Edward Fenton, Managing Director and James Nash, CEO – Asia Pacific
The Japanese market buys considerable amounts of earthquake reinsurance – both pro rata and excess of loss. Companies were able to renew unchanged capacity for pro rata treaties at the April 1, 2011 renewal, despite the occurrence of the Tohoku earthquake at a time when the renewal process was only partially completed. Typical ceding commissions for this kind of business have ranged between the low and high teens over the past few years. In most but not every case, these commissions were reduced by up to 3 percent in order to achieve placement goals. Many reinsurers also looked for greater detail on primary underwriting practices.
In addition to its purchase of pro rata, the Japanese insurance market buys significant quantities of excess of loss protection. The largest proportion of these is on an earthquake only basis with the remainder on a combined peril (earthquake and typhoon) basis. For these covers there was more of a mixed picture. Each buyer acted in a way that best suited its own circumstances, the result of which was that many of the larger programs, in particular the large mutuals, opted to extend their programs for up to 3 months while the remainder opted for 12 month renewal, as usual. Rates for renewing treaties varied between increases of 15 percent and 50 percent and were dependent on individual circumstances.
Windstorm Excess of Loss
The quoting season for windstorm business started just prior to the Tohoku earthquake. Lead reinsurers quoted for modest increases in expectation of the usual negotiation process, with a widespread expectation that small reductions would ultimately be available. Following March 11, insurers were not able to press for reductions and most elected to take up quoted pricing. The result was that windstorm rates for those programs increased by 3 percent to 10 percent. There is limited data for programs priced after March 11, but rate increases for these buyers were undoubtedly greater than for those that went earlier. Capacity remains tight for this line of business.
Fire Pro Rata and Excess of Loss
These treaties exclude Japanese earthquake and generally enjoyed a smooth and stable renewal with stable pricing. There was no shortage of capacity. As usual, reinsurers were willing to look at each pro rata treaty based on its recent experience and there were some examples of modest commission adjustments to reflect good or bad results where appropriate. Per risk excess of loss treaties renewed smoothly with broadly stable rates.
Other Non-Marine Lines
Personal accident excess of loss reinsurance in Japan includes earthquake. These covers are not expected to be significantly impacted by the Tohoku event, although some smaller mutual programs may be affected. Rates for renewal were flat to increasing 15 percent. There was no shortage of capacity.
General third party liability excess of loss covers were not affected by the recent events and enjoyed a renewal with stable capacity and flat pricing.
Credit and bond treaties renewed with plenty of capacity available. Structures were unchanged and there was opportunity for cedents to make modest increases to commission levels.
Engineering pro rata treaties enjoyed a smooth renewal. These treaties do include earthquake cover, but are normally placed on a long term relationship basis and reinsurers were generally willing to renew as before.
Tohoku Earthquake and Tsunami
The 9.0Mw earthquake that struck offshore of Japan’s Tohoku region at 14:46 local time on March 11, 2011 caused widespread devastation across eastern regions of the country. Severe shaking near the epicenter region and the massive tsunami that followed the earthquake killed thousands of people and flattened several communities. There are reports that the death toll will ultimately exceed 25,000 people.
According to both the U.S. Geological Survey (USGS) and the Japanese Meteorological Agency (JMA), the earthquake’s magnitude was measured at 9.0, making it the fourth most powerful earthquake in the world since 1900 and the largest in Japan since modern instrumental recordings began 130 years ago. According to the USGS, more than 73 million people lived in areas impacted by a Modified Mercalli Intensity (MMI) of V or higher. Several towns and cities, including Sendai City, experienced intensity VIII on the MMI scale, equivalent to severe shaking with the potential for moderate to heavy building damage, the USGS said. It added that Chiba and the capital of Tokyo were hit by MMI intensity of VII, very strong shaking that can cause moderate to heavy structural damage (see Figure 1).
The tsunami waves that followed the earthquake reached heights exceeding 7 meters (23 feet) along parts of Japan’s eastern shoreline. Some reports said waves of 10 meters (33 feet) high hit Sendai City, severely damaging the city’s port before sweeping up to 6 kilometers (4 miles) inland (see Figure 2). The tsunami waves caused widespread damage in the prefectures of Miyagi and Fukushima, with massive surges of debris-filled water sweeping away buildings, cars and ships. Reports said residents in Miyagi had just 15 minutes to evacuate before the tsunami waves reached the coastline.
Extensive damage has been reported in dozens of towns and cities along the 2,100 kilometer (1,300 mile) stretch of Japan’s eastern coastline. The Fire and Disaster Management Agency of Japan has reported more than 145,000 buildings damaged or destroyed so far, leaving about half a million people homeless.
The earthquake and tsunami also hit manufacturing output in Japan. Operations at several manufacturing facilities have been suspended, with plants in and around Sendai particularly badly damaged. Several car manufacturers, including Toyota, Honda and Nissan, have suspended production. Operations at some electronics firms such as Sony, Canon and Panasonic remain shut down. Supply chain problems have also forced some undamaged manufacturing facilities inside and outside of Japan to slow production.
The earthquake and tsunami also caused an emergency at the Fukushima Daiichi nuclear plant. Three explosions and two fires damaged the facility a few days after the event, triggering a leakage of radioactive material. Hundreds of thousands of people living close to the plant have been advised or ordered to evacuate their homes as workers attempt to bring the situation under control. However, the incident at Fukushima Daiichi is unlikely to result in a significant direct loss for (re)insurers, as coverage for nuclear facilities in Japan specifically excludes earthquake shock, fire following earthquake and tsunami.
Japan’s government estimates the total cost of the damage caused by the earthquake and tsunami could reach JPY25 trillion (USD310 billion). Although there is considerable uncertainty over the extent of the insured loss, early modeling estimates suggest the cost to the industry could be between USD12 billion and USD30 billion. EQECAT said insured losses are expected to be between USD12 billion and USD25 billion after estimating the effects of earthquake shaking, damage from the subsequent tsunami and fires, and losses to automobiles, marine, life and personal accident insurance lines.
AIR Worldwide, meanwhile, recently revised its initial loss estimate to a narrower range of USD20 billion to USD30 billion (from an initial estimated range of USD15 billion to USD35 billion). This estimate reflects insured physical damage to residential and commercial property resulting from shake, fire following and tsunami. However, the estimate does not factor in business interruption costs (direct or indirect), demand surge or any losses to casualty and life lines.
Due to the way the Japanese market is structured, insured losses are projected to be only a fraction of the overall economic loss. This is partly explained by the fact that Japan’s residential earthquake risk is reinsured to the government through the Japan Earthquake Reinsurance Company (JER), reducing the total cost to private (re)insurers. The JER retrocedes a portion of the risk back to the non-life insurance sector while the bulk of the exposure is covered by the government. Japan’s nuclear cover exclusions are also likely to see the government pay most of the costs from the fallout at the Fukushima Daiichi plant. However, much of the commercial and industrial losses, including business interruption claims, will be absorbed by international (re)insurers.
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Edward Fenton, Managing Director and James Nash, CEO – Asia Pacific