More must be done to close the quake protection gap in Japan

Although earthquake risk in Japan is relatively well understood and the industry performed well in the aftermath of the last big quake to hit the country, in 2011, more must be done to tackle the protection gap (the difference between the economic loss and the insured loss) and the extent to which insurance is used to protect certain risks.

That is the view of Rupert Moore, chief executive of Aon Benfield’s Japan team, who told SIRC Today that the industry acquitted itself well through the tragic events of the Great East Japan earthquake. “Most notable was the speed of settlement of claims which was impressive by global standards,” he said.

“In any event there are lessons to learn, such as how to tackle the protection gap in the commercial/industrial sector and reviewing the from-the-ground-up limit of reinsurance purchase.”

Moore said things have changed since that event. The industry now buys significantly more per occurrence reinsurance limit and continues to review the products offered to customers.

“We have also observed a general increase in demand from corporates and a willingness from Japanese insurers to offer their clients the coverage they need. Reinsurance plays an important part of Japanese insurers’ ability to offer a sustainably priced earthquake product to their customers,” he said.

He explained that take-up rates in Japan for earthquakes and tsunamis vary by line of business.

For personal lines, earthquake coverage is sold in a variety of ways with mutual insurers and P&C insurers offering coverage. Taking both into account, it is estimated the personal lines take-up rate is in the region of 50 to 60 percent of policyholders who have some element of earthquake coverage which is designed to cover their buildings and contents.

“This is high by global standards. That said, given the huge values at risk, payouts are typically limited to a range of 20 to 50 percent,” he noted.

For commercial and industrial risks there is less transparency on take-up rates and/or the adequacy of the limits purchased. According to a Cabinet Office-sponsored survey, at the time of the Great East Japan Earthquake (Tohoku), take-up ratio for large corporates was 36 percent (however, out of the 2,000 companies approached, only 160 responded).

In a similar study focused on small and medium-sized enterprises in Japan, of those who responded, 47 percent purchased some form of earthquake cover. Of the 3,000 companies in the survey, 826 companies responded.

“This view is not universally held. The Nikkei newspaper recently suggested that the take-up rate was in the region of 10 percent across all non-dwelling risks,” Moore said.

He suggested that one reason penetration is low is because banks typically don’t require their customers to purchase earthquake insurance to support the loans they make. Additionally, they are not charged capital for the role as a ‘silent earthquake insurer’.

“The decision to purchase insurance rests with the individual or company management and their shareholders. Earthquake is typically sold via endorsement in Japan so coverage is not automatically given within the standard policy coverage,” he said.

“As a voluntary purchase, it is important to assess the relative pricing compared to various ‘compulsory’ covers. If for example we compare the fire rate, the earthquake pricing appears relatively expensive (ie, earthquake is a high percentage of the fire rate); hence, many buyers hesitate to buy the cover.”

Moore stressed that there are also a number of challenges for insurers when offering coverage. These range from the ability to charge a risk adequate premium (in the absence of a government premium subsidy); the challenges in adjusting claims post disaster; and the ability to manage such a volatile line of business within investor appetites given the huge concentration of values in Japan.

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