Money Matters - Simplified

Japan calamity: Government may bear most of quake losses

Much of the loss caused by the Friday’s earthquake and tsunami will have to be borne by the Japanese government

Much of the losses caused by the Friday’s earthquake and tsunami will have to be borne by the Japanese government, if we go by the past experiences. The equally shattering Kobe earthquake in 1995 had caused a total loss of nearly $100 billion but the insurance cover was for only $3 billion.

This time the loss is expected to cross the $100 billion mark.

Major loss to be borne by Japanese government
What aggravates the loss is the radiation leakage from the nuclear reactors and it is still unknown what amount of damage this contamination will cause.

Aflac was the hardest hit as nearly 75 percent of the company’s revenue comes from Japan where it sells life and health insurance including popular cancer insurance

The nuclear reactor operators are required to buy insurance coverage for liabilities of only about $2.2 billion from the Japan Atomic Insurance Pool.

The pool which is an industry group does not sell utility coverage for earthquake damage or for business interruptions, which leaves the government of Japan to bear the costs of these losses.

Insurance companies from Japan, global insurers, reinsurers and hedge funds plus catastrophe bonds are also expected to bear a part of the losses.

U.S. Insurance companies also affected
U.S. life and health insurance companies which work in Japan also are among the worst hit. The stocks of these companies plummeted after the Japanese Prime Minister Naoto Kan admitted that the radiation exposure has worsened.

Aflac was the hardest hit as nearly 75 percent of the company’s revenue comes from Japan where it sells life and health insurance including popular cancer insurance.

The stocks of the company fell by 5.58 percent at the Tuesday closing in comparison to the Monday’s closing price of $53.90.

No changes in Aflac's financial projections due to the calamity
Aflac spokeswoman, Laura Kane said, “The market is looking at everything that’s exposed to Japan, and we’re part of that.”

She expressed the hope that there will not be a spurt in the number of claims in Japan and the company has not altered its financial projections due to the calamity in Japan.

Other affected companies
The other insurance companies which were also hit in the market included MetLife, which saw a drop of 3 percent, and Prudential Financial with a 2 percent drop.

Stocks of Hartford Financial Services also witnessed a drop of 4.55 percent on Tuesday.

But some other insurers which have a global presence but only a little presence in Japan were not affected much.

Nearly 90 percent of the property and life insurance business is controlled by three major companies of Japan, The Tokio Marine Group, NKSJ Group and the MS&AD Insurance Group.

These companies jointly own a reinsurer named, the Japan Earthquake Reinsurance Company, which is backed by the Japanese government.