Japan earthquake updates (12th March)

Here are some of the relevant updates regarding the events unfolding in Japan following yesterdays magntiude 8.9 – 9.1 earthquake and resulting tsunami. The news coming out of Japan shows significant damage and devastation in areas affected by the tsunami and quake, with the city of Sendai and surrounding area particularly badly hit.

You can find our latest updates on this incident here.

The latest concern is the Fukushima nuclear plant which it has now been confirmed has been hit by an explosion. Yesterday, after the quake, four nuclear plants shut down automatically. When that happens the reactor cores and fuel rods need to be cooled. At Fukushima, some of the reactor cores proved difficult to cool and one now appears to have gone critical and suffered an explosion. Information is still vague on the actual damage and how bad any resulting radiation leak could be. The Japanese government have extended the evacuation zone around the power plant to 20km. The video below from YouTube shows the explosion at the Fukushima power plant on BBC News.

Nuclear insurers, many of whom are located in the London market, will be nervously checking their coverages this morning to see what their exposure could be to a nuclear meltdown at the Fukushima reactor in Japan. This additional hazard which is still coming to light adds another dimension to the event and could cause further insured losses.

Aftershocks are hampering rescue efforts in northern areas of Japan. Since the earthquake yesterday morning there has been a number of large aftershocks, above M5.0 on the richter scale, every hour. This realtime list of large earthquakes around the world shows just how active this area of Japan is currently. These aftershocks are being felt as far afield as Tokyo and have the potential to cause further damage to already rocked buildings. The Japanese government have warned of the possibility of further tsunamis caused by aftershocks. Scientists are expressing some concern that the subduction zone could be so damaged that aftershocks could continue for a month or so and the geology means there is a possibility of further large quakes in that fault zone.

The Insurance Information Institute has said that the quake could be one of the costliest in world history but that the industry has the financial strength to pay the claims. A large proportion of the claims will be retained within the Japanese market but exposure for the major global reinsurers will be high and some Lloyd’s syndicates may also be exposed as they are active at writing cover for Japanese risks.

Business Insurance reports that a Hannover Re spokeswoman has suggested that they foresee a turn in pricing in Japan after this event and that it could also impact worldwide capacity and ‘spring a market change’.

Q1 2011 catastrophe losses are rising and reinsurers will be nervously looking at their profit forecasts with many thinking it will now be impossible to hit them. With 9 months of the year to go 2011 looks likely to be another record year of losses.

There’s a lot of talk from re/insurers that it is too early to say whether this is a market changing event but that they all expect significant insured losses. Most suggest over $10 billion as the insured loss cost to the market, although some have suggested much higher figures.

Japan has an earthquake insurance pool which usually would limit losses to international re/insurers from an earthquake event. However, yesterdays twin disasters of earthquake and tsunami could exacerbate losses and result in more hitting the global re/insurance players.

Insurance penetration is said to be lower in the northern areas around Sendai where the tsunami came ashore than in areas such as Tokyo.

The catastrophe bond impact of the event is still unknown. It will require the calculation agents to run their formulae to discover whether any of the $1.5 billion of catastrophe bonds with exposure to Japanese earthquakes have been triggered. However, with so many bonds exposed, the magnitude of the earthquake itself and the devastation that resulted it is beginning to seem likely that some loss may be borne by the catastrophe bond market. Here’s our list of the catastrophe bonds exposed to the Japan earthquake. S&P have left ratings unchanged on the exposed cat bonds that they rate, saying that it is too early to tell what impact there may be.

Risk Management Solutions had this to say on the Japanese insurance market in their latest update:

Japan ranks as the fourth largest non-life market after the US, Germany, and the U.K., with direct non-life premium income amounting to JPY 10.8trn (USD 104.9bn) in the year ended March 31st, 2009. Approximately 70% of this income is derived from personal lines. Despite the size of the market in gross premium terms, insurance penetration and density is very low when compared to leading western markets, particularly in commercial and industrial lines.

It is estimated over 50% of households have building insurance and 40% of vehicle owners hold motor damage policies. Earthquake, including shock, fire, and tsunami, is available as an optional peril on properties covered by a basic household policy. In 2010, it is estimated less than 50% of policy holders insured through conventional insurance companies took this option. These figures do not include co-operative household policies, which although excluded from The Law Concerning Earthquake Insurance (1966), tend to offer earthquake coverage automatically and are the largest provider of domestic earthquake insurance.

Commercial and industrial lines are significantly under-insured, with many large corporations insuring their properties on an indemnity basis only, with no loss of profits or earthquake insurance. Many small to medium sized business are completely uninsured.

All household and most commercial fire polices are automatically extended to include earthquake fire expenses insurance.

We’ll continue to update you as more details on the impact of these terrible events come to light.