Taking stock of Tohoku

The March 2011 Japan earthquake provides a wide range of lessons for the insurance industry to learn, including its effect on risk modelling and underwriting, says Takashi Goda, Head of Swiss Re Japan.

The Tohoku earthquake was the most powerful known to hit Japan. Thousands were killed during the 11 March 2011 disaster and there was widespread destruction of property as well.  After a year of assessments, what effect has the earthquake had on the insurance industry?

According to Takashi Goda, Head of Swiss Re Japan, there wasn’t a tangible change in risk appetites of reinsurers for Japanese risks.

“Some mid-sized players were hit heavily by losses (as percentage of capital) and forced to withdraw their business from the region.  Large international reinsurers, on the other hand, were well capitalised and able to benefit from global diversification to continue providing stable capacity at the right price, covering nat cat risks in the region.” Goda says.

Analysing the balance sheet

Although the final estimate of insured damage from the quake has yet to be established, the rough estimate for the industry in Japan is around USD 35 billion.  Japanese insurance companies’ balance sheets are well protected against earthquake loss potential due to the Japanese government earthquake program and open market reinsurance treaties.

“Original insurers have posted losses in the 3-digit million range on their net account. Reinsurers losses vary from company to company, with large companies posting loss estimates of millions to billions in dollars, depending on their shares in the Japanese market,” says Goda.  The loss is within worst-case scenario projections and all these exposures were known, while the effects of the tsunami were not taken into consideration in advance.

New insights for modelling

A large cat event such as the Tohoku earthquake always provides opportunities for calibrating loss modelling and discovering new insights. The earthquake was surprising for many scientists and the risk modelling community in view of its severity and magnitude, followed by the tsunami, liquefaction and consequential aftershocks.

Swiss Re has already adjusted internal risk modelling for some of these aspects: the occurrence frequency of earthquake events has been adjusted to take the heightened aftershock events into account, and we’ve also developed and incorporated simulated tsunami models into our underwriting considerations.

The underwriting perspective

The Japanese insurance market will continue to be affected by the earthquake for some time. In addition, the event has triggered changes in underwriting standards, resulting in long-term impact. Risk awareness has increased while adequate prices are now needed to cover risk exposures.

The industry is also heavily investigating previous non-peak risk areas to assess the true nature of their exposure. Adequate pricing and unbundling of risks will be important not only to fully reflect the nature of risk but also to prompt insureds to take adequate risk prevention and mitigation measures.

A wake-up call for government, private sector?

The insurance industry paid no more than 17% of the overall economic cost for the disastrous event. In terms of improving penetration, both insurers and industry associations have been active in promoting earthquake insurance through community-based promotional activities and other channels. 

 “Rising risk awareness has already resulted in a tangible increase in the take-up rate of residential earthquake insurance,” says Goda.

Published 13 March 2012

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