Land of the Rising Claims

Reinsurance executives claim that insured losses out of Japan are a long way from being clear, although it appears that contingent business interruption losses will have an impact, and become a learning opportunity.

By MATTHEW BRODSKY, senior editor/Web editor of Risk & Insurance®

PHILADELPHIA---Comedian Gilbert Gottfried tweeted a number of offensive jokes too soon after the Japanese earthquake of March 11. In today's world of immediacy and consequence, he lost his cush job as the voice of the Aflac duck because of them.

Beware of the Spike (08/01/11)
Surveying Crewmembers of a Shrinking Ship (08/01/11)
Property Market Jolted (08/01/11)
New Model Leaves Insurers Black and Blue (08/01/11)
Living in a Post-Sandy World (01/23/13)

Similarly or not, plenty of insurance executives, lawyers, consultants and other commentators have bombarded the trade press over the last few weeks with their own take on the Tohoku quake--in the form of what impact the megacatastrophe could have on the insurance industry. Unlike the comedian, though, these comments will bring no consequence (unless you consider being mentioned in a trade-press article something of consequence).

So continue to guess away, folks. Meanwhile, in quieter circles, industry executives are far less certain about the quake and tsunami's impact.

"It's really too early to tell what's going on," said Pina C. Albo, president at the reinsurance division at Munich Reinsurance America Inc.

"Our view is, it's going to take a while to pan out," agreed John Bender, chief operations officer of Allied World Reinsurance Co. Part of the issue, he added, is that many of the losses will be related to contingent business interruption (CBI), or losses experienced when an insured is materially impacted after a supplier or buyer gets hit by a named peril.

Perhaps there is one nugget of insight, for those of you trying to read claims waters that remain brackish. Whereas Katrina was the megacat where the rules of wind and water were tested, and the World Trade Center was the megacat where the definition of occurrence was battled over, the Tohoku quake could be the event where CBI insurance policies are scrutinized and proven inadequate.

"The whole underwriting of supply chain exposure will have a whole new level of scrutiny," said Steven M. McElhiney, president of Dallas-based reinsurance intermediary EWI Risk Services.

Early indications are that many insurers could get themselves in trouble with their contingent business interruption coverage. Albo stated that she's heard of at least one significant CBI claim.

"I heard a rumbling of one, a very large one," she said, to an intimate gathering of reinsurance professionals organized by the CPCU Society in Philadelphia on March 31. Albo also mentioned news reports that some Lloyd's underwriters are already seeing CBI claims come in.

The problem could be that insurers were not adequately underwriting the cover, for instance by failing to be disciplined with pricing or by loosening terms and conditions during their ultracompetitive soft market.

As far as these CBI or other quake-related losses being big enough or unexpected enough to shock the market into hardening, however, talk of a Black Swan event is inaccurate it appears.

"The Black Swan analogy is overused," said Bill O'Farrell, chief reinsurance officer for ACE Group, noting that as awful as the actual Japan quake and tsunami is turning out to be, the losses from such a large quake directly hitting Tokyo would be "staggering."

Still, for some carriers, the Japan event might indeed be a capital event, and for others it could be an earnings event, according to Bender.

April 1, 2011

Newsletter Sign-up