Japan earthquake insured losses up to $2.9 billion – AIR

by Artemis on April 21, 2016

The first estimate of losses to the insurance and reinsurance industry from the recent magnitude 7.0 earthquake in the Kumamoto region of Kyushu, Japan, has been released by AIR Worldwide, estimating insured losses of between $1.7 billion to $2.9 billion (excluding business interruption).

Kumamoto earthquake images, from Koji Ueda/AP via BBCRisk modelling firm AIR Worldwide’s loss estimate for the Japanese earthquake includes insured property losses, to residential, commercial, industrial and mutual properties, including structural and content damage, caused by ground shaking, fire-following the earthquake and also liquefaction.

With the April 17th M7.0 quake being the larger, AIR expects its estimated range of insured losses will capture the damage from the earlier M6.2 quake from April 14th.

“The first earthquake, a foreshock, estimated at M6.2 by the U.S. Geological Service (USGS), occurred April 14, at 9:26 p.m. local time (12:26 UTC) at an estimated depth of 23.3 kilometers (14.4 miles),” said, Dr. Tao Lai, senior principal engineer at AIR Worldwide. “Centered near the town of Mashiki in Kumamoto Prefecture, about 1,300 km (800 miles) southwest of Tokyo, the earthquake was followed by seven additional foreshocks (one an M6.0 event), within just three hours after the initial quake.”

Dr. Lai continued to say, “The mainshock, estimated at M7.0 by USGS, struck April 16 at 1:25 a.m. local time (April 15 at 16:25 UTC)—a little more than 24 hours after the initial M6.2 foreshock—at a depth estimated at 10 kilometers (6.2 miles). According to the USGS, this M7.0 event, also centered in the Kumamoto Prefecture, was 15.8 times stronger in its energy release than the M6.2 foreshock.”

Fifty-eight people were reported killed by the quake, with over 900 injured. The Japan Fire and Disaster Management Agency (FDMA) estimated that over 3,900 residences and 120 non-residential buildings were damaged or destroyed. There were a number of mudslides caused by the quake, and 14 fires attributed to it.

Other impacts from the two quakes in Japan include power and water outages; damage to highways, rail lines, bridges, and other infrastructure; short-term cancellation of some airline and train service; and “significant supply-chain and production interruption for regional industries,” according to AIR

The estimated range of insured losses is quite narrow, at just $1.2 billion, spanning from JPY 180 billion (USD 1.7 billion) and JPY 320 billion (USD 2.9 billion). But as it does not include the potentially “significant” business interruption losses and only focuses on the property loss, it is perhaps easier to estimate more accurately.

“Kyushu Island lies on the overriding plate above the Philippine subducting plate to the west of the Nankai subduction zone. The region is exposed to subduction interface, intraslab, and shallow crustal earthquakes. During the last 50 years, the region within 150 km (93 miles) of the April 16 earthquake experienced about 55 M5.0 and larger earthquakes, with a few M7.0 or larger interface earthquakes. However, historically there has not been any record of large M8.0 subduction interface earthquakes in this area,” Dr. Lai commented.

At this level of losses, up to $2.9 billion, there will not be any impact to exposed Japan quake catastrophe bonds, but reinsurance layers may face losses which could bring into play some private ILS or collateralised reinsurance put down by ILS fund managers.

That will become clearer when we understand how ILS fund’s performed in April, when we expect to hear that some ILS managers have established side pockets for the earthquake event.

As we wrote yesterday, the losses from this earthquake, as well as the one occurring in Ecuador, are expected to hit insurer and reinsurer second-quarter earnings.

AIR’s estimate does not include a range of loss elements which could push the ultimate insurance and reinsurance loss from the M7.0 Kumamoto, Japan earthquake higher. These include:

  • Losses to uninsured properties
  • Losses to land
  • Losses to infrastructure
  • Losses to automobiles
  • Business interruption losses, both direct and indirect
  • Workers compensation losses
  • Losses to Civil Engineering (Railway) Risks, Marine Cargo and Marine Hull Risks, Aviation Risks, Transit Warehouse Risks, Movable All Risk, and Personal Accident Risks
  • Loss adjustment expenses
  • Losses from non-modeled perils, such as landslide
  • Demand surge—the increase in costs of materials, services, and labor due to increased demand following a catastrophic event (Demand surge can be applied by AIR software users who want to account for this variable.)

With business interruption losses not included, the true loss to the insurance and reinsurance sector will clearly be higher, with many industrial and commercial sites still not back to normal after last weeks earthquakes in the region and the ongoing aftershocks.

AIR also explained:

After the April 14 M6.2 foreshock, power was cut in many areas, gas supplies were turned off by Saibu Gas after gas leaks were reported, and tens of thousands of households were without running water. In the initial hours after that quake, many buildings were assessed to have structural damage that made them uninhabitable, an estimated 20 buildings collapsed, and several fires were reported. Damage from the April 16 M7.0 mainshock, however, was far more significant.

Almost all of the residential building damage occurred in Kumamoto Prefecture, although Fukuoka, Oita, and Miyazaki prefectures also have experienced some damage. FDMA estimates that 1,453 residential buildings have been totally damaged (all in Kumamoto Prefecture), 1,314 half damaged, and 1,205 partially damaged. (The categories of reported damage correspond to the step-policies common in Japan.) FDMA also reported that 122 non-residential buildings were damaged from the two quakes, 63 public buildings and 59 “other” buildings. As with residential damage, almost all occurred in Kumamoto Prefecture.

Geologically, a large right-lateral shear zone running through the central part of Kyushu divides the island. This shear zone is an extension of the median tectonic line (MTL) that originates at Honshu Island and transects Shikoku Island. The MTL is the largest tectonic line in southwestern Japan.

AIR’s loss estimates explicitly capture damage from ground shaking, liquefaction, and fire following. Losses are dominated by shake damage in AIR’s scenarios, with a very small contribution from liquefaction and fire-following. Note that AIR’s estimates are based on assumptions about take-up rates in Japan (the percentage of properties actually insured against the earthquake peril), which are uncertain. The range in loss estimates also reflects uncertainty in the slip distribution on the fault plane, modeled ground motion, and damage estimation. Note, too, that AIR’s modeled loss estimates reflect damage resulting from the April 16 M7.0 mainshock. However, the range of uncertainty captured by the simulated scenarios is expected to capture the marginal impact on losses from the foreshocks, including the M6.2 event that occurred on April 14. The assumed exchange rate is 1 JPY = 0.009193712 USD.

Also read:

Japan, Ecuador quakes to impact Q2 reinsurance earnings.

Stronger M7+ earthquake extends damage in Kumamoto, Japan.

Strong 6.4 earthquake strikes Kumamoto, Kyushu, Japan.

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