March 16, 2011 12:01 pm

UK insurers assess impact of Japan

Japan’s earthquake, and the subsequent deadly tsunami it caused, has been estimated as one of the costliest disasters of recent times.

But analysts say despite the significant insurance bill there is unlikely to be an impact on personal insurance premiums across the rest of the world.

The uncertainty surrounding precisely how exposed the UK insurance sector is to Japan, and what the final bill will be, pushed down share prices for Aviva, Prudential and Lloyd’s insurers Amlin, Chaucer and Catlin.

Insurers have argued that it is still too early to calculate the precise costs of the disaster, but risk modelling agency AIR Worldwide has put the insured bill at between $15bn and $35bn, not including the effects of the tsunami.

This would be less than the insured losses incurred in the US in 2005 following hurricanes Katrina, Rita and Wilma in 2005, but more than those of the September 11, 2001 terror attacks.

Reinsurers, which provide financial backing to insurance companies, have been subject to a series of worldwide disasters in the last few months in New Zealand and Australia. Combined, these could have a negative impact on global reinsurers, which could increase catastrophe related insurance.

But after several years of profit the reinsurance sector is well capitalised and analysts say it should be capable of absorbing large losses.

Reinsurance prices have generally fallen since 2006 when there was a spike following hurricane Katrina.

Jefferies & Co analyst James Shuck estimated the latest quake would not create an insured loss great enough to increase rates, although it would prevent further price falls.

But Barrie Cornes, insurance analyst at Panmure Gordon, said that with the tsunami bill added, the cost of the Japanese earthquake to the global insurance industry could be over $60bn dollars, enough to push up global insurance prices.

Even if global reinsurance rates rise, there is no indication that general insurance premiums will be affected worldwide, said Graeme Trudgill of the British Insurance Brokers’ Association. And any effects will take years to trickle through.

General insurance markets in countries differ according to their particular circumstances. Premiums paid out previously within that market have a far greater effect on future prices than events in different countries.

Home and car insurance rates in the UK have both risen recently, but these price increases have been driven by internal conditions, such as increased fraud, rather than global disasters.

“It’s too early to say whether insurance will go up for the man on the street, it will depend on the total cost that resinsurers have to pay out,” said Trudgill. “There is a long term potential for increases, but this will depend on the total cost of the disaster and whether the reserves of global reinsurers are significantly affected.”

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