Insured losses from Japan quake could hit $35 billion

March 13, 2011
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The earthquake that devastated parts of northern Japan caused as much as $35 billion in insured property losses, a figure that would mark Friday’s quake as the costliest ever for the insurance industry even before the effects of the tsunami are factored in, according to a disaster-modeling company.

While the actual cost of the catastrophe will take months to become clear, Boston-based AIR Worldwide said Sunday the quake alone caused insured property losses of $15 billion to $35 billion. If claims come in at the middle of that range, the cost of the disaster would surpass all other natural catastrophes besides 2005’s Hurricane Katrina.

Loss estimates from AIR and its rivals are closely watched by the insurance industry and by Wall Street to gauge potential losses for individual insurers. No major companies have disclosed estimates of their own losses yet, but the size of AIR’s estimate will fuel conversations in the industry–already underway–about whether the quake will force an abrupt spike in the price of insurance and reinsurance.

Such a spike would be felt by businesses and homeowners in catastrophe-prone areas around the world, including Florida and California.

AIR’s loss estimate includes “insured shake and fire-following damage to onshore residential and commercial buildings and contents, and to properties in agricultural line of business,” but doesn’t include the potential increase in the cost of building supplies and other materials that often occurs after a disaster, AIR said.

The estimate doesn’t yet include estimates for the loss caused by the tsunami, the risk-modeling agency said. But on Saturday, AIR said it had examined prefectures most directly affected by the tsunami, and concluded that $24 billion of insured property had sat within three kilometers of the shore in those areas. Of that amount, $5 billion was within one kilometer of the coast. The company warned against adding its loss estimates to any outside estimates of tsunami damage provided by others, “as that would result in significant double counting.” AIR noted that “many of the properties destroyed by the tsunami first sustained damage from ground shaking and fire, as witnessed by videos of tsunami waves sweeping along entire buildings ablaze.”

AIR said it plans to independently estimate the loss caused by the tsunami, as more detailed information becomes available–including satellite photos from NASA of the flood extent–and provide a combined loss estimate that avoids double-counting in the affected areas.

There have been few reports about major structural damage in the Tokyo and Chiba prefectures, except for several serious fires. However, the risk-modeling agency cautioned that the high concentration of insured properties in the area and some quake impact felt means that “even relatively small individual claims will likely add up to significant numbers.”

Munich Re AG (MUV2.XE) and Swiss Reinsurance Co. (RUKN.VX), the world’s largest reinsurers by gross premium income, reiterated Sunday it was too early to provide estimates of their potential losses. Smaller peer Hannover Re AG (HNR1.XE), and Allianz SE (ALV.XE), Europe’s largest primary insurer by premium income, said the same. So did American International Group Inc. (AIG) and Lloyd’s of London, the U.K.’s 322-year-old insurance and reinsurance market.

However high the insured losses run, total economic losses are likely to be significantly more. Japanese homeowners and businesses have been reluctant to buy insurance to cover all of their potential losses because the cost of the protection has been perceived as too high. AIR estimated about 10% to 12% of commercial property exposures are insured against earthquakes outside of Tokyo.

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