An Early Take on the Kumamoto, Japan Earthquakes

Two earthquakes within a few days may seem like a lot for one region of a country to withstand, but in the case of the insurance and reinsurance industry early indications suggest the impact of the Japan quakes will be manageable.

A magnitude 6.5 earthquake struck the Kumamoto prefecture of Japan last Thursday. Just 28 hours later a magnitude 7.3 quake struck the region. So far, Japanese officials have confirmed 46 fatalities and more than 1,000 people injured.

Reports appear to show significant property damage in the region, but it’s too soon to know what insured losses will be.

Analysts say that based on early information from Japan, the quakes are unlikely to challenge the 2011 Japan earthquake and tsunami in terms of size. The 2011 quake and tsunami caused $35.7 billion in insured damages, according to Swiss Re.

In a research note, Jay Cohen, analyst at Bank of America Merrill Lynch, said the quakes should not change the market much:

“Based on the early information from Japan, we would not expect these quakes to have a material impact on reinsurance pricing.”

And:

“In addition, we do not believe that such events will cause insurers or modeling companies to reassess their catastrophe models.”

One variable is potential business interruption and even contingent business interruption losses.

The second quake caused production to be halted at various factories of leading manufacturers such as Toyota, Sony, Honda and semiconductor manufacturer Renesas Electronics.

Cat modeling firm AIR Worldwide notes that Kumamoto prefecture, in the heart of Kyushu Island, is home to roughly 25 percent of Japan’s semiconductor production. There are also more than 100 semiconductor-related enterprises located in the prefecture. In fact, Kyushu is informally known as “Silicon Island.” The area also has automobile, steel and ship manufacturers, AIR Worldwide says.

The extent of any business interruption losses and further impact on supply chains would depend on how long the factories are closed, analysts note.

Earthquake insurance for commercial risks in Japan is purchased from the private reinsurance/insurance markets. Artemis blog reports that after the second more damaging quake, it looks more likely that Japanese insurers may seek reinsurance support for losses. Some catastrophe bond exposure is also possible, though most attach at a fairly high layer.

The standard dwelling policy in Japan does not cover earthquake but policyholders can choose to add the coverage. Earthquake insurance for dwelling risks is backed by the government via the Japan Earthquake Reinsurance Co (JER). The JER protects all residences that purchase earthquake insurance. More information on earthquake insurance in Japan is available here.

These earlier posts (here, here, and here) by Insurance Information Institute chief actuary James Lynch on the 2011 Japan earthquake and tsunami are useful.

Read up on the importance of understanding earthquake insurance options in the U.S. here.

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