According to a recent article in the New York Times, insurance and reinsurance companies from Japan and abroad, as well as hedge funds and other investors in catastrophe bonds, are expected to bear a relatively small portion of the losses stemming from the earthquake and resulting tsunami, which is expected to exceed $100 billion. By way of comparison, the 1995 earthquake in Kobe, Japan resulted in approximately $100 billion of damages, according to the Insurance Information Institute, but only about $3 billion of that was covered by insurance. Thus, a substantial portion of the losses stemming from this most recent disaster will likely fall on Japan's government.

The article further notes that coverage for losses resulting from the likely nuclear contamination caused by the earthquake and tsunami is also uncertain. Although Japan requires its nuclear operators to purchase about $2.2 billion in liability insurance through a local captive, such insurance does not provide coverage for earthquake damage or business interruptions. According to the article the initial estimate of insured losses from the earthquake, provided by AIR Worldwide, was relatively "narrow," valued at $15 billion to $35 billion, and included only damages stemming from the earthquake and resulting fires, but not the tsunami, landslides or nuclear accidents. Although this initial estimate included the cost of physical damage to houses and their contents, farms and commercial property, as well as insured business interruption losses, the company's estimates will not include various uninsured losses, including cars swept away, buckled roads and weakened bridges, and “demand surge” — understood to be the spike in the cost of materials and labor costs that coincides with large-scale rebuilding after a catastrophe. As the article notes, "[t]he uninsured losses may turn out to be the greatest losses of all." The company expects to revise its estimates in the coming week.

The impact of this disaster has already spread to insurers and reinsurers in the U.S. and Europe, according to the article, which reports that U.S. life and health insurers with operations in Japan suffered a loss in stock price due to fears of radiation exposure. The article further notes that Aflac, which sells a popular line of cancer insurance in Japan, was among the biggest losers. According to the article, "[b]usiness insurers that operate globally, like ACE, Chartis, Allianz and Zurich, have a relatively small toehold in Japan, and therefore small exposure. About 90 percent of the property and casualty business in Japan is written by three big domestic insurance groups, the MS&AD Insurance Group, the Tokio Marine Group and the NKSJ Group." However, according to Kenji Kawada, senior analyst for Moody's Japan K.K, who is cited in the article, "[a] meaningful portion of the losses will flow to the global reinsurance industry,” with Munich Re, Swiss Re, Scor, Hannover Re, Berkshire Hathaway, PartnerRe and Everest Re being among the largest reinsurers with an interest in Japan. Although Moody's expects the rating of major reinsurers to remain stable, it expects reinsurance pricing to reverse course and edge higher as a result of this disaster.

To read the article in its entirety, click here.