Posted on Jul 20, 2011 by Sergio Ulloa
The March 11, 2011 earthquake that struck off the coast of northeast Japan, and the devastation resulting from the subsequent tsunami and nuclear fallout threat that followed
, have had a significant impact on the previously under-utilized local catastrophe insurance market.
The catastrophic event is now reported to have destroyed or damaged more than 530,000 Japanese homes, many due to the accompanying tsunami generated by seismic disturbance. Insurance payouts from the earthquake surpassed 1.05 trillion yen (US$12.4 billion) as of July 14, according to the General Insurance Association of Japan (GIAJ).
The GIAJ reported that the country's 25 top nonlife insurance companies have received 738,373 claims inquiries related to earthquake insurance on housing risks, with 701,558 claims already settled. These same insurers have now paid out 708.4 billion yen (US$ 8.9 billion) on insured properties in the northeastern Tohoku region, settling 353,712 claims in the area associated closest to the catastrophic event. In the eastern region of Japan including Tokyo, insurers have paid out 362.12 billion yen (US$4.6 billion) in claims with 346,417 settled cases. The Hokkaido region has for the moment reported 615 million yen (US$7.8 million) in insurance claims, according to the insurance association.
Japanese life insurers meanwhile have paid out 128.7 billion yen (US$1.63 billion) in claims from the earthquake, including 98.7 billion yen (US$1.25 billion) in life insurance payouts and a further 30 billion yen (US$380 million) in accident related insurance benefits from settling 12,520 claims. Usually these accident benefits would have excluded cover for earthquake-related damages, but the Life Insurance Association of Japan said members had agreed to pay out benefits without applying de jure policy restrictions, a previously unheard of conceit in Japan.
New GIAJ chairman Mr. Shuzo Sumi released a statement on the association's website, discussing the results and acknowledging that Japan had been reminded of the true purpose and value of insurance in experiencing this unprecedented natural catastrophe. "Difficult circumstances surround us, however, consumers and businesses have an increased awareness of risks following the Earthquake," Sumi said, adding "the general insurance industry is expected to play an increasingly important role in ensuring protection and safety. It is strongly recognized that the industry should stand to demonstrate its value."
The association has pledged to do more to ensure people who have not yet made claims in the earthquake-hit region be made aware and receive the necessary information to do so. Sumi further commented that "[T]he GIAJ will make every effort in our post-disaster responses centered on encouraging prompt payments of insurance claims. Further efforts should be made to improve the market penetration of Earthquake Insurance, based on lessons learned from the disaster and the voices of consumers and businesses."
The Japanese government has planned to increase awareness and the overall penetration of earthquake insurance through improvements to its basic disaster management plan. The national tax regime will provide additional support for this endeavor by approving income tax deductions for local policyholders with earthquake insurance.
Indeed the Japanese public has already heeded this advice. According to the latest GIAJ figures, earthquake insurance policies taken out by homeowners in April grew more than five times from a year ago. A total of 130,776 new policies were sold in April, compared with just 23,847 from the same month a year earlier. Japanese insurance companies had a total of 12.87 million earthquake policies in the month, a 5 percent increase from 2010's figures, the report said.
The earthquake insurance system in Japan is at present a private-public mixed scheme, whereby domestic insurance companies retain most costs locally by reinsuring each other with backup support from the national government. The insurance claim mechanism allows for indemnity liability to be shared, with a reinsurance system limiting exposure for a single insurer. Japan's government has also kept an earthquake relief fund, with reserves to help the insurance industry meet cost obligations. To the GIAJ, the government reinsurance system is seen as critical for maintaining the stable operation of the system. However, in lieu of these cataclysmic disasters, there are calls for the government to explore pre-event funding mechanisms for managing the economic losses generated by such large events. These solutions are only available through Japan's increased involvement in the international reinsurance markets. The present system may not be able to adequately manage the level of risk Japan has experienced. Pressure is rising in the country to increase the maximum coverage for earthquake insurance policyholders substantially up from the current 50 million yen for structure and 10 million yen for contents.
In addition to the natural disasters, the forecast for the Japanese general insurance industry will remain muted due to the significant aging and depopulation of the country, the mature market conditions, and profitability issues surrounding the auto sector, which has seen payments for car insurance increase by 2 percent already this year. Automobile insurance, a stalwart business in Japan, has been under duress due primarily to an increase in the frequency of traffic accidents, injury claims, and skyrocketing prices for auto parts. This consequently keeps underwriting results for these businesses at a level often below the break-even point.
While Japanese insurers remain well positioned and capitalized to absorb the net losses from the record-shattering earth quake and tsunami, look for global reinsurers to raise rates and turn this all into a possible earnings event