Zenkyoren loss creep makes Muteki loss seem small by comparison

The earthquake and tsunami in the Tohoku region of Japan last March took a large toll on the Japanese Zenkyoren cooperative insurer, also known as the National Mutual Insurance Federation of Agricultural Co-operatives. Zenkyoren had the largest insured portfolio exposure to the Japan quake and is one of, if not the, largest buyer of property catastrophe reinsurance in the world.

Zenkyoren’s loss estimate has been steadily rising over the months following the earthquake, with the latest estimate putting the total loss to them at 890 billion yen or around $11.4 billion (as reported by the Insurance Insider). It’s felt within the reinsurance market that there is room for this to increase a little further as well as the total exposure of Zenkyoren was over $12 billion.

Zenkyoren were the sponsor and beneficiary of the Muteki Ltd. catastrophe bond which was triggered and became a total loss after the Japanese earthquake. Zenkyoren benefitted from the cover that Muteki gave them to the tune of $300m in monies recovered from investors in the Muteki deal.

Interestingly Muteki, while a large loss for the less disaster-loss experienced catastrophe bond market, actually covered less than 3% of Zenkyoren’s losses. While Zenkyoren can be expected to pay out the figure of 890 billion yen to their policyholders (largely financed by reinsurance) the Muteki Ltd. payout amounts to just 23 billion yen. This article published today in the Japanese Mainichi newspaper discusses the increasing profile of cat bonds in the wake of the Japanese earthquake event and the contribution of Muteki to Zenkyoren’s loss payments.

The triggering of the Muteki cat bond certainly has helped to raise the Japanese markets interest in cat bonds however when compared to the total loss faced by their insurers (and the reinsurance market) the size of the loss to cat bond investors is small by comparison.

Will the loss of Muteki result in more Japanese cat bonds during 2012? It’s possible. With reinsurance rates rising steeply in the region and many of the major programs due to renew in mid-year, we’d hope to see some cat bonds issued in Q1 or Q2 with exposure to Japanese natural perils. The market would welcome the diversification as evidenced in this piece which shows the declining amount of Japanese perils in the cat bond market.