There are two reasons for this. First, the amount of insurance purchased by Japanese policyholders for a given exposure is less than that purchased by policyholders in the U.S. Most of the earthquake loss will be submitted to the Japanese Earthquake Reinsurance Pool, a semi-public entity.  Second, residential and personal lines insurance in Japan is generally limited to companies in the Japanese insurance market.  Even large Japanese policyholders tend to place most of their insurance with Japanese insurers such as Tokia Marine, Mitsui Sumitomo and Sompo.

Bramlet: What specific types of losses do you expect?  What impact (if any) have the disasters had on U.S. businesses?

Cohen and Paar: Although all of the types of coverages listed previously may be implicated in some way by the Japanese events, the most important for U.S. policyholders and their insurers is CBI coverage, which applies when the policyholder suffers an interruption in its business because the property of a third party, such as a supplier or receiver, is damaged or destroyed. Accordingly, an American auto manufacturer may have an interruption in its business and a resulting loss, if it relies on parts manufactured and shipped from Japan. These types of losses stemming from a break in the chain of supply already have caused some U.S. manufacturers to either cut back in production or close plants entirely.

Bramlet: What type of issues do you anticipate will be raised by the Japanese earthquake claims?

Cohen and Paar: Issues surrounding what caused the loss are likely to dominate claims handling, along with the calculation of the amount of loss. There are a number of relevant perils that arguably caused a loss, including fire, earthquake, flooding, the tsunami, orders of the civilian authorities limiting access, and contamination from nuclear radiation. A property insurance program is generally written on overall limit, but losses caused by certain perils are capped with a much smaller sublimit.  There is generally no sublimit on a fire loss. However, earthquake and flooding generally have significant sub limits—for instance, although the insurance program provides $500 million in insurance, the policy may pay only $50 million for a loss due to earthquake. Additionally, damage from radiation is generally excluded from any coverage. Therefore, how the policyholder presents its claim, and whether a portion of a loss can be attributed to a covered peril, will make a difference as to which and how many sub limit(s) can be applied.

The cause of the loss also may make a difference in calculating the amount of the deductible. For instance, the deductible for an earthquake claim may be based on a percentage of the value of the property lost or destroyed. In a straight BI claim, where the property of the policyholder was damaged, the value of the policyholder's property will likely be disclosed in the underwriting material, or on a schedule referenced by the policy. In the case of a CBI loss, the property that is damaged belongs to a third party and its value may be difficult to determine.

Finally, the calculation of loss can involve consideration of many aspects of the policyholders business. In the case of a CBI loss where damage to the property of a Japanese third party affects the global supply chain of a U.S. business, there are numerous factors to be considered. It often takes a very sophisticated analysis to determine what portion of the loss is covered and what is not. 

Bramlet: Will these claims arising out of the earthquake affect global insurance/reinsurance markets? How so and to what extent?

Cohen and Paar: This has not been a great time for those selling insurance for catastrophe losses. Prior to the Japanese earthquake, there was an earthquake in Christchurch, New Zealand causing an estimated $20 million in property losses, $10 million of which may be insured. The last few months also have seen significant losses because of floods in Australia. However, despite the severity of the losses from the Japanese earthquake, a relatively small portion of the losses are insured. Therefore, the impact on the global insurance and reinsurance markets is not likely to be significant. Indeed, after Hurricane Katrina, which resulted in larger insurance payouts than what are expected from the Japanese earthquake, the price of property insurance and the financial strength of insurers and reinsurers was not materially affected.

Bramlet: Could the earthquake potentially change the way insurers approach BI claims or managing risks?

Cohen and Paar: Every time there is a significant loss, insurers modify their approach to underwriting a risk. After Japan, insurers will undoubtedly re-examine their policy language to correct what they believe are unanticipated ambiguities that resulted in coverage. For instance, to prevent the possibility of multiple sublimits, an insurer may define “earthquake” to include the related tsunami. The events in Japan undoubtedly will affect the underwriting and investigation that is done before a policy is sold. At a minimum, insurers are likely to inquire into what operations, or supply chain links the policyholder has to Japan or other companies on the Pacific Rim prone to earthquakes. Perhaps even more important, the events in Japan should alert policyholders to potential risks that they need to manage by moving away from, or finding possible substitutes for, Japanese suppliers.