Japan Earthquake May Be ‘Catalyst’ for Higher Reinsurance Rates Globally

Japan’s biggest non-life insurers may have to pay higher reinsurance rates when they are renewed next month after the nation’s strongest earthquake.

Revisions will be affected in the aftermath of the March 11 temblor and subsequent tsunami, said Hideyuki Ishii, a spokesman at Tokio Marine Holdings Inc. (8766) Sompo Japan Insurance Inc. is still assessing the impact from the disaster, said Yuzuru Tsukui, a spokesman at the unit of NKSJ Holdings Inc. (8630) MS&AD Insurance Group Holdings (8725) Inc. is in negotiations, said Toshitsugu Matsuura, a company spokesman.

“Given the current situation, it is a concern that it will have an impact on our renewal discussions going forward,” said Tokio Marine’s Ishii.

The outcome of negotiations on the reinsurance rates for Japanese insurers, which typically are done once a year in April, the start of the business year, may push up prices for catastrophe cover that have fallen for two years. Japanese insurers generally pass on 70 percent to 80 percent of their catastrophe cover to overseas reinsurers, said Teruki Morinaga, a director at Fitch Ratings Japan Ltd.

“Japan’s latest earthquake may become a catalyst to change the recent trend in reinsurance rates around the world,” Tokyo- based Morinaga said. “This could be the beginning of a hardening in the global reinsurance rates,” said Morinaga. In reinsurance terms, a hardening of markets or rates refers to an increase in prices for coverage.

Passing on Risks

Reinsurance rates fell for a second straight year in January on high levels of capital available in the industry, according to Guy Carpenter & Co., the reinsurance brokerage of New York-based Marsh & McLennan Cos.

Reinsurers help protect primary carriers against the cost of major claims from disasters such as hurricanes and earthquakes.

Japanese insurers and global reinsurance companies that backstop their policies may face claims of as much as 2.8 trillion yen ($35 billion) tied to the disaster, AIR Worldwide said earlier this month. Moody’s Investors Service said the earthquake may cause as much as 400 billion yen in claims for life insurers. Japanese Prime Minister Naoto Kan said it was the country’s worst crisis since World War II.

The death toll following the disaster has risen to more than 9,500 while more than 16,000 are still missing, according to the National Policy Agency.

Ongoing Discussions

“It remains unclear how much of an impact it would have,” said Sompo Japan’s Tsukui.

MS&AD’s Matsuura declined to elaborate on the renewal discussions except to say that they were “ongoing” and that talks are private.

The quake and tsunami damaged a nuclear plant run by Tokyo Electric Power Co. in the worst nuclear accident since Chernobyl, releasing radiation leakage into the sea and air. Japanese casualty insurers are not liable for coverage of nuclear damages or radiation leaks.

Shares of Tokio Marine, Japan’s second-largest casualty insurer, declined 0.6 percent to 2,254 yen at the 3 p.m. close on the Tokyo Stock Exchange. NKSJ, the third largest, rose 1.3 percent to 535 yen, while MS&AD, the biggest, advanced 2.7 percent to 1,885 yen. Each stock has declined about 10 percent since March 10, the day before the earthquake.

Japan Risk

Japanese casualty insurers are passing on their earthquake insurance to reinsurers mainly on commercial buildings, Fitch’s Morinaga said. “Risks against earthquakes in Japan will probably go up going forward from now on,” Morinaga said.

Recent natural disasters including a temblor in New Zealand and floods in Australia have not been enough to prompt a review in reinsurance rates because there was enough excess capital to cover for the damages, he said.

“It’s inevitable that the reinsurance market is going to face a tough time from now on,” Hisahito Suzuki, chairman of The General Insurance Association of Japan, said last week. “We need support from the overseas reinsurers with which the Japanese insurers will be having discussions -- we are looking for reasonable rates to secure stable reinsurances for our coverages.”

Munich Re, the world’s biggest reinsurer, on March 22 dropped its 2011 profit target after estimating the company’s claims from Japan’s catastrophe will reach about 1.5 billion euros ($2.1 billion). Swiss Reinsurance Co., the world’s second- biggest reinsurer, estimated on March 21 it will face claims of about $1.2 billion from the earthquake and the tsunami in Japan.

Historical Trend

Reinsurers such as Munich Re and Swiss Re renew about two- thirds of their annual property and casualty contracts in January, and the remainder in April and July. The renewals on April 1 typically focus on the Asia-Pacific region.

“In general prices are rising in the local market after such an event, often globally as well,” Thorsten Jeworrek, Munich Re’s head of reinsurance, said in an e-mail. “That’s how it has been in the past.” He declined to elaborate further on price developments.

Payouts for Japanese non-life insurers may reach a record after the magnitude-9 temblor and tsunami, Suzuki of the non- life insurance association said March 17. The insurers will use reserves set aside, reinsurance and government funds to cover the earthquake payouts, and the impact will be limited, he said.

The overall damages from the earthquake and tsunami are as much as 25 trillion yen, almost four times the amount after Hurricane Katrina in the U.S., Japan’s government estimated on March 23. The country has suffered a record 262 aftershocks measuring magnitude 5 or more in the seven days following the March 11 earthquake, Kyodo News said on March 20.

“We do not rule out that this event might change not just rates on Japan, but natural catastrophic rate, in particular earthquakes around the Pacific,” said Birgit Roper-Gruner, an insurance analyst at Societe Generale SA in London.

To contact the reporters on this story: Komaki Ito in Tokyo at kito@bloomberg.net; Tomoko Yamazaki in Tokyo at tyamazaki@bloomberg.net

To contact the editor responsible for this story: Andreea Papuc at apapuc1@bloomberg.net

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