Here’s a useful breakdown of who pays for what after Japan’s massive earthquake:
- Residential losses – Japanese insurers, the Japanese government scheme.
- Commercial/industrial losses – covered by private insurers, reinsurers.
- Nuclear facilities – covered by insurance pools.
- Radioactive contamination – the Japanese government.
Which might help explain (some) of why Japanese government bonds are sliding on Wednesday. Japanese insurers could well be selling some of their bonds to help cover losses in their stock portfolios, just as the outlook for Japan’s finances might worsen.
Anyway, most of the above round-up comes from BNP Paribas’ European credit analyst, Rafael Villarreal, who notes that “the market is under the mistaken impression that the insurance industry is liable” for events at Fukushima.
As he writes:
Since the 1950s, insurers have known the risks posed by nuclear facilities and have known that the capacity needed to absorb possible claims as a result of a nuclear disaster far exceeded the capacity that could be provided by an insurer or a small syndicate of insurers, or even the whole national market’s insurers.
At first, the industry had no statistics on which to base its underwriting; there was fear that large numbers of claims would be made simultaneously (accumulation risk) at the time of a catastrophe and very large amounts could be involved; there was not a sufficient number over which to spread risk and diversify, and so on. The industry had to take specific measures to ensure cover was provided, ensuring that there was as much capacity available for the nuclear power industry (to allow it to develop) without endangering the insurers’’ solvency.
Governments and industry worked together for the creation of national and international nuclear insurance pools. Pools are free to reinsure on a facultative basis (specific risk-contract of reinsurance) with other Pools.
[Nuclear plant] Operators pay premiums to the Pool. The Pool can enter into inter-pool arrangements with other Pools. In other words, the international Nuclear Pool community could be behind any one accident.
The pools seem to cover things like damage of the plant, cleanup expenses, business interruption and so on. What they don’t cover is what’s really worrying most of the Japanese public and the market right now (on very different levels) — radiation.
Back to Villarreal:
When insurers say a risk is uninsurable, it means the government will end up picking up the tab. Since the 1950s, to protect their solvency from the potential effect of having to pay full policy limits under every contract, insurers have excluded radioactive contamination from those classes where it was deemed uninsurable. The radioactive contamination of third party property is not insurable by conventional means, nor are attacks with nuclear weapons … The governments provide compensation (e.g. Chernobyl). The amounts involved have exceeded many times over the capacity of the nuclear insurance industry, which confirms that the decision to exclude it was the right one.
It’s certainly looking that way now.
That radioactive problem is very much Japan’s — in every sense of the word.
Related links:
Nuclear risks in property insurance and limitations of insurability - Swiss Re, 2003
Insurance and the earthquake – JPMorgan, via Scribd