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How Will Insurance Penetration Hamper Japan’s Recovery?

Earthquake in Japan: The Global Insurance Impact

The latest damage report for the earthquake and tsunami that struck the northeast coast of Japan could potentially reach $300 billion, making the catastrophe the world’s costliest natural disaster ever recorded. At latest count almost 50,000 buildings have been destroyed, according to the National Police Agency of Japan. The damage estimates include homes, roads, factories and other infrastructure but does not include economic losses from the nuclear disaster or other power outages that will continue to cause business disruption.

In a recent 2010 A.M. Best Company Review, it was reported that more than 51 percent of insured losses from Hurricane Katrina have been paid by commercial insurers, which included over $21 billion in paid claims on an estimated $41 billion in insured losses. More recently in Christchurch, New Zealand, a 6.3 magnitude earthquake struck causing over $10 billion in insured losses, which was 75 percent of the overall economic loss. In both cases the reinsurance communities picked up over 50 percent of the reimbursement.

Unfortunately, insurance penetration for natural disasters in Japan is remarkably low considering that approximately 1,500 earthquakes with magnitudes of four to six on the Richter scale strike yearly. According to Warren Isom, executive vice president for Willis Re, who spoke at HB Litigation Conferences’ 18th Annual Insurance Insolvency & Reinsurance Roundtable, on March 30, 2011, “Insurance for earthquakes and tsunamis is neither compulsory nor automatic in Japan.  Most coverage is for mortgaged financed dwellings, and even then personal lines for dwellings or household coverage is less than 20 percent.” In addition, commercial industrial insurance is plagued with high deductibles and co-insurance premiums. For example, a factory insured for $1 million with disaster coverage would likely pay a 20-percent deductible and then receive only one dollar for every four dollars of damage after $200,000. 

Energy insurance coverage, similar to commercial industrial coverage, also has high deductibles and co-insurance premiums, which may impact the current power outages and energy crisis. It is also likely that vehicles are not covered by natural disaster, though marine insurance is much more prevalent. It is estimated that insured loss to boats and freighters was $300 million alone.

Although some predict insured losses would be $20 – $35 billion, it is too early to determine what the actual insured losses will be. “The impact from the planned power outages is likely to be significant,” Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office, was quoted as saying by Reuters®. Because of the crisis at the Fukusima Daiichi nuclear plant, many factories and plants remain closed. As a consequence, business disruption losses will continue to mount. 

Some insurance coverage litigators have classified the earthquake as a grave natural disaster of “unusual character” since it has triggered devastating tsunamis and the current nuclear crisis. Others argue that Japan sits atop a very unstable zone with daily tremors, and is where 10 percent of the world’s active volcanoes are found. Many insurers suspect Japan’s current risk management approach to be a focus as the post-mortem on the disaster is conducted. Some, however, are optimistic the impact will not be as dramatic as Katrina, since Japan has a high level of insurance retention through government programs. Tied with the reinsurance industry, the government and joint stock companies have pooled resources of $57 billion available for disaster claims, according to Isom of Willis Re. Business interruption looms large, though, as Japan plays a key supply-chain role producing much of the world’s semiconductors, automobile engines and LCD displays, as examples. On April 12, 2011, the International Monetary Fund cut its forecast for economic growth in Japan citing lack of production capabilities from power disruption.

According to Linda Kornfeld, a partner in the Los Angeles office of Jenner & Block, business interruption issues from the power disruption will be significant.  “Procedural requirements including a notice requirement to communicate the loss in a certain timeframe preventing a lack of coverage, and proof of loss illustrating the nature of loss and attempts to q."uantify the loss can be complex. Failure to do so correctly could provide insurers proof of failure to comply and thus, deny coverage."