New quake estimate: Enough to harden market, not crush it

Towers Watson weighs in: $20 billion to $45 billion for the quake and tsunami. But the tragedy “will not have a devastating effect on either the capital of the Japanese insurance industry or the international reinsurance market.”

The range is wider and, overall, higher than either Eqecat or AIR estimates. Unlike AIR and Eqecat, the estimate isn’t heavily dependent on computer models. It relies on Tower communications with clients and on the Japanese government’s estimate of $300 billion in economic losses. (Generally at some point, insurer estimates rely less on models and more on assessments at the scene.)

It also assumes that 50% of residences affected had purchased quake and tsunami protection. That’s a higher take-up rate than I’ve read elsewhere.

The loss breaks down this way. (Figures don’t quite add up because of rounding, and yen are convered to dollars at 82 to 1.):

International insurance includes primary coverage written by non-Japanese insurers, generally commercial risks.

The property numbers include the Japanese co-op/mutuals, but exclude the business assumed by the government.

That’s adds up to quite a burden on the Japanese insurers, but Towers figures they can take it. Notes Towers:

Japanese insurers hold catastrophe reserves, which are built over time. They will draw into these reserves before dipping into capital.  Japanese insurers typically hold capital well in excess of capital requirements. Both of these factors will effectively limit the hit on the Japanese industry’s capital.

More on the residential loss estimate:

  • Residential losses: $5.8 billion to 14.2 billion (before government’s share of the Japanese reinsurance pool).
  • Residential losses: $3.6 billion to $7.8 billion (after government’s share of the Japanese reinsurance pool).
  • Zenkyoren (largest Japanese co-op): $3.5 billion to $8.5 billion gross. The Zenkyoren doesn’t participate in the reinsurance pool but has an enormous layer reinsured, $8 billion excess of $3.3 billion.
  • Other co-ops: $2.3 billion to $5.7 billion.

To compare Towers’ midpoint with those of AIR and Eqecat, see below:

Another estimate

Towers did not issue an estimate for personal accident. Recall that AIR’s estimate excludes auto, personal accident, marine and life.

Towers estimates that $12 billion to $15 billion will end up in the international reinsurance community – a bit higher than the industry’s hit for the second New Zealand quake. That makes it “a significant ‘earnings’ event rather than an impairment to capital.”

As a result, no shortage of capital to harden the market as happened post-Katrina. Still, Towers forecasts 20% to 50% rate increases to Japanese reinsurance programs.

Many Japanese cat programs renew April 1. Aon reports that some programs extended last year’s terms as they take stock of the situation. Those that did renew saw increases of 25% to 50% on quake and 5% to 10% on typhoon. Guy Carpenter largely agrees with Aon.

Towers is also suggesting April 1 India renewals may rise, as will Australia and New Zealand’s July 1 renewals.

Much of Florida’s reinsurance market renews June 1 and July 1. Rates may be higher there as well, says Towers. But Aon notes that rates on Florida’s April 1 cat renewals fell 5% to 10%, while Guy Carpenter indicated they were flat.

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