In the wake of a magnitude 9.0 earthquake that struck Japan on March 11, with insured-loss estimates reaching as high as $35 billion, analysts and rating agencies fell on either side of the debate about whether the event will cause a turn in the long-running soft-market cycle.
Boston-based catastrophe modeling firm AIR Worldwide said its early range of estimates for insurance industry property loss is 1.2-2.8 trillion Japanese Yen, or $15-$35 billion (at current exchange rate). AIR said its estimates include property damage and direct business-interruption losses from the earthquake only, but not automobile losses, indirect business-interruption losses, or losses from the enormous tsunami and landslide that followed.
Modeler EQECAT said insured losses from the event will be between $12 billion and $25 billion.
Individual companies have also begun releasing early loss estimates, with ACE stating that it expects its net after-tax losses in the first quarter from the earthquake, for both insurance and reinsurance, to be $200-$250 million. SCOR said its total property and casualty losses from the Japan earthquake will not exceed $257.9 million before tax. QBE estimated losses of around $125 million.
Several rating agencies and analysts are now discussing whether the industry losses will be enough to turn the market. Moody’s Investors Service said this event—combined with other 2011 first-quarter events such as the Feb. 22 earthquake in New Zealand, January floods in Australia, Cyclone Yasi and U.S. winter storms—could be enough to at least stabilize pricing.
A note from Morgan Stanley agreed. “We now believe reinsurers have suffered large enough losses that many will seek higher global prices to recoup lost profits,” Morgan Stanley said.
Fitch Ratings said the losses from the earthquake can be absorbed by the insurance and reinsurance industry without widespread solvency problems. But the rating agency said that when also factoring in future catastrophe losses—the hurricane season has yet to begin—the Japan quake could “ultimately be a catalyst for a positive change in the pricing cycle.”
Standard & Poor’s echoed that sentiment, stating that worldwide catastrophic events in 2011 may drain enough of the excess capital in the reinsurance and insurance markets to “spark a tightening of premium rates for many lines of coverage.”
And a note from A.M. Best Co. declared, “This could be a market-changing event for global reinsurers, particularly if the major international reinsurers and Lloyd’s are impacted strongly.”
Independent reinsurance brokerage firm Holborn said “there will be major losses on fire, flood, commercial, marine, auto, [workers’ compensation] and life coverages.” Holborn predicted that most reinsurers will now report a loss this quarter and many will have a full-year loss for 2011.
Others, however, do not believe the losses will be widespread enough to cause a market change.
Joshua Shankar, research analyst with Deutsche Bank, said in a report that much of the loss is to be absorbed by the Japanese government, and the losses that trickle to the reinsurance market will not be significant enough to impair companies or change market perceptions.
As noted by James Vickers, chairman of Willis Re International and Specialty, earthquake insurance for dwelling risks is retained “entirely within Japan in the government-based pooling scheme managed by” the Japan Earthquake Reinsurance Company (JER).
EQECAT said it believes $2-$4 billion of insured losses will be ceded to the JER.
Mr. Shanker said that about 25-30 percent of insured losses from the earthquake have the potential to impact Bermuda and U.S. reinsurers, with a loss of $25 billion or less.
“It is our view that a loss event of historical proportions in Japan is unlikely to have an impact on the price of insurance in Peoria, Ill.,” wrote Mr. Shankar.
Dean Evans, an analyst with Keefe, Bruyette & Woods (KBW), said pricing could improve in New Zealand, Australia and Japan as well as for California earthquake coverage and Florida wind renewals. But his KBW report paralleled Mr. Shanker’s report in seeing little likelihood that U.S. domestic insurance prices would harden.
Earthquake coverage, which includes tsunami, is available as an option to a basic homeowners insurance policy in Japan, but less than 50 percent of those insured by conventional insurance companies took the option
This does not include cooperative household policies, which can be reinsured with companies outside of Japan. A briefing from rating agency A.M. Best said cooperative insurers “will be hit severely.” The areas most affected by the earthquake and tsunami are considered non-industrial fishing and farming villages, so the presence of cooperatives is strong.
