Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Serious Tokyo earthquake could be $130-150bn industry loss: Swiss Re


The global insurance and reinsurance industry could face in the region of $130 billion to as much as $150 billion of losses if a really severe earthquake strikes the Tokyo region of Japan, according to Swiss Re.

japan-fuji-image“The high concentration of population and wealth in the Tokyo region mean a serious quake could cause insured losses of an estimated USD 130-150bn,” Swiss Re explained.

Adding that, “This would be the highest ever loss globally from one event.”

It is almost one hundred years on from the Great Kanto Earthquake now, an event that killed over 100,000 people and caused economic losses that reached close to one-third of Japan’s GDP.

It is still the country’s worst natural disaster to ever occur and while Japan is a global leader in enforcing stringent building codes and disaster mitigation measures, Swiss Re notes that “its areas of very dense populations and asset values create great potential for huge losses today.”

Seismic risk in Japan remains extremely high and as a result it has been a focus for insurance-linked securities (ILS) capacity, with catastrophe bonds and collateralized reinsurance both featuring within insurer reinsurance towers there.

In fact, there are over $1.4 billion of Japanese quake exposed catastrophe bonds outstanding at this time, Artemis’ data shows, with another $520 million of Japan multi-peril cat bonds with quake exposure as well and more Japanese quake embedded in some international multi-peril deals.

Given the scope for losses, it is no surprise Japan earthquake is a peak peril and so its insurers benefit from the use of the capital markets as a source of reinsurance.

Swiss Re provides some data that helps to lay bare the scale of the potential for losses, saying that, “The economic losses from a Mw 7.3 quake beneath the Tokyo Metropolitan area could be nearly USD 1 trillion in today’s prices – and we estimate that the associated insured losses could be almost twice the annual average loss from all natural disasters globally for the last 10 years.”

Swiss Re adds that, “We estimate the associated insured losses from residential and non-residential claims at about JPY 13.3-15.2 trillion, or USD 130-150 billion today: the biggest ever single-event loss to the global insurance industry.”

The reinsurer also noted, “The Tokyo Disaster Management Council estimates up to a 6% probability of a repeat Mw 7.9 earthquake striking the city within the next 30 years.”

Which ensures that Japanese earthquake exposure will remain an area that the capital markets can support the global reinsurance industry, in assuming risk and diversifying it into the capital markets.

The level of risk also explains why Japan quake is becoming one of the most transferred risks in parametric form as well, with relatively significant use of parametric insurance to protect corporations with significant exposure to quake damage or business interruption.

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