“ The recent events in Japan, coupled with its long history of damaging earthquakes, highlight the vulnerability of Japan’s heavily concentrated urban areas and serves as a reminder that large-scale loss of life and widespread repercussions to the insurance industry— and the global economy—are real.”
industry. Despite overall economic losses now estimated to exceed $300 billion, total insured losses stemming from the disaster are only estimated to be between $20 and $35 billion. This is because the majority of economic damages are either not insured or are covered by government insurance programmes.
It is interesting to compare the situation in Japan with other countries
that have experienced major natural catastrophes such as Hurricane Katrina and the recent earthquake in Christchurch, New Zealand. A report by Towers Watson does just this.
It notes that roughly $65 billion of the $150 billion in economic losses Larsen agrees but believes that the impetus for the change will come
from reinsurers. “The pressure to get tsunamis modelled will come from reinsurance companies driven by a need to protect their capital,” he says. “They will want to help their clients understand the potential impact so that they can price their own risks accordingly. We have seen a lot of tsunamis in the world, but not insurance consequences on this scale before. We expect a lot more inquiries about the potential for modelling this as a result.”
Not all believe this will be a straightforward process, however. Francois
Morin, global product leader, property & casualty claims reserving for Towers Watson, who specialises in risk and capital management and performance measurement, argues that although tsunami modelling makes a lot of sense in theory for the industry, in practice it will not be that simple.
“It would be nice to factor tsunami risk into the models, of course, but
it is a big nut to crack,” Morin says. “I am not sure how far off the coast the models are accurate, for example. Sometimes, the actual earthquake can take place several nautical miles off the coast. We need to accelerate the development of these models, but I think a truly reliable solution is a long way off.”
Morin adds that the way in which risk models can be used to design and implement flood defences can also be limiting. “In Japan, in many ways, their preparations were excellent, but there is only so much that design and engineering can do. Mapping things out in theory is one thing, but you only get to test it out every so often. In this instance, the defences were clearly inadequate.”
Muir-Wood also notes that the use of such models will not be limited to
just pricing risk, but they will be more widely used by planners. “One big question is whether governments should allow people to live in certain low-lying, high-risk areas,” he says. “Clearly, tsunami risk needs to find its way into national risk models to prevent future catastrophes in which tens of thousands of people die because of not anticipating an event of this magnitude.”
The recent Japanese earthquake is also notable because of the low percentage of total losses that will be borne by the private insurance
18 | INTELLIGENT INSURER | Summer 2011
stemming from that event was insured privately (43 percent) and most of that amount was, in turn, ceded into the international reinsurance markets. In contrast, no more than 12 percent of the Japanese economic losses are covered privately, and of that $20 to $35 billion, only between $12 and $15 billion is reinsured internationally—less than 5 percent of the economic losses.
The New Zealand earthquake is different again. Despite being a
much smaller loss in economic terms, the majority of the losses will be covered by the international reinsurance markets—an estimated $10 to $12 billion. In fact, the New Zealand earthquake could cost international reinsurers more than the Japanese one, despite overall losses being a fraction of the size.
The whole question of risk perception also relates to the penetration
levels of earthquake coverage at a household level. This stands at around 30 percent of homes in Japan—clearly not enough given the consequences of recent events. “While those who lived in northeast Japan did know they lived in an earthquake zone, along the coast of Fukushima Prefecture to the south, people did not see earthquake risk as a very big problem and did not widely purchase earthquake insurance,” says Muir-Wood.
Larsen adds that the low earthquake insurance penetration in Japan
was no surprise. He also notes that this applies to other parts of the world. “Despite the high risk, California is the same. It has very anaemic penetration levels. It is not a desirable thing for people to buy.” Anecdotally, the Japan quake has sparked renewed interest in earthquake coverage in California, although this is yet to be confirmed in hard figures.
But even for those households with earthquake coverage, the risk barely
got past the Japanese government. “This was to be expected,” says Smolka at Munich Re. “Firstly, the earthquake limits under the property policies for commercial risks are relatively low. Additionally, due to supervisory regulations in Japan, a significant part of the insured residential losses will not be transferred to the international insurance and reinsurance market.”
But this is a problem that Morin believes both Japan and other countries should learn from. “There is huge value in sharing risk. It is much better to have smaller pieces of a pie instead of a single bigger slice. It is the only way that mega catastrophes can be dealt with. It is what the California Earthquake Authority does—it has mechanisms in place to pass risk into the private market. In Japan, however, the government ends up paying.”
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