He notes that Japan has the economic stability and size to withstand
losses of this magnitude. Other countries, however, would not be so fortunate. He says that had Chile not had risk-sharing mechanisms in place, its economy could have been very hard hit.
Muir-Wood notes: “Japan is big enough to fund a cash injection into the
markets and it has proved in the past that it is very good at getting back on its feet again. This will be very painful for the country but it will also galvanise Japan.”
Larsen also warns the reinsurance industry of the dangers of not planning for the wider economic fallout from such events. “The stock markets were affected. Many insurers keep their reserves in capital market instruments so they have the potential to get hit on both the asset and liability sides—that can be dangerous.”
The lesson here is a simple one, say observers. “A potentially crucial issue
in this context is contingent business interruption,” says Smolka. “This could have implications for suppliers and buyers of Japanese products. Consequential contingent BI (business interruption) is a key topic for the insurance industry generally. The first consequence, which we can already see, is the need for greater transparency of interdependencies. The most obvious examples are the automotive and chip-manufacturing industries, where Japan plays an important role.”
Morin at Towers Watson agrees. “Supply chains are global and an event
like this opens your eyes to the potential consequences of events of this magnitude,” he says. Larsen at Eqecat agrees: “This will happen again. A greater level of business interruption coverage is needed and better enterprise risk management at all levels.”
Despite many clear lessons to be learned, the risk community is broadly
in agreement that the industry has weathered the Japan earthquake and subsequent losses well. Although further research into tsunami risk is imperative, if anything, the biggest lessons should be taken on by the Japanese government, which has been left with a massive bill.
“The insurance industry’s global capital base appears to be in better shape today compared for example with 2001, the year of the World Trade Center attacks,” says Smolka. “And risk management procedures and discipline have improved since then—particularly in the reinsurance industry. The measures to cope with the high earthquake risk in Japan were already in place before the earthquake and have proven successful. On the other hand, the pressure to improve profitability will certainly increase.”
Others, such as Dr Jayanta Guin, senior vice president of research and modelling at risk modelling firm AIR Worldwide, are also keen to be realistic about the industry’s ability to predict such events. But this makes the use of risk-sharing mechanisms and risk management tools all the more important.
“Fortunately, catastrophes such as the recent earthquakes in Japan
and New Zealand are rare. But it is exactly their rarity that makes estimating losses for future catastrophes so difficult,” says Guin. “Furthermore, the increase in the number and value of exposed
20 | INTELLIGENT INSURER | Summer 2011
THE NUCLEAR QUESTION One of the most devastating side effects of the Japanese earthquake
and subsequent tsunami was the damage it caused to several nuclear power facilities. The damage triggered the evacuation of the population in the immediate vicinity and reports of radiation leaks posing a potential threat to the wider population.
The loss estimates given by the industry exclude any exposure
to this nuclear threat, because most policies specifically exclude it. Nuclear risks are covered by a bespoke nuclear pool. This, however, explicitly excludes nuclear losses caused by earthquake or tsunami.
Not all are convinced that the industry will have nothing to pay,
however. “The market should not be liable due to the wording of policies, but there could be some liability issues that we are struggling to see right now,” says Larsen at Eqecat. Morin at Towers Watson agrees: “The nuclear stuff is not fully understood and it needs to be clear.”
Operators of nuclear plants in Japan must buy liability insurance
through the Japan Atomic Energy Insurance Pool. But they are required to buy coverage of only about $2.2 billion for liabilities and it does not cover earthquake damage or business interruptions. Thus, it will likely again fall to the Japanese government to bear these costs.
properties in areas of high risk has and will continue to contribute to increasing losses for insurers.
“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. It is critical that companies have the tools they need to make an appropriate assessment of their risk and to develop risk management strategies that will prepare them for the next large-scale event.”
“The purpose of catastrophe modelling is to help companies anticipate
the likelihood and severity of potential future catastrophes before they occur so that they can adequately prepare for their financial impact. The insurance industry has embraced catastrophe models to estimate the loss potential to their books of business and to give them the tools and information they need to choose between alternative strategies for managing that risk. These recent events further demonstrate the importance of using catastrophe models to manage catastrophe risk.”
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