13/04 Japanese Earthquake and potential Insurance/Reinsurance losses

April 13, 2011

Summary

It seems frighteningly easy to asses reinsurance losses in Japan: damage to homes, industrial plants, vessels, ports, etc is well defined and limited. The nuclear exposure is in some ways straightforward.
Regarding insurance and reinsurance, a neglected area in public discussions so far is Business Interruption and Contingent Business Interruption.
GM’s notification of contingent business interruption regarding their assembly plant in Shreveport is the first of many to come.

Analysis

In insurance most catastrophic losses such as earthquakes, windstorm, tsunamis and flood are well defined and there is a clear segregation into defined “pots” of reinsurance. There are event clauses to define what losses can be aggregated and there are separate reinsurance treaties to be allocated. An insured’s policy defines the limit, coverage and exclusions. Similar, an insurance company’s reinsurance protections define retention, limit, coverage and exclusions.
Regarding Japan and the Tohoku Earthquake, the coverages for losses caused by the earthquake shock, tsunami and nuclear radiation are well defined and a vast majority of damages will be paid by the Japanese taxpayer.

There is a different picture in the insurance and reinsurance world when looking at international companies’ Business Interruption and Contingent Business Interruption following earthquake, tsunami and nuclear radiation.

Examples:

  • Japanese suppliers cannot deliver goods due to roads that have been blocked.
  • Port facilities are not functioning and ships cannot be loaded.
  • Containers at ports have been washed away.
  • Electricity cuts at production plants.
  • Employees couldn’t show up for work.
  • etc

All the above might have halted the production of goods or stopped their on-time delivery to other manufacturers. These manufacturers in other countries regularly buy insurance coverage against interruption in their supply chain. There might be waiting periods (typically 7 to 30 days) before any insurance cover kicks in and there are some exclusions and sublimits. However, many insurance companies will be receiving notifications from insured industrial clients soon.
One example has made the news recently: General Motors has notified insurers regarding their Contingent Business Interruption cover for their assembly plant in Shreveport, Louisiana (USA). Whether the insured amount here will ultimately be the USD 1 billion quoted in the press remains to be seen.
Certainly, we will see other manufacturers making similar noises in the insurance and reinsurance market.

Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
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About Uy Do

Banking System Analyst, former NTT data Global Marketing Dept Senior Analyst, Banking System Risk Specialist, HR Specialist
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