. Contents must be replaced.

Thousands of private and commercial vehicles need to be recovered and, if possible, repaired or entirely replaced.

Building and infrastructure contractors will be in short supply, relative to the enormous task involved.

Destruction of physical infrastructure in the north-east

The list of property groups affected includes -

· Residential suburbs (houses, contents, cars, shops).

· Light industrial suburbs (factories, offices, machinery, stock, vehicles).

· Heavy industrial suburbs (factories, offices, plant, machinery, stock, vehicles).

· Several entire towns have been flattened and covered with debris.

· Fuel installations (a petro-chemical plant on fire, four nuclear power reactors near melt-down)

· Harbour infrastructures (piers, bridges, large and small vessels).

· Inland infrastructures (roads, rail, underground pipes/cables, an airport, a dam that breached).

· Transport (cars, buses, trains, civil and military aircraft).

· Utility stations and sub-stations (water, electricity, gas, communications)

· Access routes (many roads and entrances blocked).

In most cases, the tsunami damage is of a total loss nature and interruption of normal life and business activities is likely to be prolonged.

Insurance markets

The economic loss from (and final cost of) this event will be gigantic with figures of US $70 billion to US $100 billion being mentioned. There has been an immediate knock on effect in falling financial markets.

There will most certainly be a reaction from (and claims impact on) both Japan’s regional as well as overseas direct and reinsurance markets.

Japan’s major reinsurance renewals are due on 01 April 2011 and AIR Worldwide (risk modeler) has put out an initial estimate of US $35 billion for insured losses. Reinsurers will also be taking the past year’s Australian floods and New Zealand earthquake into account.

Leading Japanese insurers like Tokio Marine, Mitsui Sumitomo, Sompo, Nipponkoa, Toa and Aioi do provide some earthquake/tsunami cover locally, with the Japanese Government as the ultimate reinsurer through the Japanese Earthquake Reinsurance Corp. The USA’s AIG also has a significant presence in Japan.

Personal lines, commercial and corporate policies will be involved at the direct insurance level in Japan as well as catastrophe reinsurances polices in Japan and, perhaps, elsewhere - more particularly London and Germany.

The actual extent of the claims impact, however, will depend on insurance and reinsurance technical criteria such as -

· historic availability and (costly) take-up of property/interruption earthquake and tsunami insurance in the region affected.

· proximate cause, an insurance principle which links directly-resulting perils like tsunami, fire, explosion, water, floods etc to the original cause (earthquake) and which may be either covered, uninsured or specifically excluded in specific cases.

· the actual extent to which Japanese and foreign (to Japan) reinsurers are finally involved.

· the overall losses being treated as a single event for (re)insurance technical purposes.

· personal accident and life insurances, travel insurances, marine insurances, energy insurances and aviation insurances affected by the event.

· specific nuclear pool cover on the two damaged nuclear power stations.

In addition, there may be business interruption cover in Japan’s foreign insurance policies through suppliers or customers extensions, if they include earthquake and prevention of access losses.

That said, the local Japanese direct and reinsurance markets are very large and strong and should pick up most of the claims.

Major European and Lloyd's reinsurance markets are also known to be involved along with some American and possibly also Chinese reinsurance markets also affected.

South African insurers will not be directly involved, except in a few specific cases where South African client’s business interruption suppliers’ extensions may be in force, though only if earthquake/tsunami is included in this cover.

Given the major reinsurer renewals about to take place for Japan, South African markets may, as a consequence, experience harder than expected terms during 2011/12 renewals.