Despite the thousands of deaths and huge global financial impact resulting from the March 11 magnitude 9.0 Japanese earthquake - the fifth largest ever recorded worldwide – and subsequent tsunami, the disaster will not have a devastating effect on either the capital of the Japanese insurance industry or the international reinsurance market, according to global professional services company Towers Watson.
However, the cumulative impact of worldwide catastrophe losses in 2010 and 2011, combined with Risk Management Solutions' (RMS) recent version 11.0 model revisions, will likely result in some firming of catastrophe rates that will vary on a regional basis, although not at the same levels seen after Hurricane Katrina in 2005, according to the company.
"While some similar factors are present in 2011, other significant factors are not," said William Eyre, Jr., managing director of Towers Watson's reinsurance brokerage business. "Absent another event, we do not foresee the same level of price increases that we saw at the beginning of 2006. The 2010-2011 losses are widely believed to be more of a significant 'earnings' event rather than an impairment to capital. Additionally, though rating agencies may adjust their views of risk because of the international catastrophe experience, we do not expect the same type of downgrades seen in 2005 and 2006."
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Towers Watson estimates total insured losses resulting from the disaster will be between $20 billion and $45 billion. The wide gap between the insurance losses and economic losses — currently estimated to be in excess of $300 billion — exists are because most of the loss is either uninsured or assumed by the Japanese government.
Further, most potential liabilities associated with nuclear exposure from the event are not significantly insured by the private market and remain the responsibility of the Japanese government. Towers Watson's insured loss range - which includes losses for both Japanese and international insurers and reinsurers – comprises damages to residential and commercial properties (including business interruption), marine, auto and life insurance.
Aflac Japan dominates the market in terms of individual policies, and is the largest foreign insurer in terms of premium. It's also the fifth most profitable foreign company in any industry in Japan. Aflac's CEO Don Amos recently told Fox Business he was unsure how many claims would result from the disaster, but "still expect to still attain our earnings per share growth. If something else goes wrong from a nuclear perspective that's another story. But right now we will do fine."
| Japan Earthquake Insured Loss Estimate | ||||||||||
| ($ Billions) | ||||||||||
| Low | High | |||||||||
| Residential | 9.5 | 21.9 | ||||||||
| Commercial | 4.7 | 11.0 | ||||||||
| Life | 2.9 | 4.6 | ||||||||
| Marine | 1.1 | 1.5 | ||||||||
| Auto | 0.2 | 0.7 | ||||||||
| International Insurance | 1.5 | 5.0 | ||||||||
| Total | 20.0 | * | 45.0 | * | ||||||
*Low and high total insured loss estimate figures are rounded.
"Of the insured loss, only $12 billion to $15 billion will be reinsured internationally; about 30% to 40% of the insured loss or 4% to 5% of the overall economic loss," said François Morin, Towers Watson's global product leader, property & casualty claims reserving. "Despite the terrible tragedy of the earthquake and the massive economic damage, the impact on the world reinsurance market, while material, is unlikely to approach the level of Katrina. To put Katrina in perspective, about $65 billion of roughly $150 billion in economic loss (43%) was insured, and much of the insured amount was reinsured in the wider international market."
Towers Watson notes that after Katrina, catastrophe rates increased 50% to 100% for peak-zone US exposures. However, there were several factors in 2005 that do not appear to be present to the same extent. In the wake of the three major hurricanes — Katrina, Rita and Wilma — there was the two-pronged recalibration of catastrophe risk by the major modeling firms and required capital for reinsurers, which was promulgated by the rating agencies.
Further, while most multi-line reinsurers absorbed the catastrophe losses reasonably well, certain catastrophe specialists either exited the market or experienced financial distress. These factors caused a simultaneous increase in demand for catastrophe reinsurance with a decrease in supply, leading to the rise in market pricing.
"Unlike Katrina, the vast majority of this loss will not be borne by the world reinsurance market, and for some reinsurers, their loss from the two recent New Zealand earthquakes may surpass their loss from Japan," said Eyre. "The low take-up rates for earthquake insurance and the propensity of the Japanese market to insure domestically means that the vast majority of the Japan loss will be absorbed within the country."
Turning to reinsurance renewals, citing published reports and market estimates, Towers Watson projects 20% to 50% rate increases for Japanese programs, likely increases in India (April 1 renewals) and Australia/New Zealand (July 1 renewals). Impacts on U.S. programs may be different, depending on the type of exposures reinsured, but many industry observers are expecting some pressure for increases for the upcoming U.S. hurricane renewal season (June 1 and July 1 renewals, respectively).
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