Japan typhoons expose lack of BI cover

Two large typhoons in Japan as well as earthquakes and heavy rainfall experienced in Japan have recently revealed the growth potential for business interruption cover in the country’s commercial insurance market, Ken Motoda, president of AGCS Japan, the local unit of Allianz’s commercial insurer, told SIRC Today.

“It has been an unfortunate year for Japan so far,” Motoda said.

“Typhoon Jebi has been the biggest event so far this year and the biggest in the last 25 years in Japan,” he said. Insured losses from Jebi are estimated at between $5 billion and $7 billion, he noted.

Japan has also been hit by Typhoon Trami in September as well as by two earthquakes and very heavy rainfall, Motoda added.

Overall these events together may reach a total of $15 billion in insured losses, he said.

As a commercial insurer, AGCS expects claims from clients in Japan to be driven mostly by property damage and some marine cargo claims. A large area was flooded, affecting some cargo assets, Motoda explained.

Losses may have been higher if the penetration of business interruption (BI) and contingent business interruption (CBI) had been as high as, for example, in the US.

BI losses can be triggered by traditional property damages resulting from natural catastrophe losses or a break in the supply chain due to property damages at the premises of a supplier or customer, which could be covered by CBI policies.

In general, in any nat cat event, the insured ratio is between 15 to 20 percent. If the insured loss for Jebi is $5 to $7 billion then actual losses including BI and CBI could theoretically go up to $20 billion, Motoda explained.

BI losses for businesses can often be much higher than the cost of any physical damage. The average large BI property insurance claim is now at around $2.4 million, more than a third higher than the average direct property damage loss, according to AGCS.

“We see great growth potential for BI and CBI in Japan,” Motoda said.

A severe BI can have a significant impact particularly on smaller companies which may, in some cases, result in the business having to shut down, according to AGCS. Moreover, increasing interconnectivity means the potential for higher losses is growing, the company added.

In Japan, there is an increasing concentration of production sites and logistics hubs in risk exposed areas, according to the insurer. If such clusters are hit by natural catastrophes, disruptive effects can quickly multiply, resulting in CBI losses around the globe, the insurer warned.

Clients are increasingly acknowledging the need for BI cover in Japan, according to an AGCS survey. While in the last 7 years BI has consistently been the top 2 risk for clients and risk managers, in 2018 it has taken the top spot followed by cyber.

Natural catastrophes dropped to the fourth position.

“There is a need for the market to purchase BI and CBI coverage in addition to property damage coverage,” Motoda said.

“I would suggest that corporations analyse their risk related to BI and CBI and, as part of their risk management processes, and consider purchasing business interruption cover as part of their property damage insurance,” Motoda added.

“BI can have a tremendous effect on a company’s revenues. Yet its impact is one of the hardest risks to measure,” he said.

In order to avoid losses, insureds need to understand the risk and prepare for damage ahead of catastrophe events; they have to have a plan and a back-up plan, Motoda explained.

“This can reduce the potential damage and also potential business interruption losses,” he added.

Overall, the financial impact on primary insurers from the recent catastrophes in Japan is likely to be limited, Motoda said.

“Japanese insurers, foreign and domestic in Japan, are very well capitalised and well protected through reinsurance,” he noted.