Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Japan quake damage thought insufficient to worry catastrophe bonds


Damage from the magnitude 6.2 earthquake which struck the Nagano region of central Japan on Saturday is not thought to be sufficiently severe to worry any of the exposed Japanese earthquake catastrophe bond transactions, according to the market.

The earthquake struck a little after 10pm local time on the 22nd November, around 15 miles to the west of Nagano City and at a depth of 6 miles, according to the USGS report. Widespread shaking was felt, with some reports that the quake had been felt as far away as Tokyo itself. The Japan Meteorological Agency recorded the intensity of the earthquake as M6.7.

Damage is largely restricted to the ski region of Hakuba and surrounding villages. Reports suggest over 140 homes were severely damaged or completely destroyed, with 44 people injured. Landslides have been reported, with roads damaged and at least one major rail line blocked.

There are also reports of some commercial buildings being damaged but no information on numbers, how severely damaged they were or what their uses are.

Dozens of aftershocks have been reported making assessing the damage dangerous and difficult for the authorities.

Due to the limited extent of the damage to buildings and infrastructure , as well as Japan’s robust construction standards, it is not expected that the earthquake will concern any of the exposed Japanese earthquake catastrophe bonds. Exposed cat bonds which cover Japanese earthquakes include; Nakama Re Ltd. (Series 2014-1), Kizuna Re II Ltd., Nakama Re Ltd. (Series 2013-1) and Kibou Ltd. (Series 2012-1).

Swiss-based ILS investment manager Plenum Investments said that; “The earthquake will not affect any of the outstanding Japan earthquake CAT bonds because of the only limited amount of damage to buildings and infrastructure.”

There is however, as ever with a catastrophe event that causes insured losses, a possibility that some reinsurance policies could be triggered if the damage levels reached insurers program deductibles.

If the earthquake loss is sufficient to hit reinsurance programs then there is always a chance that an ILS fund could hold a position on an affected reinsurance contract. Also certain reinsurance sidecars, such as Swiss Re’s Sector Re, were understood to contain Japan quake risks. However at the level of damage currently reported any impact from that would be expected to be minimal.

Update: Japan Today suggests that the architectural structure of the buildings in the affected region will have helped to reduce losses.

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