Commercial Market To Take Biggest Hit From Japan Quake

Hannover Re says it currently anticipates losses in the order of €250 million ($353.2 million at current exchange rate).

American International Group Inc. (AIG) released a pretax loss estimate for first-quarter catastrophes of $1 billion for Chartis, its P&C unit. The total includes a pretax insurance loss of $700 million related to the Japan earthquake.

Speaking to the overall impact on the commercial insurance sector, Moody's says in a report that while there are caps on losses for residential insurers, and while life insurers are expected to be able to withstand their losses, commercial P&C insurers have no cap on claims.

Moody's adds that domestic insurers and reinsurers in Japan will probably see a significant portion of claims.

In a statement, Kenji Kawada, a Moody's vice president and senior analyst in Tokyo, says, "Insurers, both in Japan and around the world, will sustain heavy losses, and this will in turn result in negative credit implications for domestic and foreign insurers, but especially for the property and casualty sector in Japan and reinsurers globally."

On the residential side, Moody's says 90 percent of Japan's insurance market is concentrated among three domestic insurers: MS&AD Insurance Group, Tokio Marine Group and NKSJ Group.

Moody's revised its outlook to negative for those three groups, stating, "The negative outlook for these P&C insurers reflects the view that losses from the event will further pressure the profitability and, to a lesser degree, the capitalization benchmarks of these insurers at their current rating levels."

The rating agency adds that it will likely take many months to figure out the extent of insured losses from the quake and tsunami and that magnifies "the potential for upward revisions of initial loss estimates."

For residential earthquake insurance, though, the maximum liability for all domestic private insurers is $7 billion, as losses are capped by a government-supported program where a significant portion of the exposure is absorbed.

However, no limits exist on the commercial side, which is why Moody's says the losses will be more substantial for insurers and reinsurers. Lloyd's of London is also expected to take a hit.

"Catastrophe reinsurance covering Japanese earthquakes is a large market," the report states. "An additional wildcard is the potential for business-interruption losses, caused by damage to power and transportation infrastructure."

Impact On Rates, Capital

In a recent webinar, Aon Corp. representatives say there are indications that some rate firming is taking place for risks in catastrophe-prone areas, but the overall impact of the event is not yet clear.

Ted Hodgkinson, chief broking officer, Asia, Aon Risk Solutions, says that regarding catastrophe-risk reinsurance renewals, insurers are offering coverage, but the location of risk is paramount in renewal negotiations.

On new business, "insurers are not offering capacity in any meaningful way," he says. But there is more flexibility away from the current disaster area.

U.S. multinational clients have sustained losses, says Al Tobin, national property leader, Aon Risk Solutions U.S. in New York, primarily in contingent business-interruption claims. Those losses have ranged from a few million to tens of millions of dollars, he observes.

Tobin says a change in rates from a catastrophic event affecting U.S. insurers would need to be in the range of $80-$100 billion. It is still too early to know if this is that event, he adds.

A report by analyst firm Keefe, Bruyette & Woods says a new wave of capital into the market, similar to what happened after Hurricane Katrina, is unlikely to occur in the wake of this event. KBW says post-Katrina investment returns have been "marginal," and adds that there simply isn't that excess capital available in the world."

Additional reporting by Phil Gusman and Chad Hemenway