Property and casualty companies would also be on the hook for reinsured commercial and industrial risks. SCOR, for example, said it covers industrial and commercial risks as a reinsurer of domestic companies, and also as a reinsurer of the “Kyosai,” a cooperative pool of risk.
Rating agency Moody’s listed SCOR as one of a group of the major global reinsurance players to be affected by the earthquake. The list also includes Munich Re, Swiss Re, Hannover Re, Berkshire Hathaway and Partner Re.
ACE is included in a list of international companies Moody’s said is most exposed to commercial lines in Japan, but companies on that list—which includes Chartis, Allianz and Zurich—have only a small market share.
Robert Hartwig, president of the Insurance Information Institute (I.I.I.), noted in a statement that although the Japanese nonlife insurance industry is large—third only to the United States and Germany—commercial lines are “significantly underinsured” for earthquake risk.
Modeler Risk Management Solutions (RMS) said many commercial risks are insured only on an indemnity basis and have no coverage for loss of profits or earthquake.
“The implication is that a larger share of losses is likely to be retained by domestic Japanese insurers and reinsurers than was the case with recent earthquakes in Chile and New Zealand,” Mr. Hartwig said.
A.M. Best said the insured losses of “major players” are not expected to exceed $14 billion. Reserves of these companies stood at about $31 billion as of March 31, 2010, A.M. Best said.
The private insurance market is also not heavily exposed to damage at nuclear reactors.
The International Atomic Energy Agency (IAEA) said there were explosions in three nuclear reactors at the Fukushima Dai-ichi nuclear plant in Japan. Three other reactors at the site were shut down for maintenance before the tsunami. Elevated levels of radioactivity were detected in the area and a 30 kilometer (19 mile) no-fly zone was also established around the plant, the IAEA said.
Michael Cass, general counsel for American Nuclear Insurers, based in Glastonbury, Conn., a joint underwriting company consisting of 21 insurance companies, said under the reinsurance treaties with the Japanese electric companies, damage resulting from earthquake, tidal wave or volcanic activity is excluded under the policy.
He said any claims would be handled by the government. He cautioned that the situation is still developing, but he believes the carrier has limited exposure.
A spokesman for nuclear power plants reinsurer Nuclear Electric Insurance Ltd., headquartered in Wilmington, Del., said the company believes it has no exposure to the power-plant failure because earthquake and tsunami’s are excluded from its policies.
Chaucer Holdings PLC, a Lloyd’s insurance group, said its specialist Nuclear Syndicate 1176 that provides coverage for Tokyo Electric Power Co.—the owner of the Fukushima Daiichi and Fukushima Daini power plants—has no coverage for property damage or business interruption in place.
At the Onagawas plant, owned by Tohuku Electric Power Co., there is property damage coverage, but earthquake and tsunami are excluded perils.
Consequences In California
While the industry tries to get a handle on losses coming from Japan, insurers in California can expect to see claims from damage caused to marinas by tsunami waves that hit the U.S. West Coast.
Pete Moraga, a spokesman for the Insurance Information Network of California (IINC), said information on the extent of the damage to boats and marinas in both Northern and Southern California is unclear as of yet. He said he has heard varying damage estimates, as high as $50 million, but those estimates are unconfirmed, and Mr. Moraga said a clearer picture will emerge once adjusters are able to assess the damages.
From the available videos that showed waves sweeping away boats and damaging marinas, Mr. Moraga said the damage doesn’t seem like it would cause major losses for insurers, “but it’s tough to tell before damage estimates come in.”
As for the types of coverages likely to be triggered, Mr. Moraga mentioned boat insurance, for those owners who took out coverage on their vessels. Videos showed capsized boats, but he said boats that initially appeared to escape the worst of the event could also be damaged after being knocked around against the docks.
Other losses will come from business-interruption claims, Mr. Moraga said. Claimants must meet a physical-damage threshold and a time threshold of 48 hours, he said. He noted that both thresholds will likely be met for businesses in both Northern and Southern California.
Liability claims could also be filed, he said, stemming from lawsuits from boat owners who did not have insurance and claim that the marina did not properly care for their vessels.