Insurance companies in Japan are preparing to pay large amounts in expected earthquake scenarios – Insurance News

Kathmandu. Japanese insurance companies are facing increasing pressure from the possibility of two major earthquakes. This is what the government believes is likely to happen over the next 30 years.

According to an analysis by S&P Global Ratings, there is a 60 to 90 percent chance of an earthquake occurring in the Nankai Truffle. Tokyo has a 70 percent chance of an earthquake.

Potential insurance payouts to the industry from these events could exceed payouts from the 2011 East Japan Earthquake. Standard & Poor's warned that the significant increase in insurance claims, especially those offering seismic coverage to companies, will primarily affect non-life insurers.

Based on government damage estimates, non-life earthquake-related payments, excluding local earthquake insurance, could reach $26.2 billion for the Nankai Trough event and $7.0 billion for the Tokyo earthquake.

In 2024, the general revenues of the insurance industry amounted to about $14.1 billion. This means that a large earthquake could add about 45 percent to the damage rate after the Nankai Trough earthquake and 12 percent after the Tokyo earthquake.

Domestic earthquake insurance will have a limited impact on private insurers. This is because the government covers most of the risks through the Japan Earthquake Reinsurance Corporation.

Under the current plan, the maximum financial burden on the private sector is $2.1 billion. Life insurance companies are expected to cope well with this impact. Standard & Poor's estimates that life insurance payouts will be about $15.4 billion after the Nankai Trough earthquake, and about $1.2 billion for the Tokyo earthquake.

Japan's insurance industry made modest profits of about $19.8 billion in 2024. This suggests that life insurance companies can withstand these losses. During the COVID-19 pandemic, life insurance companies in Japan made profits by paying $8.3 billion in claims.

Ban's financial market volatility is another concern. After the 2011 earthquake, the local stock market fell by about 15%, long-term interest rates fell and the yen initially rose before the authorities intervened.

Standard & Poor's said insurers have since reduced their exposure to equity, interest rate and currency risks. This makes it more resilient to the same shocks. However, a major earthquake could significantly impact Japan's sovereign credit rating due to economic damage and reconstruction costs.

Many Japanese insurance companies have large real estate portfolios and rely mainly on home-based businesses. This means that their assessment is linked to the overall assessment. A reduction in sovereign ratings would put further pressure on insurance company ratings.

The Standard & Poor's index said that while Japanese insurance companies have strengthened risk management, they will not be able to fully protect against the financial pressures caused by a major earthquake. The impact on credit may be higher than seen since the outbreak in 2011. Source: Insurance Asia

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