Insurance losses won't beat Katrina

MUMBAI: The economic impact of Japan's earthquake might end up being in the region of $171-$183 billion making it more expensive than Hurricane Katrina, the costliest natural disaster till date, according to a report by Credit Suisse.
However, the jury is still out on what the actual insured losses would be. "The estimates from most credible sources still range from $20 billion to $35 billion," said Sanjay Kedia, MD, Marsh India. In that case, insured losses would still be lower than that of Hurricane Katrina which saw claims amounting to over $70 billion.
The wild card in the case of Japan is the business interruption losses. Insurers say that it is not clear when most of the affected manufacturers will resume production. In certain sectors like petrochemicals, business interruption losses are much higher than material loss. Brokers estimate that some of the large claims could come from refineries and auto manufacturing plants which might have direct business interruption or indirect interruption following disruption of supplies.
Kedia said that although the nuclear reactors would be the single largest assets to be destroyed in the aftermath of the tsunami that followed the earthquake, the cover for the reactors would be insulated from the general insurance market.
"Nuclear reactors are insured in the specialist nuclear market. The losses caused by radiation are also excluded under standard policies. While these are covered under nuclear public liability cover the claims are paid out of a nuclear pool" said Kedia.
Insurers are optimistic that the impact of the quake on world markets would be less than Katrina because unlike the US, Japan has a very high level of insurance retention. For instance losses to residential properties due to an earthquake are covered under a government supported programme.
Moody's Analytics said that after the earthquake and tsunami Japan's transportation infrastructure has been crippled, electric power to factories is facing constant disruption and nuclear power capacity has been severely limited. The rating agency said that the shutdown would impact manufacturing across the world. "Given Japan plays a pivotal role in the global production supply chain, factory shutdowns are harming global output. Japan supplies one-fifth of the world's semiconductors, makes automobile engines needed in assembly plants around the world, and is one of the leading producers of LCD displays"