Home About Archives RSS Feed

The Independent Investor: Who Pays for Japan?

By Bill Schmick

It appears that the ongoing disaster in Japan will not end up on the doorstep of the world’s insurance industry. Total damage estimates now range from $200 to $300 billion but insurers will “only” be saddled with 10 to 20 percent of those costs. That still makes it one of the costliest disasters in the history of the insurance sector and there are some nagging details that could cost them even more.

Considering the spate of natural disasters so far this year (New Zealand’s earthquake and Australia’s flooding), not to mention the wave of calamities since 2004, Hurricane Katrina, erupting volcanoes in Iceland, earthquakes in Chile and Haiti – it is a wonder the insurance industry is still around to pay anyone.

The earthquake claims alone (excluding the tsunami and radiation damage) against reinsurers (insurance companies who insure insurance companies) are estimated to run as high as $35 billion. This just may further deplete an industry whose capital is dwindling daily and just about guarantees a first quarter loss for most companies in that industry with exposure to Japan.

Big reinsurance companies are starting to total up their exposure. Swiss Re says they face $1.2 billion in claims, while AIG allows for at least $700 million. Munich Re and Hannover Re, two large European insurers, aren’t ready to guess and the French reinsurer, Scor SE, believes its losses will total no more than $262 million. Warren Buffet’s Berkshire Hathaway Inc. also has some exposure through its reinsurance companies, but has not yet released estimates.

One reason the big insurers have escaped the majority of catastrophe claims is the insular nature of the Japanese. Unlike most countries, the Japanese prefer to insure their own property and businesses against catastrophes and other risks. Unfortunately, analysts believe that Japan historically has tended to under-insure most of its productive assets such as auto factories, semiconductor plants, consumer manufacturers, farm land and everything in between.

Nuclear risks like the present fallout from the Fukushima plant tend not to be insured by private companies. The quasi-government-owned Japan Earthquake Reinsurance Company will most likely bear the brunt of those losses (although this government agency might only insure half of the losses or less).

Actually, few if any insurance companies worldwide will insure against a nuclear accident, which makes the ongoing concern over the Indian Point nuclear unit in New York that much more serious. The reactor sits atop a fault line, that if worst came to worst could conceivably expose radiation to 6 percent of the nation’s population and a comparable amount of this nation’s assets.

Of far more serious concern to the insurance industry are supply chain disruptions that are occurring, and will continue to occur thanks to the devastation in Japan. The prospects of long-term supply disruptions are highly probable as Northern Japan’s factories have been shut down by limited power supply and are failing to produce and ship parts and products that are essential to high tech, electronic, auto and other industries worldwide. By some estimates, Korea, for example, depends on Japanese parts for 23 percent of its finished products.

On Thursday, for example, Toyota told its plants in the U.S., Canada and Mexico to prepare for a possible shutdown due to the lack of parts availability. General Motors has already stopped production of a truck plant in Louisiana and a related engine plant in New York.

Business interruption coverage is a routine insurance product which insures a business against just such an interruption. Just about every business worth its salt has such a policy or policies. While a business’s supply chain  generally has a few weeks of safety stock supplies, there isn’t a lot of time for companies to find new suppliers, shift production or try to make spot purchases before they run out of parts. Costs skyrocket as several companies in the same line compete for scarce parts.

Possible shortages of Japanese-made components can significantly impact profits across the globe as businesses fail to deliver products to market on time. You can be sure that some insurance company somewhere will be on the hook to make up for that cost of lost production. It is this supply chain problem that has the managements of insurance companies staying awake at night.

The insurance industry is keeping mum about this potential problem. I can understand their reticence, but until we get all the facts I would not go bottom fishing in that sector.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.

0 Comments
Tags: Japan, insurance      

Support Local News

We show up at hurricanes, budget meetings, high school games, accidents, fires and community events. We show up at celebrations and tragedies and everything in between. We show up so our readers can learn about pivotal events that affect their communities and their lives.

How important is local news to you? You can support independent, unbiased journalism and help iBerkshires grow for as a little as the cost of a cup of coffee a week.

News Headlines
Herberg Middle Schoolers Thank Firefighters With Gift Baskets
BCC Names Local Fall Dean's List Students
Dalton Board of Health Votes to Postpone Demolition
Guest Column: Quit Smoking for Valentine's Day
Simon's Rock Presents Tongji Philip Qian's Duration of Status
Pittsfield Glow Up! Business Improvement Applications Available
SVHC Enacts New Workplace Violence Policy
Berkshire County Edward Jones Accepts Limited Partnership Offers
BCC Offers 'Save a Life' Class
North Adams Committee Advises Splitting Short-Term Rental Measure
 
 


Categories:
@theMarket (436)
Independent Investor (451)
Retired Investor (127)
Archives:
February 2023 (2)
February 2022 (5)
January 2023 (6)
December 2022 (7)
November 2022 (7)
October 2022 (8)
September 2022 (9)
August 2022 (5)
July 2022 (7)
June 2022 (7)
May 2022 (7)
April 2022 (8)
March 2022 (9)
Tags:
Banking Markets Oil Crisis Economy Europe Fiscal Cliff Taxes Europe Japan Congress Energy Federal Reserve Debt Ceiling Metals Currency Interest Rates Banks Bailout Selloff Jobs Commodities Stocks Stock Market Employment Greece Rally Election Retirement Stimulus Debt Deficit Pullback Euro Recession
Popular Entries:
The Independent Investor: Don't Fight the Fed
Independent Investor: Europe's Banking Crisis
@theMarket: Let the Good Times Roll
Independent Investor: Enough Already!
@theMarket: Let Silver Be A Lesson
The Independent Investor: Japan — The Sun Is Beginning to Rise
Independent Investor: What To Expect After a Waterfall Decline
@theMarket: One Down, One to Go
@theMarket: 707 Days
The Independent Investor: And Now For That Deficit
Recent Entries:
@theMarket: The Markets Melt Up
The Retired Investor: Increase Tax-Deferred Contributions Right Now
@theMarket: Macro-Economic Data Indicate a Soft Landing
The Retired Investor: Back to the gym
The Retired Investor: The Billionaire Lottery
The Retired Investor: Beware Political Pollsters
@theMarket: Markets Are Stuck in Chop City
The Retired Investor: U.S. Income Inequality
@theMarket: Good News on Economy Is Bad News for Stock Market
The Retired Investor: Are Christmas Trees Worth It?