Global insurance industry expected to cope with Japan

Fears that the Japanese disaster might cause turmoil in the global reinsurance industry and have knock-on effects for the Christchurch rebuild have been allayed by analysts who say much of the insurance cost will be covered internally by Japanese companies.

Shares in the world's biggest reinsurers, Munich Re and Swiss Reinsurance, fell sharply after the earthquake and tsunami that engulfed the northern coast of Japan.

Reinsurers already face losses tied to the Christchurch earthquake and flooding in Australia in December and January.

"It's been a tough first quarter," said Paul Newsome, an analyst at New York-based Sandler O'Neill & Partners.

"We've had a number of large events on a worldwide basis."

Global reinsurers - including those which will be required to provide funding for the Christchurch quake - face losses "somewhere in the US$10 billion range" after costs are absorbed by Japan's primary insurers and its government, said Meyer Shields, an analyst with Stifel Nicolaus & Co.

Reinsurers, which provide financial backing to insurance companies, already paid out big claims on a Chilean earthquake last year. "A larger share of losses are likely to be retained by domestic Japanese insurers and reinsurers ... " said Robert Hartwig, president of the Insurance Information Institute.

The country had US$107 billion of non-life insurance premiums written in 2009, third only to the US and Germany, said Hartwig.

Japan backs a reinsurance programme for homeowners. "The Japanese markets are dominated by Japanese companies," Shields said of primary insurance coverage.

The analyst said his loss estimate for private reinsurers was likely to change as he got more information, and for now it's not higher.

Munich Re shares dropped 4.3 per cent in Frankfurt electronic trading. Swiss Re declined 3.5 per cent in Zurich trading. Munich Re, the world's biggest reinsurer, said yesterday its full-year profit target of about US$3.3 billion "will only remain achievable if random losses in the further course of the year remain below expectations."

An earthquake in Japan is one of catastrophe insurers' four "peak zones" along with a San Francisco earthquake, US hurricanes and Gulf of Mexico hurricanes, so costs will probably be spread equally among the biggest reinsurers, says insurance analyst Joy Ferneyhough.

"My initial sense is this isn't going to be a huge industry loss," she said.

"This will be something smaller and manageable, which will impact 2011 earnings, but not 'the big one' that we've been waiting for to turn pricing."

- BLOOMBERG