Insurers: 'Japan Could Be One of the Costliest in World History'

Insurance industry officials at the Insurance Information Institute (I.I.I.) say the earthquake in Japan could prove to be one of the costliest to insurers "in world history."

And what makes the "natural disaster so extraordinary is that four of the five costliest earthquakes and tsunamis in the past 30 years have occurred within the past 13 months,” says Dr. Robert Hartwig, an economist and president of the I.I.I. in a statement. At a magnitude 8.9, the earthquake in Japan is only slightly smaller than the 2004 Indonesian quake that killed 230,000 people.

For just the earthquake alone, insured losses in Japan could range between $15 billion to $35 billion, says A.I.R., a Boston company that leads the industry in catastrophe risk modeling software and consulting services. A.I.R.'s estimates do not include losses from the resulting tsunami. Already, the $35 billion in estimated insurance costs for this quake alone rank it right behind the $62.2 billion in insurance costs for Hurricane Katrina in 2005, unadjusted for inflation, says Munich Re.

Prior to today’s earthquake, insured earthquake losses worldwide dating back to February 2010 totaled an estimated $23 billion, largely from the earthquakes in Chile and New Zealand.

Japan is the world’s most indebted country, with $11 trillion in debt, and a debt to GDP ratio that is 200%. Just this past January, Standard & Poor’s cut Japan’s sovereign debt rating for the first time since 2002, saying the government has no “coherent strategy” to deal with its mountain of debt. Japan’s economy is still struggling 16 years after the Kobe quake in 1995.

Immediately after the quake, the central bank of Japan, began pumping in massive liquidity. To stabilize the markets, the Bank of Japan, let flow with a record $265 billion into the financial system. The yen has been strengthening in the days after the quake, as repatriated yen come back into Japan for rebuilding.

Bond market players on Wall Street say the debate now is whether U.S. Treasury yields will climb higher as Japan stops purchasing U.S. debt and comes back into the worldwide capital markets to borrow in order to deal with the catastrophic events from the quake and tsunami.

Japan ranks third behind the Federal Reserve and China in ownership of U.S. debt, an estimated $880 billion. More than nine out of ten Japanese government bonds are held by domestic investors. Historically, Japan has not used its foreign exchange reserves for domestic spending purposes.

Catastrophe modeler A.I.R. warns in a statement that the losses “become extremely large if the modeled rupture is extended southward towards the Tokyo and Chiba prefectures, which contain a higher concentration of insured properties.”

And A.I.R. also warns: “The website of Japan’s national seismic network remains offline, so ground motion observations are still unavailable,” adding, “since considerable uncertainty still exists with respect to the parameters of this earthquake, AIR considers this a preliminary loss estimate.

SNL Financial says in a statement that U.S. property companies with the most real estate exposure to the earthquake in Japan are Starwood Hotels & Resorts Worldwide, ProLogis, Simon Property Group and AMB Property.

Japan insurance companies MS&AD Insurance Group, NKSJ Group and Tokio Marine Group comprise about 90% of the insurance market in Japan, says Moody's Investors Service.

The fact that earthquakes have picked up in speed troubles the insurance industry.

“Insurers and reinsurers worldwide have the financial strength to pay the claims that will emerge after today’s 8.9-magnitude earthquake and the resulting tsunami in Japan but these events, coupled with the severe quakes that recently struck New Zealand and Chile, have placed extraordinary demands on the industry,” says the Insurance Information Institute (I.I.I.) in the statement.

The Japanese nonlife insurance industry “is very large—third only to the United States and Germany—with $107 billion in premiums written in 2009,” said Dr. Hartwig in the statement.“The implication is that a larger share of losses are likely to be retained by domestic Japanese insurers and reinsurers than was the case with recent earthquakes in Chile and New Zealand.”

But while a larger share of losses are likely to be kept by domestic Japanese insurers and reinsurers (ranked third in the world behind the US and Germany), Dr. Hartwig also noted that the bond market faces “some Japanese seismic risk,” because those costs have been securitized through the catastrophe bond market.

“It is too soon to tell if pay outs under any of those bonds will be triggered,” Dr. Hartwig said in the statement.

The insurance industry group ranks the five worst earthquakes in terms of severity of losses--the numbers do not include estimated economic losses, which for example surmounted an estimated $100 billion in Japan in 1995:

*The earthquake that struck Northridge, California, in January 1994 remains at the top of the list, having caused $15.3 billion in insured losses at the time, or $22.5 billion in 2010 dollars;

*The February 2011 quake in New Zealand--up to $10 billion in insured losses;

*The February 2010 earthquake and tsunami in Chile--$8 billion;

*The September 2010 quake in New Zealand--$5 billion;

*The fifth-costliest earthquake worldwide since 1980 also occurred in Japan, in January 1995, in Kobe, Osaka and Kyoto, causing $3 billion in insured losses at the time ($4.3 billion in 2010 dollars).