Terri Goveia
Pricing, policies, evolve in the wake of Japanese disaster | Canadian Insurance

Pricing, policies, evolve in the wake of Japanese disaster

Japanese businesses face cat cover increases up to 25%.

Prices will likely harden in the wake of the Japanese earthquake and tsunami–a catastrophe risk experts are comparing to Hurricane Katrina and 9/11 for its impact on the global insurance market.

The cost of cat coverage is rising for Japanese companies even as the ripple effect of the country’s disaster fans out to global property and business markets, according to risk experts at Aon Corp. In the long run, pricing, policies and even risk modeling approaches will likely change following what industry members are calling a “black swan” event, Aon panelists told attendees during a March 23 global web seminar.

Companies in Japan are already seeing “moderate” hikes in cat pricing ranging from the single digits to 25%, depending on their location,  according to Ted Hodgkinson, regional managing director at Aon. Although he characterized the market in Asia as “stable” in the wake of the earthquake and tsunami, he said members also remain “jittery,” as  broader implications emerge.

Outside Asia, “pricing will be driven by the ultimate price of Japan and the cumulative effect of New Zealand and Australia,” he said during the early morning discussion, Japanese Earthquake and Pacific Tsunami Response. “There’s significant potential for [abrupt] change.”

That change will likely affect different aspects of the market. “Japan has had long- term experience with earthquakes, but the current situation is so much more damaging because of the combination of events,” said Lori Champion, director of  Aon Risk Consulting. “This is definitely a black swan event…I think there will be many lessons learned from this.”

Firming prices

The total impact of first quarter 2011 disasters will hit the global property market, according to Andrew Laing, a managing director at Aon. “It’s clear that there will be an immediate stabilization of pricing.”

With the Asian domestic market tightening, more business will flow into the global market, prompting rates to harden, he told seminar attendees, noting that all the Q1 disasters have already had a firming impact on pricing in Chile and other parts of Latin America.

Businesses in the U.K. and Europe can expect rates to remain stable unless they have global catastrophe exposure to Japan, Asian, Australia and New Zealand. Another analyst, Al Tobin, noted that the London catastrophe market is already looking for increased pricing.

Impact on BI

But there are still many unknowns, such as the impact on the property market for contingent business interruption. Damage to Japanese infrastructure and the country’s manufacturing industry has prompted European and North American organizations to turn to their supply chain and logistics contingency coverage, said Henry Daar, executive vice president with Aon’s risk solutions property practice.

The earthquake, tsunami and any fire “are all going to trigger contingent coverage,” he said. Directly affected organizations may find a small silver lining in the fact that most policies don’t view ensuing fire and explosions as earthquake damage. “When you view those losses as fire, earthquake deductibles don’t apply,” he said.

Companies with supply chain exposure have access to coverage  if their suppliers In Japan can’t provide materials. If they usually paid $2 per unit for materials, and must source them elsewhere at $3 a unit , they can have the incremental increase covered, he said. “Those exposures are covered regardless of whether it reduces your loss.”

Those whose customer chain is interrupted also have recourse in contingent coverage, he added.

Nuclear exclusions

However, the nuclear situation in Japan could  complicate coverage, triggering exclusions, according to Daar. “If nuclear radiation is the sole reason [for disruption], it may be that no coverage exists,” he said. “Nuclear exclusion is going to apply regardless of whether [damage was] caused by the earthquake or tsunami.”

Timing may play a role–if a supplier’s property is damaged by the quake, and then days later, affected by a radioactive contamination, the lag between the two events “may not bump coverage,” Daar said. “It will be a fact by fact determination.”

The black swan effect

Apart from pricing, the disaster will also change how the industry–and its clients–view risk,  Daar said.

“After losses like this, similar to Katrina and 9/11, policies are evolving,” he said. “The challenge for us is to take these events, work with underwriters and fashion ways to price these kinds of risks. If we can understand the risks, and pricing, we’re better prepared to cover them going forward.”