We’ll learn a lot more about the economic impact of the Japan devastation in the coming days.
This is RBC’s flash commentary on costs. Note the difference between “economic costs” and the far smaller “industry costs” (i.e. costs that specifically have to be borne by insurers):
The last catastrophic earthquake to hit Japan was the 1995 Kobe earthquake, which was much lower in magnitude (“only” 7.2), but hit much closer to a highly populous and industrialized area. The entire city was effectively destroyed (from an economic impact, at least), and economic losses were estimated to be at least $100 billion. However, due to the low penetration of earthquake insurance, total industry losses were only $3 billion (WillisRe estimate) to $6 billion (Congressional Budget Office estimate), with much of these losses borne by the government.
Another (very rough) benchmark would be company probable maximum loss (PML) estimates. Very few reinsurers specifically break out Japanese PMLs, but one large reinsurer’s (XL Group’s) “1-in-100” PML for Japan earthquake is $209 million, according to its 2010 10-K filing. Given XL’s overall industry position, we estimate that that figure translates to a $10 billion industry loss. $5 billion to $20 billion in losses Given the many complicating factors involved, we would have to draw a very wide circle around any industry loss estimates.
We can easily see economic losses approaching or exceeding the $100 billion-plus Kobe figure, and would expect total industry losses to be proportionally higher (maybe $5 billion to $20 billion), given our view of a) the more widespread nature of the damage and b) the relatively higher commercial and industrial exposure (which falls more heavily on the private (re)insurance industry). We would also expect reinsurers to pick up most of the private industry tab.