Will Insurance Companies in Japan Pay for the Damages of the Tsunami?

The devastating impact of the 2011 tsunami in Japan has raised important questions about the financial responsibility borne by insurance companies and the government. This article delves into the intricacies of the Japanese insurance system, clarifying how insurance companies and the government collaborate to manage claims following catastrophic events such as earthquakes.

Understanding the Japanese Insurance System

The Japanese insurance system, particularly for major events like the 2011 tsunami, is based on a complex network of reinsurance and governmental support. This ensures that insurers can handle significant payouts without facing insolvency risks.

Government Payouts and Reinsurance: A key mechanism involves the government offering reinsurance, meaning insurer payouts are shared between commercial insurers and the government. Once claims exceed a certain threshold, typically around ￥115 billion, the cost is shared equally between insurers and the government. This arrangement aims to protect insurers from facing catastrophic losses while ensuring comprehensive coverage for policyholders.

Previously Seen Events and Their Financial Impact

To put the current situation into perspective, let's consider a significant previous event, the Great Hanshin Earthquake in 1995. According to a report by Yen Rates Research from UBS, the payouts from the Great Hanshin Earthquake amounted to ￥78.5 billion, or approximately USD 892 million, at the exchange rate of ￥85 to USD 1. Following the 2011 earthquake, the Bank of Japan has already stated that payouts are expected to exceed this amount, potentially reaching hundreds of billions of yen.

The financial representation of this event is detailed in Chart 1, which outlines how Japanese insurers and the government share the burden of earthquake insurance payouts. The entire cost of claims up to ￥115 billion falls on commercial insurers. Beyond this point, costs are shared equally between insurers and the government, up to approximately ￥1.925 trillion.

The Role of Commercial Insurers

Commercial insurers in Japan play a crucial role in managing day-to-day insurance needs. However, when it comes to major disasters, these insurers rely on government support through reinsurance mechanisms. This dual-layered approach ensures that even in the aftermath of ultra-catastrophic events, policyholders can receive the necessary payouts without significant risk to the insurance market as a whole.

Sum-Up and FAQs:
- Are all properties in Japan insured against tsunami or earthquakes? No, only a small percentage of real estate is insured.
- Will the insurance companies go bankrupt due to such disasters? No, due to the reinsurance system, the financial burden is distributed between insurers and the government.
- How does the government help after a natural disaster? The government provides reinsurance, sharing the financial burden with commercial insurers.

While the 2011 tsunami was a historically significant event, it's important to understand the robust insurance and reinsurance systems in place to mitigate financial distress for both insurers and policyholders. As natural disasters continue to challenge global insurance markets, Japan's approach serves as a model for how governments and insurance companies can work together to create more resilient insurance structures.