Mon, Mar 14, 2011 - Page 10 News List

Insurance sector mulls huge cost of Japan quake

COUNTING THE COST:Insurers face at least US$30 billion in claims this quarter from earthquakes in Japan and NZ, floods in Australia and the Middle East unrest

Reuters, NEW YORK

The unexpected nature of Friday’s earthquake in Japan, plus the damage from the subsequent tsunami and fires, makes estimating insured losses from the disaster especially difficult, senior executives at two top catastrophe risk modeling firms said on Saturday.

However, most experts agree the growing threat of disaster from damaged nuclear reactors is unlikely to have much effect on the mainstream insurance business because of the way insurance for the nuclear power industry is structured.

Insurance policies often exclude certain factors from coverage, and that will probably occur in this case — exclusions on earthquake damage in the property insurance for reactors and exclusions on nuclear damage for homeowners’ insurance policies.

What remains is likely to be an international liability pool, where reactor operators insure each other against claims in situations like this one.

How deep that liability extends is unknown, however — Japan is not a party to major international conventions limiting the nuclear liability of operators.

Generally speaking, the insurance industry does not model the potential for nuclear accidents when it looks at the effects of disasters in areas with nuclear power.

“The scrambling of the reactor is a huge event that’s really difficult to model,” Eqecat senior vice president Tom Larsen said in an interview.

Any impact was more likely to be felt by life insurers than property insurers, he said.

Even without the nuclear threat, though, there is plenty of scope for damage claims of historic proportions.

About US$24 billion of insured property is located in the 3km band along the coast of the four -prefectures most affected by the quake, senior vice president of research and modeling at -disaster-modeling firm Air Worldwide Jayanta Guin said. There is about US$300 billion of insured property in the four prefectures most affected by the quake’s shaking.

It would be days or even weeks until an accurate estimate could be made of what was lost, how it was lost and what it would take to repair the damage, Guin said.

One problem is that the damage was difficult to model because the intensity and location of the quake were unexpected, Guin added.

Eqecat, another risk modeler, said the quake was at least eight times stronger than any it had modeled in that part of Japan.

The firm said on Saturday that economic losses from the quake would likely exceed US$100 billion. It did not release an estimate for insured losses.

Equity analysts covering the insurance industry said on Friday that the quake may have caused up to US$15 billion in insured losses, which would make it the costliest quake in insurance industry history.

Another major question for the insurance industry in the days ahead will be whether the disaster will force insurers and reinsurers to raise prices after three years of declines.

Going into this year, brokers and analysts said it would take an insured event of US$40 billion to US$50 billion to stem price declines for at least one year.

Standard & Poor’s equity analysts estimated on Friday that insurers faced at least US$30 billion in claims this quarter from a combination of earthquakes in Japan and New Zealand, floods in Australia and losses related to unrest in the Middle East.

Major insurers and reinsurers with exposure to the Japanese market, such as American International Group, ACE Ltd, Munich Re and Swiss Re, are expected to take weeks to assess their losses. Even then, the numbers are likely to rise steadily for months afterwards, as they did with the earthquake in New Zealand in September.

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