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Sendai Quake Raises Questions About Emerging CAT Loss Profile, Risk Models

Japanese government coverage limits insurers' and reinsurers losses, but the industry needs to take a close look at the reliability of its CAT models.

The Sendai quake and Tsunami even has taken a incalculable human toll in terms of suffering and a horrifying toll in terms of deaths and injuries, yet to be fully assessed. The economic toll is also going to be enormous, perhaps in the range of $100 billion USD, according to an early estimate by EQECAT. Open market insurance losses are likely to be much lower, because much of the insured property is covered through a government scheme.

While EQUECAT is yet to calculate an insured loss estimate, its peers RMS and AIR have provided a range of roughly $15 to $35 billion, as we reported this morning. The story notes that impact of the 1995 Kobe earthquake on insurers was only about $3 billion, despite overall economic losses of about $100 billion.

As Swiss Re comments in a release today:

The circumstances in Japan are particularly complex since damage to property was not only caused by the earthquake itself but also by fire following the earthquake and the ensuing tsunami. In terms of residential insurance policies, the cover for earthquake shock and tsunami are provided by a government-run scheme. This cover is typically not reinsured in the private market.

The nuclear emergency playing out in Japan is also unlikely to have a significant impact on property insurance losses, in part because some of the worst consequences are likely to be health- rather than property-related and because of limited nuclear liability. The above referenced news story notes that, "AIG, the largest property insurer in Japan, is believed to have a blanket nuclear exclusion in all its Japanese policies."

Despite the limited exposure of the global insurance and reinsurance industry owing to factors mentioned above, one can't help but wonder what this catastrophe, along with the Australian floods and the Christchurch earthquake bode for the emerging CAT loss profile for 2011. I&T will continue to report on the Sendai quake/tsunami as more information becomes available, and on the emerging CAT loss profile as the year goes on. Warning flags have been raised about insurers' catastrophe models, and high overall CAT losses despite a mild Atlantic hurricane season make the matter all the more urgent.

Anthony O'Donnell has covered technology in the insurance industry since 2000, when he joined the editorial staff of Insurance & Technology. As an editor and reporter for I&T and the InformationWeek Financial Services of TechWeb he has written on all areas of information ... View Full Bio

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