Recent global catastrophes are likely to erase close to 25% of first quarter profits for reinsurers with exposure to the Japan and New Zealand earthquakes as well as the Australia floods, a recent MarketWatch article reported.
Most of the losses are likely to result from business-interruption, or BI, claims, which are based on lost profit and operating expenses incurred when a company must shut down due to a disaster that is covered by the firm’s property policy. However, because BI insurance is generally sold as part of a general commercial-property-insurance policy, rather than as a separate policy, it is often difficult to determine just how much exposure a reinsurer faces for this type of coverage.
Nevertheless, insurance industry analysts expect BI claims to account for a large percentage of the Japan earthquake losses from commercial insurance policies. For example, with respect to the February 2010 earthquake in Chile, BI accounted for up to 40% of total losses. The large losses are expected to increase the cost of coverage, resulting in a hard market for in the reinsurance industry.
With respect to the U.S., exposure from the Japan quake is likely to be greater in the area of contingent business interruption insurance, or CBI. CBI insurance covers losses that a company incurs when its supplier experiences damage or is shut down after a disaster, thereby stopping the flow of parts, and income, to the insured company. This type of loss is becoming common to U.S. companies who have suppliers in Japan. For example, General Motors recently reported that it was forced to stop some production for a few days after the quake because of a shortage of parts.