The true extent and cost of the damage caused by April’s earthquakes that struck the Kumamoto region of Kyushu, Japan is becoming clearer, with the Japanese government saying it expects the total economic loss to be up to $42 billion.
The Japanese government’s Cabinet Office said that it expects the damage, mainly to dwellings, from the Kumamoto earthquakes will cost the nation between JPY 2.4 trillion and JPY 4.6 trillion, which is a range of $22 billion to $42 billion.
Also of note in the last couple of days is the fact that Sony Corp. has revealed that the Kumamoto earthquakes are expected to cost the firm around JPY 115 billion, including damage to a factory and lost opportunity cost, as one of its main hubs for smart phone camera lens development was in the Kumamoto region.
That’s around $1.05 billion of losses for Sony shareholders to face and the electronics manufacturer said that it only expects to recoup JPY 10 billion from insurance ($91 million) which is believed largely from the property damage to a factory and doesn’t yet include any business interruption payout that could be due.
With Sony a key supplier of smartphone camera parts to the likes of Apple’s iPhone, it is possible that customers of Sony could file business interruption claims as a result of the impact.
But that’s just one company and the Kumamoto region had many more which suffered damage, closure to factories, offices and sites, or that have suffered from supply chain issues as a result of April’s quakes, all of which could add to the final insurance and reinsurance toll.
And those claims from companies around the world affected by the Kumamoto earthquakes are certain to make the true toll of the event rise further and increase the final impact to insurance and reinsurance capital.
Similarly, the economic loss estimate from the Japanese government is significantly higher than any estimates of economic losses made by agencies connected to the reinsurance industry. Yes, the Japanese government will include infrastructure costs, response and recovery, among other items, but the scale of the economic impact to the country again suggests the insurance and reinsurance industry loss will be higher than perhaps expected.
The Kumamoto earthquakes provided a very good demonstration, once again, of the importance of risk capital and the opportunity for countries to make more use of it.
With risk modelling company insurance industry loss estimates for the event ranging up to $2.9 billion, but insurance claims pay-outs already having passed $1.65 billion with just 59% of claims inquiries settled as of Monday, the final loss is clearly going to move closer towards the upper end of the estimated range.
As the uncertainty surrounding the potential for business interruption remains, as it can take time for supply chain issues to manifest and be quantified, some insurers will play a waiting game before they can understand what claims they must pay.
But the major area of losses that the reinsurance market and perhaps some collateralised reinsurance or ILS fund players will be responsible for will largely be the property damage, which while a rising industry loss is still destined to be within their catastrophe budgets.
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