Japan and insurance: losses to reinsurers will undoubtedly be large, but it will be mitigated by the realities of the Japanese earthquake insurance system. Consider this simple fact: only 18.5% of Japanese households have earthquake insurance.
In an earthquake-prone country, how is that possible? Because coverage is optional, and because most Japanese households apparently have concluded that: 1) the price is high considering the meager coverage (a minimum of 30 percent and a maximum of 50 percent of insured value, up to a maximum of 50 million yen, or $617,000), and 2) the government will backstop them.
Most importantly, there is a cap on both private insurer and government payments, according to BTIG's Jeff Uscher: total claims are limited to 5.5 trillion yen (about $67 billion): 1.98 trillion yen from private insurers, 4.3 trillion yen from the Japanese government.
What happens when claims exceed that amount, as they are likely to? According to Uscher, all insurance payments may be proportionally reduced to fit into the 5.5 trillion yen limit.
In other words, individual homeowners are on the hook. In reality, the government is likely to dramatically increase spending to help people out.
Uscher noted that after a 1994 quake destroyed much of Kobe,
"the Japanese government funded reconstruction efforts with a special supplementary budget and this actually helped to boost the economy. Demand for infrastructure and building construction jumped, as did demand for cement, rebar and other construction materials."
There is a reinsurance plan, according to Uscher:
"the private insurance companies sell earthquake insurance riders to their fire insurance customers and collect the premiums. The bulk of that liability is reinsured to the Japan Earthquake Reinsurance Co., Ltd. (JER), which is owned by the private sector insurance companies. JER, in turn, reinsures a portion of its liability with the Japanese government."
What about the exposure of global reinsurance companies? Big reinsurers do have some exposure for commercial damage, including Transatlantic Holding , Axis Capital , and XL Group ...Morgan Stanley says early estimates for insured losses are $10-$35 billion.
One thing is clear: when you throw in Australian floods and the Chilean and New Zealand earthquakes, this is turning into an expensive twelve-month period for global reinsurers.
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