Tohoku Earthquake – A year after

The Tohoku earthquake was the most powerful known earthquake to ever hit Japan. It not only cost the loss of many lives, but also the widespread destruction to infrastructure and property, as well as interruptions to logistic and supply chains. All had severe economic repercussions and impacted the re/insurance industry greatly. After a year of assessments, what are the lessons learnt and how has our industry reacted to help accelerate the recovery process? Takashi Goda, Head of Swiss Re Japan shares his views on prevailing industry trends and its indications for the upcoming April renewal.

1.  A year after the March 11 earthquake, have you seen a change in the risk appetites of reinsurers for Japanese risks?

There was no tangible change. 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.

Individual carriers have reviewed or are reviewing their cat models for Japanese risks, which can lead to more variations in their assessment and pricing of Japanese risks. Ceding companies are also putting more importance on the credit rating of reinsurers.

2. How much have the balance sheets of insurers and reinsurer been affected by loss claims from the event? Is there any capacity left in the market?

The final estimate of the insured damage is yet to be seen. The rough estimate to the entire industry in Japan will be around USD35bn, roughly a third each for Residential Scheme, “Kyosai” (mutuals) and the Industry EQ cover. The Japanese Insurance companies’ balance sheets are well protected against the EQ loss potential by way of the Government EQRe scheme and open market reinsurance treaties. Original insurers have posted losses in the 3-digit millions 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. The loss is within worst case scenario projections and all these exposures were known, while the effects of the tsunami was not taken into consideration in advance.

Currently there’s no indication of major capacity shortage and reinsurers are working with their clients to tackle various challenges.

3.  Will model change happen in Japan after the earthquake? How would this affect reinsurers?

The fundamental approach to earthquake risk modelling has not been changed, however, a large cat event always provides opportunities for calibrating loss modelling as well as new insights not considered before. The Tohoku 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 deployed substantial resources and we have already adjusted our internal risk modelling for some aspects: the occurrence frequency of earthquake events is adjusted to take the heightened aftershock events into account, and we’ve also developed and incorporated simulated tsunami models into our underwriting considerations. Both tsunami and aftershock consideration is beyond what vendor models can currently provide, the “blind spots” of which have been highlighted by the recent events. Underwriters in the reinsurance industry will require careful analysis, adjustments and judgments onto final costing decisions until existing models become updated to consider those aspects.

4. Is there any change to underwriting terms and conditions?

From an underwriting perspective, the Japanese insurance market will continue to be affected by the earthquake for some time to come. At the same time, the event has triggered changes in underwriting standards, resulting in long term impact. Risk awareness has increased while adequate prices are now demanded 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 incentivize insureds to take adequate risk prevention and mitigation measures.

5. Is there any wake-up call for the Japanese government and private sector to react to the country’s low earthquake insurance penetration, and to question the adequacy of insurance programme?

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.

There were also discussions on whether the current government’s special account for earthquake reinsurance should be transferred to an independent third party. Due to the industry’s and public concern for the fund's safety and security, the use of government special account shall remain unchanged. Nevertheless, there are on-going discussions on how to improve the resilience of the scheme and enhance the level of protection.

6. How will the earthquake affect the April renewal this year?

The Tohoku Earthquake disaster happened right before last year’s renewal so it’s understandable that this year’s renewal will reflect a more precise picture of market trends. Undoubtedly, the market will weight in on the impact of the unprecedented nat cat losses to make appropriate corrections of the previous pricing.

Adding further to the complexity is the need to review catastrophe models to better reflect emerging risks and losses from secondary agents. The market takes note that these secondary agents include tsunamis, aftershocks, soil liquefaction, business interruption and contingent business interruption, which have contributed significantly to recent losses yet are traditionally undervalued in loss modelling.  Adequately accounting for the potential impact of these secondary agents will be a major challenge in catastrophe modelling and for upcoming renewal discussions.

Published 13 March 2012