Moody's Japan K.K. says that insurance and reinsurance companies, both in Japan and around the world, will sustain heavy losses following last Friday's huge and tragic earthquake in Japan, and this will in turn result in negative credit implications for the two 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," says James Eck, a Vice President and Senior Credit Officer in New York, and Kenji Kawada, a Vice President and Senior Analyst in Tokyo.
"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 a 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," add the two analysts.
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 quake, the largest ever recorded in Japan, triggered a powerful tsunami with waves up to 10 meters high in the hardest-hit prefecture of Miyagi, resulting in more than 10,000 deaths and missing persons, and causing vast destruction to property and infrastructure.
Eck and Kawada made their comments in conjunction with the release of an article they authored in this week's Moody's Weekly Credit Opinion and also published separately as a special comment. It is entitled, "Massive Japanese Earthquake Negatively Impacts Insurers and Reinsurers."
Even though it is still too early to estimate the full extent of the damage, the two analysts identify those market participants and sectors most affected as being Japanese domestic insurers; Japan Earthquake Reinsurance Co., Ltd; international insurers; global reinsurers/Lloyd's market; retrocessionaires; and catastrophe bonds.
With Japanese domestic insurers, the non-life sector is highly concentrated, with three groups -- MS&AD Insurance Group (insurance financial strength rating, or IFSR, Aa3, stable for Mitsui Sumitomo Insurance; and A1, stable for Aioi Nissay Dowa Insurance), Tokio Marine Group (IFSR Aa2, stable), and NKSJ Group (IFSR Aa3, stable) -- accounting for nearly 90% of the Japanese market.
Japan Earthquake Reinsurance Co., Ltd (JER), joint-owned by private P&C insurance companies, assumes residential earthquake exposure from domestic insurers, and provides up to Yen5.5 trillion (US$66.9 billion) in claims-paying capacity. Losses above Yen115 billion (US$1.4 billion) are shared with domestic insurers and the Japanese government at various levels of co-participation as loss levels increase beyond the JER's first layer retention. The company's maximum exposure is approximately Yen606 billion ($7.4 billion).
With international Insurers, the largest global players -- including ACE Limited (IFSR Aa3, stable), Chartis (IFSR A1, stable), Allianz (IFSR Aa3 stable), and Zurich (IFSR Aa3 stable) -- write commercial lines business in Japan, but have only a small market share. These companies also utilize reinsurance to manage exposures.
Moody's further believes that a meaningful portion of losses will flow to the global reinsurance industry (including various Lloyd's syndicates), as catastrophe reinsurance covering Japanese earthquakes is a large market.
Moody's expects the largest global reinsurance players -- including Munich Re (IFSR Aa3, stable), Swiss Re (IFSR A1, stable), SCOR (IFSR A2, positive), Hannover Re (not rated), Berkshire Hathaway (IFSR Aa1, stable), PartnerRe (IFSR Aa3, stable), and Everest Re (IFSR Aa3, stable) -- to report the highest losses on a nominal basis.
Moody's further notes that as the supply of retrocession coverage (where one reinsurer buys coverage from another reinsurer) has increased over the past couple of years, prices have come down, encouraging some reinsurers to buy more protection from retrocessionaires. This coverage is often bought on a collateralized basis from privately held reinsurers and hedge funds.
In this case, given the magnitude of Japan's catastrophe, it is possible that attachment points for such coverages could be breached, resulting in losses being passed to the retrocession market.
Finally, Moody's notes that 10 catastrophe bonds outstanding -- with approximately $1.7 billion in par value -- include Japanese earthquake risk as a covered peril. Most of these bonds were sponsored by global reinsurance companies to hedge their risks, including Munich Re, Swiss Re, SCOR, Flagstone Re (IFSR A3, negative), and Platinum Underwriters (not rated).
These bonds are typically exposed to losses beyond a certain triggering threshold, which can include actual insured losses sustained from an event or a parametric trigger, where the reinsurance payout is based on the location, magnitude, and depth of an earthquake.
The Moody's report says that this event could stabilise reinsurance pricing in the months ahead as reinsurers' capital (and capacity) has been reduced by a string of catastrophic events during the past six months, including two earthquakes in New Zealand, floods and Cyclone Yasi in Australia, and now, the largest Japanese
earthquake since record keeping began.
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