Japanese Earthquake Update

20 May, 2011

The ALM provided an update to its website entry of 15th March 2011 (see below) on the Japanese earthquake to its members in the April 2011 issue of ALM News. Since then, Lloyd’s has announced its own estimate of the cost of the three major catastrophes which have hit it in the first quarter of 2011, as follows:-

Japanese earthquake US$1.95bn (£1.22bn @ $1.60: £1)

New Zealand earthquake US$1.2bn (£750m@ $1.60:£1)

Australia floods (Jan2011) US$650m (£406m@ $1.60: £1)

These catastrophes are all set to fall predominantly upon the 2010 account. They amount to 5.3%, 3.3% and 1.8% respectively of the 2010 account capacity of £23.0bn. This amounts to 10.4% of capacity in total and, while a minority part will fall instead upon the 2011 account, this will be more than offset by the impact on the 2010 account of catastrophes which occurred during 2010, most notably the Chile earthquake and the first New Zealand earthquake.

In addition, estimates of earthquake losses are notoriously difficult to make with any accuracy at an early stage, so it would not be surprising if they were to increase. This may particularly be the case with the Japanese earthquake, partly due to the impact it has had on the supply chains of many major manufacturing companies across the globe, many of which will probably have purchased contingent business interruption insurance.

While Lloyd’s overall may therefore suffer catastrophe losses somewhere in the region of 15% of capacity for the 2010 account, pushing it into a moderate pure year loss, maybe somewhere in the region of 5% of capacity (see the back page of ‘Lloyd’s Results Summary’, which was despatched recently to ALM members with the April issue of ALM News), some Names who have disproportionate exposure to some of the specialist catastrophe reinsurance syndicates could fare somewhat worse.

In the April 2011 issue of ALM News, a table of syndicate level net realistic disaster scenarios (RDSs) for a Tokyo earthquake was displayed. It is interesting that the first forecast we have seen of the 2010 account result for one of the catastrophe reinsurance specialist syndicates was revealed yesterday, for Amlin’s Syndicate 6106. Its Tokyo earthquake RDS was 49.1% but its forecast result for the 2010 account was for a loss of only 13.8% to 18.8% of capacity, which rather supports what we said in our earlier website entry below. Names with large exposures to such syndicates may underperform for the 2010 account, but the figures from Syndicate 6106 are not as bad as they could have been, and it is worthy of note that the syndicate is forecasting a profit of 40.4% to 45.4% of capacity for the 2009 account. (Note: In contrast, Syndicate 6103 only underwrites USA business so will not be affected by the above catastrophes.)

15th March 2011
Biggest Ever Japanese Earthquake

Japan suffered its biggest earthquake in recorded history on Friday 11th March 2011, upgraded to 9.0 on the Richter scale by the Japan Meteorological Agency on 14th March. This is over 8,000 times bigger than the earthquake which struck Christchurch, New Zealand, last month.

The earthquake’s epicenter was about 80 miles offshore and about 235 miles northeast of Tokyo, which means that the damage in Tokyo appears to be relatively limited and that the cost to Lloyd’s is likely to be far less than the 10% of capacity exposure which a typical Name has to a direct hit on Tokyo, as measured by Lloyd’s Tokyo earthquake RDS (realistic disaster scenario).

An early estimate from catastrophe modeling firm, AIR, suggests that insured losses from the earthquake alone may amount to somewhere in the region $15bn to $35bn, but it is likely to take some weeks, if not months, before any reliable estimate becomes available. This does not include the damage from the resulting tsunami, which AIR has not yet estimated, but which is likely to be rather greater than the damage from the earthquake itself. Against this, for global reinsurers like Lloyd’s, one positive feature of Japan is that it has the third biggest insurance sector in the world, after the USA and Germany, so that a high proportion of the insured loss will be retained by Japanese insurers and reinsurers, as well as by the Japanese government. Further, a lot of Japanese reinsurance is placed on a pro-rata basis with the likes of Munich Re and Swiss Re, whereas Lloyd’s tends to write more excess of loss business. And the ALM recalls that Rolf Tolle was somewhat negative about the business rating environment in South East Asia towards the end of his tenure as Franchise Performance Director, so it may be that Lloyd’s relatively has less Japanese exposure than some other major reinsurers.

It is a sobering thought that four of the five biggest quakes in the past 30 years have now occurred within the last 12 months or so. Chile was estimated to cost insurers around $8bn, the first NZ quake last September about $5bn, the second NZ quake last month perhaps about $10bn and now Japan, almost certainly the most expensive of them all. From the above, it can be seen that the total damage caused by quakes over the last 12 months are likely to have cost insurers between $38bn and $58bn, before allowing for the tsunami arising from the Japanese quake.

While over half of the Chile quake will revert back to the 2009 account, the other three recent quakes will largely impact upon the 2010 account. It seems very likely that the four quakes combined will have cost Lloyd’s over 10% of capacity for the 2010 account, which may push the overall result for that year into loss, particularly since prior year releases and investment income both currently seem likely to be much lower for the 2010 account than they have been for 2008 and other recent years. That said, the US 2010 hurricane season did pass by with minimal insured losses, so it is hoped that any overall loss for the 2010 account will be relatively modest.

Following the explosion at the Fukushima nuclear plant, Names on the Nuclear Syndicate 1176 may have had some concerns. However, the managing agent, Chaucer, has confirmed that Syndicate 1176 “does not expect any significant insured loss” since it does not provide cover for two of the three nuclear plants in the proximity of the affected area and, for the third, at Onagawa, earthquake and tsunami are specifically excluded, as is the normal practice for nuclear plants in Japan.

Finally, there has been much speculation by analysts and underwriters about the potential impact upon premium rates. It seems very likely that Japanese reinsurance premium rates will rise at the next renewal which, for most reinsureds, is due on 1st April 2011. Although some leaders had already quoted for such renewals before the recent quake, few slips had been completed and the ALM understands that most policies, particularly the excess of loss policies which constitute Lloyd’s greatest involvement, are likely to end up being priced after taking into account the recent quake.

The same is likely to be true for Australian and New Zealand renewals, which tend to occur mid- year, after the recent catastrophes there. What is less easy to guess at the current time is the extent of the impact upon the US renewals this summer. Maybe the cumulative effect of the catastrophes over the past 12 months, combined with catastrophe model recalibrations this year, will at least stop further falls in such US reinsurance rates, but this is by no means certain as reinsurers were sitting on substantial excess capital prior to the recent quake. We will just have to wait and see.

Go to top