Insurers face $35bn payout

THE insurance industry is braced for a hit worth tens of billions from Japan’s earthquake, as the country digests a tragedy that has likely cost tens of thousands of lives and left millions homeless.

But the bulk of the costs could be borne by the Japanese government, which provides insurance to re-insurers for earthquakes up to a pay-out limit of 5.5 trillion yen (£41.8bn).

Risk-modelling firm AIR Worldwide has offered an initial estimate of a $15-$35bn (£9.3bn-£21.8bn) loss on insured properties, which would be many times the $956m pay-out triggered by Japan’s second-worst earthquake in Kobe in 1995.

But under Japan’s unique reinsurance regime, most losses caused by earthquakes are ceded to a national reinsurer, which in turn cedes much of its risk to the government.

The policy means that although the earthquake is likely to be one of the most expensive in history, it will be the government that bears much of the hit, rather than private reinsurers.

The cost of the tragedy will put extra strain on Japan’s already-dire public finances: its debt-to-GDP ratio stands at 200 per cent.

And AIR’s initial estimate only includes estimated damage from the quake itself and not from the tsunami, with the firm warning that the number is likely to be revised upwards as the true extent of the catastrophe becomes clear.

Despite the government backstop for reinsurers, their shares tumbled on Friday. Munich Re closed down 4.28 per cent at €111 (£96.30) and Swiss Re fell 3.54 per cent to SFr51.4 (£34.43) as investors panicked over the impact of the disaster.

Analysis by Goldman Sachs put exposure among non-life insurers at only 3.28 per cent, or ¥144bn (£1.1bn), of their total premiums.