Japan quake could cost insurers $60 billion

LONDON - Japan's devastating earthquake and tsunami may cost the global insurance industry as much as $60 billion, which would make the disaster the most expensive ever behind Hurricane Katrina, according to early estimates.

Global insurance stocks took a hit on Monday as traders reacted to images of flattened towns and ravaged coast lines, but analysts stressed there are some mitigating factors, including the fact that damage to residential property is covered by a state-backed system and that nuclear damage is excluded from policies.

Analysts said those elements mean insurance costs will likely fall short of those associated with the Gulf Coast's Hurricane Katrina in 2005, though the full cost of Friday's 8.9 magnitude quake won't be known for some time.

Special report: Disaster in Japan

Expenses will continue to mount due to ongoing aftershocks from the massive March 11 earthquake off the coast of northeast Japan and shutdowns at electronics factories, car manufacturers and oil refineries. The official death toll of 2,800 is expected to rise above 10,000.

"Given the enormity of the earthquake that struck Japan ... it is still in the very early aftermath of the event," said Jayanta Guin, senior vice president of research and modeling at AIR Worldwide, which has put early estimates for insurance costs at $15-35 billion.

"Search and rescue efforts are still underway and damage assessment has only just begun, while considerable uncertainty still remains in the seismic parameters that define the event," added.

A Credit Suisse report suggested initial insurance cost estimates ranging from $10 billion to $50 billion.

Barrie Cornes, an insurance analyst at Panmure Gordon & Co. in London, warned that with the tsunami bill added in, the cost to the global insurance industry could rise above $60 billion dollars.

"The loss will be so large that it will probably provide the trigger to ensure a re-rating of the non-life sector — a similar impact happened post 9/11," Cornes said.

Those upper ranges would make the disaster the second most costly to the insurance industry since 1970, behind Hurricane Katrina which led to global losses of an inflation-adjusted $71 billion.

Moody's ratings agency said a wildcard factor was the potential for so-called "business-interruption losses," which are influenced by damage to power and transportation infrastructure.

"We believe that estimating claims will be a protracted process, as the size and scope of the event will place significant strain on insurers' claims adjustment resources," the agency said in a report. "Moreover, aftershocks could last for weeks, causing additional insured losses."

Fears of the unknown weighed heavily on some of the world's biggest reinsurance companies on Monday.

Munich Re shares were by Monday trading at euro107.65, down 7.7 percent from their close on Thursday, the day before the disaster, while Hannover Re was off 7.6 percent from Thursday's close at euro37.68.

In New York, Aflac Inc. dropped 3.6 percent to $53.56. Lloyd's, the world's biggest insurance market, is unlisted.

"The market has probably overreacted this morning," said Christian Muschick, an analyst at merchant bank Silvia Quandt & Cie. AG in Frankfurt.

While it is still early for clear estimates, the disaster may mean first quarter losses, Muschick said, and "if the losses exceed what is set aside for natural disasters, then they will likely be unable to achieve their guidance for the year."

But the impact on the biggest reinsurers will be less than it was from the global financial crisis, and the companies will likely be able to raise their rates in the wake of the disaster.

Aflac, which sells health and life insurance to one out of every four people in Japan, said that while it expects claims to be high, it was well-prepared to cover them.

It added that its Japanese sales will likely face only a minimal impact, with less than 5 percent of Aflac Japan's new sales and in-force premiums coming from the hard-hit Iwate, Miyagi and Fukushima prefectures.

Australia's QBE Insurance made a preliminary estimate of losses of $125 million.

"The majority of our estimated net claims from the devastating Japanese earthquake will come from the relatively low exposures in our reinsurance, marine and energy operations in Europe," said QBE Chief Executive Officer Frank O'Halloran.

Fitch ratings agency said the costs would be disproportionately retained by domestic Japanese insurers because damage to residential property is covered under Japan's Earthquake Insurance System, which is government-backed to $52.6 billion.

There is also a low take up of insurance by Japanese households and businesses outside cities such as Tokyo or Osaka in comparison to Western countries.

The Japanese government will absorb the cost of earthquake-related damage to a nuclear power facility 240 kilometers north of Tokyo.

Lloyd's of London insurer Chaucer, one of the world's biggest insurers of nuclear risk, said the Japanese Nuclear Act of 1961 absolves nuclear power operators of liability from damage caused by major natural disasters.

Those factors together limited the expense to insurers from the 1995 Kobe earthquake to about $3 billion, a small fraction of the overall economic loss of $100 billion.