Global Reinsurers May Sidestep Japan Losses

Sunday, 13 March 2011 03:23 PM

European and U.S. reinsurers may sidestep costs tied to Japan’s strongest earthquake in a century as the country’s government, its carriers and uninsured property owners absorb most of the losses.

Global reinsurers may face losses “somewhere in the $10 billion range” after Japan’s primary insurers and a reinsurance program backed by the government pay their share, said Meyer Shields, an analyst with Stifel Nicolaus & Co. Commercial and industrial lines risks are “significantly underinsured” in Japan, according to a statement from Newark, California-based Risk Management Solutions Inc.

The 8.9 magnitude earthquake struck off the coast of Sendai, a city of 1 million in the northeast, and caused a tsunami that killed hundreds. Munich Re and Swiss Reinsurance Co. fell in European trading yesterday, while some reinsurance stocks in the U.S. were little changed. Reinsurers, which provide financial backing to insurance companies, already paid claims on a Chilean earthquake last year and face losses tied to a February temblor in New Zealand.

“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,” Robert Hartwig, president of the Insurance Information Institute, said in a statement.

Munich Re shares dropped 4.3 percent to 111.75 euros ($155) in Frankfurt electronic trading. Swiss Re declined 1.9 Swiss francs, or 3.5 percent, to 51.7 francs in Zurich trading. XL Group Plc slipped 1 cent to $22.22 at 4:15 p.m. in New York Stock Exchange composite trading. Warren Buffett’s Berkshire Hathaway Inc. Class A shares rose 0.2 percent to $128,000.

Wide Damage

The earthquake and tsunami damaged “broad areas” of northern Japan, according to RMS. The country had $107 billion of non-life insurance premiums written in 2009, third only to the U.S. and Germany, according to Hartwig. Japan backs a reinsurance program for homeowners, according to the U.S. Congressional Budget Office.

“The Japanese markets are dominated by Japanese companies,” Shields said of primary insurance coverage. The Baltimore-based analyst said his loss estimate for private reinsurers is likely to change as he gets more information, and that for now it’s not higher “because there’s so much residential exposure and government participation. That’s why we’re sort of dialing it down.”

Lost Power

Television showed footage of waves sweeping away buildings and vehicles. Airports were closed and bullet train services suspended. More than 4 million homes are without power, Tokyo Electric Power Co. said.

“Since the communication lines are all down and access is very limited, it’s very hard to know exactly what’s happened to our clients,” said Ken Davey, senior vice president at commercial insurer FM Global. “It’ll be a couple of days before we actually make contact with clients in the immediate area.”

An earthquake in Japan is one of catastrophe insurers’ four “peak zones,” along with a San Francisco earthquake, U.S. hurricanes and Gulf of Mexico hurricanes, so costs will probably be spread equally among the biggest reinsurers, according to Joy Ferneyhough, a London-based insurance analyst at Banco Espirito Santo de Investimento SA.

“My initial sense is this isn’t going to be a huge industry loss,” she said. “This will be something smaller and manageable, which will impact 2011 earnings, but not ‘the big one’ that we’ve been waiting for to turn pricing.”

Northridge Quake

The insurance industry may have to pay about $10 billion in claims, according to James Shuck, a London-based insurance analyst at Jefferies International Ltd. That would make the disaster the second-most costly temblor on record, after the $15.3 billion quake that struck Northridge in the U.S. in 1994, according to data compiled by Zurich-based Swiss Re.

Before this earthquake, the most destructive temblor to hit Japan struck Kobe, Osaka and Kyoto in 1995, costing insurers about $3 billion, not taking inflation into account. The quake caused $100 billion in total economic losses, much higher than the amount covered by insurers because infrastructure such as roads and bridges were rarely insured due to the high cost of insurance in earthquake-prone areas.

“Insurance penetration and density is very low when compared to leading Western markets, particularly in commercial and industrial lines,” RMS said of Japan in an e-mailed statement. “Many small- to medium-sized businesses are completely uninsured.”

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European and U.S. reinsurers may sidestep costs tied to Japan s strongest earthquake in a century as the country s government, its carriers and uninsured property owners absorb most of the losses. Global reinsurers may face losses somewhere in the $10 billion range after...
Sunday, 13 March 2011 03:23 PM
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