In Japan, the public bears most of the risk of earthquakes

The devastation unfolding in Japan will likely generate the largest insured losses for any earthquake, but by far the biggest part of the tab will fall on the Japanese people.

Less than half of residences in the country carry earthquake insurance, according to the 2010 Annual Report of the Japan Earthquake Reinsurance Co. (A pdf in English is available here.)Â   The company, usually called the JER, protects all residences that purchase earthquake insurance.

The standard dwelling policy in Japan does not cover earthquake, but customers can choose to add the coverage. But earthquake insurance covers only up to half the losses that a standard residential policy does.

So a home that is covered for fire losses of, say,  ¥20 million (US$245,000), only has  ¥10 million (US$122,000) cover for earthquake. (Earthquake cover includes tsunami and fires caused by the earthquake.) Personal property coverage is similarly pro-rated.

Claimants recover 5%, 50% or 100% of the earthquake limit, depending on whether the loss is considered a partial loss, a half loss or a total loss. Early reports showed partial losses far outnumbering the other types, but claims are continuing to come in.

Japanese companies offer earthquake cover, but the premium – determined by zone by the Non-Life Insurance Rating Organization of Japan – is routed to the JER. To protect itself, the JER purchases its own reinsurance. JER’s main reinsurer is the Japanese government, but private reinsurers are also involved.

The highest payout the JER contemplates is  ¥5.5 trillion, or $67 billion. That’s well above early estimates of the insured loss, which top out at $35 billion, according to the cat modeling firm of AIR. AIR’s estimate excludes tsunami losses but includes losses to commercial buildings, which are not reinsured by the JER.

Should the maximum loss occur, JER is responsible for the first $1.4 billion. Of the next $65 billion, the Japanese government, would pay around 80%, with private insurers and the JER roughly splitting the rest.

If the loss exceeds JER’s  ¥5.5 trillion limit, the company could pro-rate its payments downward.

I.I.I. is continually updating its web page devoted to the disaster.

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