Research & Commentary: Effect of 2011 Japan Earthquake on the Reinsurance Industry

Published April 1, 2011

With billions of dollars in property losses expected in the aftermath of the earthquake and tsunami in Japan, insurers will have to pay enormous claims. As almost always happens in the wake of a major catastrophe, most of the money to pay these claims will come from reinsurers.

To date, there appears to be little evidence that paying the claims will stress the global reinsurance market. Some types of earthquake premiums may rise (that won’t be clear until later in the year), but no major insurer or reinsurer has reported problems getting claims paid.

Nonetheless, two real problems have emerged. First, it appears Japan prepared for the wrong quake: Many of the most vigorous efforts to prepare were made along a different fault than the one along which the earthquake occurred. Second, Japan—through government programs and protectionist policies—concentrated too much risk at home rather than spreading it around the world.

The following articles examine reinsurance, how it is managed globally, and how the reinsurance market reacts to natural disasters like the earthquake in Japan.

Japan Earthquake Developments and Impact on the Industry
This report from Stifel, Nicolaus & Company, a financial services firm, studies the impacts of the 2011 Japan earthquake on the insurance and reinsurance industries.

The Japanese Earthquake and Tsunami Impact on the Commercial Insurance and Reinsurance Market
This report from Woodruff-Sawyer, an insurance services and risk management company, compiles a list of key findings about the effect of the Japan earthquake and tsunami on insurance and reinsurance markets.

Japan’s Strict Building Codes Saved Lives
This article from The New York Times discusses the intensive preparations the Japanese government and individual households made before the earthquake, arguing Japan’s stringent building codes likely saved lives in the 2011 quake.

Japan Faces Up to Failure of Its Earthquake Preparations
This article from David Cyranoski of Nature magazine discusses the failure of Japan’s earthquake forecasting, early warning, and tsunami protection system during the 2011 quakes.

Catastrophe Risk and the Regulation of Property Insurance: A Comparative Analysis of Five States
Robert Klein of Georgia State University examines the regulation of property insurance markets affected by catastrophe risk, particularly the risk of tropical storms and hurricanes.

The Pricing of U.S. Catastrophe Reinsurance
This paper by Kenneth A. Froot and Paul G.J. O’Connell studies the relationship between catastrophe losses and reinsurance prices, discussing what drives changes in price over time.

The Global Market for Reinsurance: Consolidation, Capacity, and Efficiency
J. David Cummins and Mary A. Weiss analyze the economic impact of the wave of mergers and acquisitions currently underway in the global reinsurance market.

Reinsurance and Natural Disasters
This paper by Nigel J. Thorne studies the relationship between reinsurance prices and natural disasters, arguing the relationship will become more important over time as a result of the increasing exposure to loss reinsurers are taking on.

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