Just think what you would do if you got an email telling you that within 60 seconds the earth will shake under your feet. That’s what happened in Japan before a 9.0 magnitude earthquake hit northeastern Japan on March 11, followed by a 33-foot wall of water.
It’s not a lot of time to react. The town of Kesennune, Japan disappeared six seconds after the tsunami hit. Following the initial quake, Japan suffered more than 300 aftershocks, release of radiation into the atmosphere from its nuclear power plants and a volcanic eruption.
The economic destruction to Japan is wide and deep. An estimated 10,000 people died. Businesses large and small were closed, supply chains disrupted and employees dead or homeless.
Japan’s nuclear and oil operations have suffered tremendous damage. Electricity was being rationed. Toyota, Honda, Nissan, Sony, Cannon and Panasonic and other corporate giants suspended operations. Roads, bridges, ports, trains, airports, utilities and communications networks were badly damaged.
The impact on the global economy is notable. Equity markets immediately plummeted, reacting to the daily anxiety of the disaster and damage to Japan’s nuclear plants. Businesses around the world will see critical supply chains cut-off for the foreseeable future. No one knows when life will return to normal.
Estimates of the economic cost of the earthquake, change daily and wildly. AIR Worldwide estimated economic losses to exceed $100 billion. Others said the cost will go as high as $150 billion. Eqecat estimated property damage at $20 billion, including extensive residential and commercial property damage, restoration of infrastructure and damage to the nuclear power plants. Insured losses are estimated between $20 billion and $35 billion. With the tsunami that number could rise to $60 billion—more than all of the $37 billion insured losses for natural catastrophes in 2010.
What impact the event will have on the market is also a guessing game. Analysts say much of the burden for paying for insured losses will fall on the local market and Japan’s state-backed earthquake insurer. About 30% of the expected $60 billion of losses on commercial and specialist risk lines will be covered by earthquake insurance, according to Jeffries International. Some of that will be insured in the international markets. Bermuda and London markets are more at risk from marine or specialty lines risks.
Moody’s warned of heavy insurance losses for insurance and reinsurance markets in Japan and in the international market.
“This will in turn result in negative credit implications for the two sectors,” Moody’s said.
Those most affected in addition to the local market and the Japan Earthquake Reinsurance Co., include international insurers, global reinsurers, Lloyd’s of London, retrocessional reinsurers and catastrophe bonds.
A spokeswoman with Hanover Re said the disaster “will turn the prices in Japan” and “could also have implications on worldwide capacity and spring a market change.” A reinsurance broker with Holborn Corp. in New York said the single event would not deplete reinsurers’ capacity, but every one of them would lose money in 2011.
The New Zealand earthquake has already put Swiss Re over its yearly $1 billion catastrophe and large claim budget. Munich Re said it expects losses from the Christchurch quake to reach more than $1 billion.
As the mayhem continues to unfold, we are reminded that natural disasters take place around the world and the take their toll—in lives and dollars. A total of 950 natural catastrophes were recorded in 2010, nine-tenths of which were weather-related events such as storms and floods. This total makes 2010 the year with the second-highest number of natural catastrophes since 1980, according to Munich Re. Just wait for 2011 numbers to be tallied.
Natural disasters are not predictable. As the 9/11 Commission noted “Preparedness is not a luxury. It is a cost of doing business.”
When emergencies do occur, the experience and expertise of brokers is critical. The impact of a natural disaster can last for days, months or even years. Taking quick action to respond may mean the difference between a business’ survival or failure. U.S. government statistics show that 40% of small to medium businesses never reopen after a disaster and 25% fail within two years. A total of 83% of the corporate 1,000 companies hit by a disaster lose 20% to 30% of their value in a five-year period.
Brokers can help clients put a sound disaster plan in place that tells people what to do and where to go in an emergency. They can advise clients on performing corporate due diligence to identify risks and mitigate losses to property and people. Brokers can assist clients in filing claims and outlining steps to take to get back up and running. A wealth of information to help clients plan and recover from a disaster can be found on the U.S. Federal Emergency Management Administration website at www.fema.gov/business.
In the past year, three of the four quadrants along the fault lines that border the Pacific Ocean have been hit by massive earthquakes. Only one remains undisturbed and experts predict a massive earthquake there within a quarter century. That area is the U.S. West Coast. A massive quake there would likely be more costly than all of the others.