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Japanese quake sends ripples through the insurance world

15 March 2011 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

At 14h46 on 11 March 2011 a massive earthquake measuring 9.0 on the Richter scale struck 130km east of Sendai, Japan. The quake gave rise to tsunamis up to 10 metres high, which tore into towns and villages along Japan’s Pacific coast, travelling as far as 10 miles inland. In the immediate aftermath of the quake 20 countries in the region were on tsunami alert. Television footage showed graphic detail of the devastation caused by rising water… Houses and other structures were torn apart – cars, boats and aeroplanes (even fighter jets) were picked up and dumped hundreds of metres inland! By Monday morning Japanese police had confirmed 1, 647 deaths, but the media says thousands are still unaccounted for.

Apart from the massive cleanup operation the Japanese are facing possible radiation threats from two of the country’s nuclear power stations which suffered partial meltdowns over the week-end. The power plants, damaged by the earthquake and subsequent tsunami, were struggling to keep their nuclear cores cool. Two explosions at the Fukushima I Nuclear Power Plant forced authorities to evacuate all citizens within 20km of the plant, while a 10km perimeter has been established around the Fukushima II Nuclear Power Plant as a precaution.

Repair bill could top $100 billion

The Japanese stock market shed 5% after the quake, with companies like Japan Marine Insurance (down 14%) leading the way. And the bank of Japan has already stepped in with around $185 billion to ensure liquidity in the country’s money markets.

This disaster is going to cost insurers and re-insurers billions of rand. Early estimates from AIR Worldwide put the insured losses from the earthquake and tsunami at $14.5 to $34.6 billion, but CNN has already suggested the insured price tag could top $100 billion. Uninsured losses could exceed this figure by some margin. There is little doubt the re-insurers will be hit hard. Already reeling from wide-scale flood and hurricane damage on the East Coast of Australia and earthquake damage in New Zealand, they now face additional claims running into hundreds of millions of dollars.

Re-insurance is the practice by ordinary insurers of transferring some of their risk portfolios to other parties (the re-insurers) in order to reduce their exposure to a single large insurance event. A local insurer would, for example, assess their overall exposure to flood damage by a single flood event on the Vaal River – decide how much of the risk they can handle – and then arrange cover with re-insurers for anything in excess of that risk.

Re-insurers have varying exposures to the catastrophe

Re-insurance giant Swiss Re is still calculating the group’s exposure to the event. They issued a statement in which they committed to the Japanese insurance market and to supporting the country’s recovery from the devastating earthquake and tsunami. “We are deeply sympathetic to all those who suffered from the disastrous earthquake and tsunami in Japan,” said Swiss Re Chief Executive Stefan Lippe. The group said it would be difficult to apportion liability at this stage due to the number of factors contributing to the damage. Some damage was caused by the earthquake, some by the tsunami and some by fires following these events. “In terms of residential insurance policies, the cover for earthquake shock and tsunami are provided by a government-run scheme,” they said. This cover was typically not re/insured in the private market. Coverage for nuclear facilities in Japan excludes earthquake shock, fire following earthquake and tsunami, both in terms of physical damage and liability, while coverage for property policies excludes nuclear contamination!

Global re-insurer Munich Re has already announced $1.5 billion in losses from the Australian and New Zealand disasters. The group’s exposure to Christchurch alone topped $1 billion. And a few days before the Japan disaster, Munich Re Chairman Nikolaus von Bomhard told shareholders they would need a very mild rest-of-year in order to trade profitably through 2011. The group incurred natural catastrophe losses of $2 billion in 2010 with half of this total due to the Chilean earthquake.

And QBE, Australia’s largest international insurance and re-insurance group and one of the top 25 in the world, announced they were exposed to approximately $125 million in net insurance claims from the earthquake and tsunami in Japan. This follows their recent announcement of $550 million for large individual risk and catastrophe claims so far in 2011, mostly from Australia and New Zealand. “The bulk of our estimated net claims from the devastating Japanese earthquake will come from the relatively low exposures in our re-insurance, marine and energy operations in Europe,” CEO Frank O’Halloran said.

A rise in re-insurance premium in the offing

Given the sheer scale of natural disasters in the early part of 2011, local insurers can expect their catastrophe re-insurance rates to sky rocket next time they sit around the negotiation table… It seems certain that some of the “risk” in the global re-insurance pool will fall on local insurance companies’ shoulders.

Editor’s thoughts: Recent events in New Zealand and Japan must have the US state of California shaking in their proverbial boots. The region – which accounts for a huge slice of US GDP – is situated slap bang atop the San Andreas Fault – and that means a major earthquake is always just a heartbeat away… Q1 2011 has dished up an unbelievable number of natural disasters thus far. Do you think 2011 will be a record year for catastrophe re-insurers? Add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Paul, 15 Mar 2011
What also needs to be considered is the ripple effect to our local market, something consumers tend to disregard, however the impact will mean difficult reinsurance renewals for local insurers who are effectively picking up a portion of these costs. Although many insurers have had good financial results the impact of these global disasters may mean that we will not see the relaxation of rates anticipated after the releasing of results and before the Tsunami. We could be in for another tough year.
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