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First Blood: Japan's Quake to Hit Insurance Market

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First Blood: Japan's Quake to Hit Insurance Market

by James Eck and Kenji Kawada, Moody’s Investors Service, 16 March 2011
topics:
Risk Management
tags:
catastrophe bonds earthquake insurance market players insurers Japan reinsurers tsunami

On 11 March, a massive 9.0 magnitude earthquake struck off the coast of northeast Japan, approximately 130 km east of Sendai and 373 km northeast of Tokyo. The earthquake, the largest ever recorded in Japan, triggered a powerful tsunami with waves up to 10 meters high in the hardest-hit Miyagi prefecture, resulting in more than 10,000 dead and missing persons and causing vast destruction to property and infrastructure.

 
Preliminary estimates of insured losses are US$15 billion to US$35 billion, and could rise as losses from the tsunami, which are not yet fully incorporated in the range, are refined. These losses will fall to insurance and reinsurance companies in Japan and around the world, resulting in negative credit implications for both sectors.
 
The ultimate amount of insured losses from this event, as well as the market participants that will bear them, will depend on the types of coverage provided (residential earthquake risks are covered by a government reinsurance program, while commercial risks are not), the amount of reinsurance purchased, and the structure of reinsurance programs.
 
An additional wildcard is the potential for business-interruption losses, which are influenced by damage to power and transportation infrastructure. We believe that estimating claims will be protracted process, as the size and scope of the event will place significant strain on insurers’ claims adjustment resources. Moreover, aftershocks could last for weeks, causing additional insured losses.
 
We expect the following insurance market participants to be most affected: Japanese domestic insurers, Japan Earthquake Reinsurance Co. Ltd., international insurers, global reinsurers/Lloyd’s market, retrocessionaires and catastrophe bonds.
 
Japanese Domestic Insurers
The Japanese non-life insurance market is highly concentrated, with three groups accounting for around 85% of the Japanese market on premium income from fire (including earthquake) insurance:
 
  • MS&AD Insurance Group (insurance financial strength rating (IFSR) Aa3 stable for Mitsui Sumitomo Insurance and A1 stable for Aioi Nissay Dowa Insurance)
  • Tokio Marine Group (IFSR Aa2 stable for Tokio Marine & Nichido Fire Insurance)
  • NKSJ Group (IFSR Aa3 stable for Sompo Japan Insurance)
 
Earthquake coverage is not included in standard fire policies in Japan and must be purchased separately for most residential property exposures. Earthquake insurance covers damage from earthquake, fire following earthquake, volcanic eruptions, and tsunamis.
 
Residential earthquake risk is ceded by insurers to Japan Earthquake Reinsurance Co., Ltd. (JER). However, Japanese domestic insurers take back a portion of losses incurred by JER above ¥115 billion (US$1.4 billion), with maximum exposure of ¥593 billion (US$7.2 billion).
 
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