Economic loss estimates for the Japanese earthquake and tsunami have been put as high as $308 billion, but only a portion will result in insured losses for the international insurance and reinsurance industry. In a new Q&A document Moody’s say they expect the bulk of losses to flow to the Japanese government, Japanese insurers (including co-operatives) and international reinsurers.
The Q&A document tries to bring together a lot of the information about re/insurers exposure to the events and remove any confusion surrounding the expected losses. We still don’t know the extent of the insured loss but it is believed that it will be towards the higher end of the $12 billion to $35 billion ranges.
Moody’s expect a large insured loss for reinsurers as a result of the exposure of Japan’s big three non-life insurers (Tokio Marine Group, NKSJ Group and MS&AD Insurance Group) and Japan’s largest cooperative insurer (Zenkyoren). Between them they have some of the largest earthquake reinsurance arrangements in the world. They also expect life insurers to take a big hit with death and benefit claims of as much as $4 billion to $5 billion. Moody’s also mentions that there is the potential for life and health insurers to be on the hook for claims due to the nuclear plant emergency from radiation in future, but that is very uncertain right now.
Moody’s say that they believe some of the losses from this event will flow to the retrocession market. They also mention catastrophe bonds and industry loss warranties as instruments at risk. Moody’s rate four of the exposed catastrophe bonds (Muteki Ltd Series 2008-1, Valais Re Ltd Series 2008-1, Vega Capital Ltd Series 2008-1 and Vega Capital Ltd Series 2010-1). These four deals amount to $570m in exposure for the catastrophe bond market. Moody’s says that they are monitoring the transactions and awaiting further information.
On reinsurance rates and prices, Moody’s say they expect rates for Japanese insurers for catastrophe reinsurance will turn decidedly up. Early reports suggest this upturn will be in the region of 20% and could be even higher as negotiations play out. For U.S. catastrophe reinsurance renewals Moody’s say they expect prices to stabilise or go up by single figure amounts.
Interestingly the report from Moody’s closes:
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Ironically, neither Japan nor New Zealand is considered a hotspot, or “peak zone”, for most reinsurers. Japan and in particular New Zealand are considered “coldspots”, where natural disasters are supposed to occur less frequently than in hotspots like the U.S. and Europe. “Coldspots” are suppose to provide balance to reinsurers’ portfolios but this has not played out as planned in the first quarter. A change in perception of risk may also argue for upward pressure on reinsurance prices in hotspots.