NU Online News Service, March 14, 11:58 p.m. EST
The insurance industry is just beginning to grasp the consequences following the massive earthquake and tsunami in Japan late last week, with one catastrophe modeler estimating insured property losses at $35 billion.
Some smaller reinsurers "may suffer outsized losses relative to their capital positions," according to Standard & Poor's MartketScope Advisor. Claims from the earthquake are "likely to set new records."
Losses from this earthquake and other catastrophic events this year "may spark a firming of worldwide insurance and reinsurance rates," Standard & Poor's said.
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"We now believe reinsurers have suffered large enough losses that many will seek higher global prices to recoup lost profits," said a note from Morgan Stanley.
Fitch Ratings said the losses from the earthquake can be absorbed by the insurance and reinsurance industry without widespread solvency problems but this events and the others in 2011 "could ultimately be a catalyst for a positive change in the pricing cycle."
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," S&P said.
Independent reinsurance brokerage firm Holborn said the economic loss from the earthquake in Japan will be twice that of last year's quake in Chile. Holborn predicts most reinsurers will report a loss this quarter and many will have a full-year loss for 2011.
Boston-based catastrophe modeling firm AIR Worldwide said it estimates that insured property losses from the 9.0 magnitude earthquake that struck off the coast of northeast Japan on Friday—not including losses from tsunami-related losses—could be as much as $35 billion.
In an announcement yesterday morning, the firm said its early range of estimates of insurance industry property losses related to Friday's Tohuku quake is 1.2 trillion-to-2.8 trillion Japanese Yen, or $15-to-$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 tsunami and landslide.
Ultimately the insured losses will depend on the layers of the complicated Japanese market. Residential earthquake risk is covered by government reinsurance, but commercial risks are not, according to rating agency, Moody's.
"We believe estimating claims will be a protracted process, as the size and scope of the event will place significant strain on insurers' claims adjustment resources," said James Eck and Kenji Kawada, Moody's analysts. "Moreover, aftershocks could last for weeks."
Modeler EQECAT said economic losses will likely exceed $100 billion.
The earthquake in Japan adds to a very active year of catastrophic events including an earthquake in New Zealand, flooding in Australia and unrest in North Africa and the Middle East. These events, as well as winter storms in the United States and other events, could cause worldwide catastrophe losses to top $30 billion in the 2011 first quarter.
In 2010, estimates of insured catastrophe losses are about $37 billion, S&P noted.
The market sectors most affected will be Japanese domestic insurers, the Japan Earthquake Reinsurance Company Ltd., international insurers, global reinsurers, retrocessionaires and catastrophe bonds, Moody's explained.
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.
Commercial lines are significantly underinsured, according to modeler Risk Management Solutions. Many commercial properties are insured only on an indemnity basis and have no coverage for loss of profits or earthquake.
Damaged property considered in AIR's range of estimates includes residential, commercial/industrial, and agricultural property—structures and contents—resulting from the shake and fire, AIR said.
Loss adjustment expenses are not included in the estimates, and neither are costs related to demand surge or losses to uninsured properties.
"Search and rescue efforts are still underway and damage assessment has only just begun, while considerable uncertainty still remains in the seismic parameters that define the event," said Jayanta Guin, senior vice president of research and modeling at AIR.
Since considerable uncertainty still exists with respect to the parameters of this earthquake, AIR stressed that it considers this range of estimates preliminary, adding that it plans to refine the figures when additional information such as ground motion recordings becomes available.
The firm said that since the AIR Earthquake Model for Japan does not account for the effects of tsunami, as more detailed information becomes available, AIR plans to independently estimate the loss due to tsunami and provide a combined loss estimate that avoids double-counting in the affected areas.
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