NU Online News Service, March  11, 3:59 p.m. EST

Despite the size of its nonlife insurance market, Japan insurance penetration is very low, particularly in commercial and industrial lines, said modeler Risk Management Solutions (RMS).

Earthquake coverage, which includes tsunami, is available as an option to a basic homeowners insurance policy, but less than 50 percent of those insured by conventional insurance companies took the option. This does not include cooperative household policies.

A magnitude 8.9-9.1 earthquake hit off the east coast of Honshu, Japan at about 2:45 p.m. local time. The Insurance Information Institute said the quake could be one of the costliest in world history, but insurers and reinsurers have the financial strength to pay the claims that will emerge, said Robert Hartwig, president of I.I.I.

“The Japanese nonlife insurance industry is very large—third only to the United States and Germany—with $107 billion in premiums written in 2009,” said Mr. Hartwig. “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.”

Some earthquake risk in Japan has been securitized through the catastrophe-bond market, but it is too early to say whether payouts will be triggered, he added.

Commercial lines are “significantly underinsured.” Many are insured only on an indemnity basis and have no coverage for loss of profits or earthquake, RMS said. However, most homeowners and commercial fire policies include earthquake fire expenses.

Operations were suspended at auto manufacturers, electronics factories and oil refineries. The quake’s epicenter was about 235 miles from Tokyo but just 80 miles from the city of Sendai with a population of one million.

Reinsurance brokerage Holborn reported that 200 people have died in Sendai and many are lost as a result of a huge tsunami that followed the earthquake and covered hundreds of miles, picking up cars, planes boats and debris with its current.

Holborn said “there will be major losses on fire, flood, commercial, marine, auto, [workers’ compensation] and life coverages.”

Sendai is home to major industrial and manufacturing areas, with many chemical plants, but the extent of damage to these facilities is not known, RMS said

James Vickers, chairman of Willis Re International and Specialty, said in an e-mail that the insurance broker’s offices were unaffected by the earthquake and its staff is safely accounted for.

The firm’s insurance company clients are fully operational and are managing the claims-management process.

While it is still too early to know the extent of the impact on the insurance industry, he noted that the region most affected by the earthquake, Sendai, “is not one of the key areas of major economic activity in Japan” and insurance penetration totals are much lower than in the major urban centers such as Tokyo, Nagoya and Osaka.

As far as the impact on the insurance industry, Mr. Vickers said that earthquake insurance for dwelling risks are retained “entirely within Japan in the government-based pooling scheme managed by Japan EQ Re.” The only losses for property and casualty companies that would be reinsured would be for commercial and industrial risks.

Reinsurance arrangements are “slightly different” for mutual companies there, but like P&C insurers, earthquake coverage is not automatically written, he said.

Mr. Vickers noted that the 1995 Great Hanshin-Awaji earthquake in Kobe resulted in economic loss estimated at approximately 2.5 percent of Japan’s GDP at that time. Insured loss was around $3 billion, and that was mostly retained domestically, he said.

Nuclear reactors at the Hokuriku Electric Company’s Onagawa facility automatically shut down after the earthquake, and no leaks were reported. A thermal power plant in Isogo stopped operations, RMS said.

Modeler AIR Worldwide said a clear picture of the damage from the earthquake and tsunami is still being developed, but there have been reports of building collapses and hundreds of homes being washed away.

Fires are burning commercial plants, industrial facilities, office buildings and oil refineries, AIR said.