Posted on Mar 14, 2011 by Sergio Ulloa
The massive 8.9 magnitude earthquake which struck North Eastern Japan on 11th March 2011, triggering a tsunami, is clearly becoming one the world's worst natural disasters.
The earthquake which hit the Pacific Ocean just off Japan and initiated the huge tsunami, with the full force subsequently striking the country's northeast townships, has lead to potentially tens of thousands of deaths, left untold thousands homeless and a potential nuclear disaster. This is sparking a huge rescue operation and will undoubtedly wreak havoc on the Japanese economy. The force of the earthquake was felt hundreds of miles away shaking buildings in Tokyo.
When the earthquake struck at 14.46 pm local time (JST), tsunami warnings were released covering a wide area of the Pacific Ocean. The full force hit Japan's Northeast shoreline leading to widespread damage to property, power blackouts and resulted in the nuclear reactor at the Fukushima plant, in Okuma, in the Fukushima Prefecture to discharge nuclear radiation; this has lead to the evacuation of thousands of residents within a 10 kilometre radius.
One of the hardest hit areas is the city of Sendai, with a population of more than a million people, it is the commercial hub of the Tohoku region in northern Honshu.
Insurers and reinsurers write a lot of business in developed countries such as Japan, reflecting the demand for cover, the ability to pay for insurance and the scope for assessing risks.
Japan has infrastructure designed to withstand earthquakes, with domestic and residential properties built to standards to absorb the tremendous pressures unleashed by an earthquakes. However, it was the subsequent tsunami, following the earthquake, which caused the majority of damage. The huge volume of water, traveling at tremendous speed, engulfed the hinterlands of the Northeast coast, with the city of Sendai feeling the full impact of the force delivered by the unstoppable pressure from the ocean.
While the financial markets are absorbing the impact of the disaster, the value of insurers and reinsurers shares on stock markets worldwide tumbled, pending an evaluation of the full impact of the financial cost of the disaster. The event is likely to lead to uncertainty in financial markets for some time, including the possibility of the effects of after-shocks.
As Japan's Northeast region waits for the waters to recede and the massive clearance process to begin, the rest of Japan is fully functional, including the capital Tokyo and key ports and rail link elsewhere in the country. While Japan is relatively prepared for disasters of this nature, however, it comes at a time when the economy is still struggling to regain standing, with high unemployment levels and static exports.
Meanwhile, as the full extent of the disaster unfolds, early indications suggest the total bill will be between US$30 billion to US$50 billion. While the scale of the crisis is still unclear, the impact on the insurance industry is clearly going to be enormous, with reinsurance companies expected to bear the majority of the cost.
Although the high risk of earthquakes in Japan would have been factored into insurance companies' premiums, because of the history of these incidents and known geological fault lines, the scale of this incident is virtually unprecedented. The shares in the world's largest reinsurers such as Munich Re, Swiss Re and Hannover Re have already been under pressure, with concerns about the ultimate cost of claims and the impact on net income in 2011.
Swiss Re has estimated that the earthquake which struck the city of Christchurch in New Zealand in February this year (2011) will cost them approximately US$800 million in claims. It is forecast that the Christchurch quake, which measured 6.3 in magnitude on the Richter scale will cost the insurance industry between US$6 billion to US$ 12 billion.
The unprecedented floods in the Australian states of Victoria and Queensland, which occurred in early 2011, had already hit the insurance industry hard hit this year. The cost of these natural disasters follow the large scale level of claims in 2010 - recorded as one the worst years for natural catastrophes - totaling US$37 billion in insured losses.
The extent of the latest disaster in Japan has led to some of Japan's biggest firms halting production, with Toyota, Honda and Nissan among the business closing until factories can be inspected to ensure they are safe. Along with industry closures, transport links in the hardest hit area of Northeast Japan have been brought to a virtual standstill.
Needless to say, the international community has been quick to provide aid in the recovery process.
When the Asian financial markets opened on Monday 14th March, the Bank of Japan injected US$182 billion into the economy in a move to provide liquidity for financial markets and prevent a collapse of the Japanese economy. Oil prices have fallen in anticipation of a slowdown in world economies resulting from the disaster.
There are concerns that the Japanese economy will fall into recession, which could potentially cause a knock-on effect across world markets - many already grappling with difficult trading conditions.
Although the scale of disaster has caused extensive damage to parts of the east coast of Japan, the vast majority of the country, including Tokyo and Osaka, remain functional and open for business.
Japan had established a mechanism to minimize risks for insurers providing property and casualty insurance cover in the country against claims resulting from earthquakes. The insurance claim mechanism allows for indemnity liability to be shared, with a reinsurance system limiting exposure for a single insurer. Also the government of Japan has kept an earthquake relief fund, with reserves to help the insurance industry meet cost obligations.
In recent years, other major catastrophic events which caused major impacts include Hurricane Katrina which devastated the New Orleans area, and the 2004 tsunami, which struck Thailand and Southeast Asia.
The last major earthquake to hit Japan occurred in 1995, known as the Kobe earthquake. This stuck the Hyogo Prefecture region on the country. The quake registered 6.8 magnitude on the Richter scale and led to approximately ten trillion yen worth of damage to the region.
When Japan's Tokyo Stock Exchange opened for trading on its first full day after the earthquake on the 14th March, among the major fallers were shares in Tokio Marine Holdings - one of the Japanese leading insurers. Until the full extent of the impact on the Japanese economy can be assessed, it is likely that the Japanese financial markets will be turbulent.