Risk Management Solutions Inc. (RMS) released the findings of an in-depth study that provides life and personal accident insurers in Japan with key benchmarks for the potential risk of human casualties from catastrophic events.
The RMS study, “Catastrophe Mortality in Japan: The Impact of Catastrophes on Life and Personal Accident Insurance,” examines scenarios that would cause more than 10,000 fatalities — representing a 1% increase in annual mortality — in the categories of infectious disease, earthquake, tsunami, and terrorism. This is the most extensive analysis to date of potential catastrophe risk in Japan for these segments of the insurance industry.
“Japan has the largest life insurance industry in the world. While it has rarely faced losses on the catastrophic scale confronted by property insurers, large losses are clearly possible and, as some argue, inevitable in the longer term,” said Hemant Shah, president and CEO of RMS. “Our hope is that this study will improve the understanding of the potential risk from human casualty in Japan and lead to the reduction of casualties from future catastrophes through increased awareness, preparedness, and mitigation.”
Infectious disease currently ranks third after cancer and heart disease as the primary cause of death in Japan. Given current heavy travel volumes and open borders between countries, a disease originating anywhere in the world can spread quickly into susceptible populations in many countries. A new mutation of the influenza virus is particularly feared within the scientific community, and countries neighboring Japan are the likely source of an outbreak.
For this study, RMS looked at the scenario of an influenza virus mutation developing into a pandemic and spreading through many cities in Japan despite stringent response measures implemented by the government. The pandemic scenario in Japan results in an estimated 24 million people requiring medical treatment and 500,000 deaths. The deaths result in group life and individual life insurance payouts totaling $58 billion.
Earthquakes are also a major cause for concern in Japan, where they have been responsible for more than 160,000 fatalities since 1900.
High casualty levels in Japanese earthquakes have usually occurred in older residential homes, but today’s risk includes the collapse of high-occupancy buildings. Modern office buildings and major apartment complexes contain thousands of people at a time. These tend to be built to more stringent design codes, and are less likely to collapse.
However, as they increase in number, the chances of even a small number of these high-occupancy structures failing would mean a large loss of life. A severe earthquake can reveal construction faults or design errors that would otherwise be hidden — one of the major surprises in the 1995 Kobe Earthquake was the failure of modern buildings that had been designed to an earthquake code.
RMS looked at two earthquake scenarios for the study: a magnitude 7.3 earthquake occurring at night in downtown Osaka and a magnitude 8.0 earthquake hitting the Tokyo region during the day.
Results showed that the Osaka event would cause 10,000 fatalities and 96,000 injuries, while the Tokyo quake would cause 17,000 fatalities from shake, 8,000 fatalities from fire, and over 170,000 injuries. Insurance payouts for human casualties under personal accident, group life, and individual life policies in the Osaka and Tokyo earthquake scenarios reach nearly $1.4 and $3.3 billion respectively.
In addition to flu and earthquake, the study also examines scenarios of high mortality arising from a major tsunami and an extremist terrorism attack. The scenarios presented in this report quantify a range of losses that could be incurred by the insurance industry given these different types of events.
“Catastrophes threaten the earnings and reserves of life insurance companies in Japan,” commented Dr. Andrew Coburn, vice president of catastrophe research. Some insurers can suffer a disproportionate share of the loss if a particular town or locality where they have a concentration of their policy holders is impacted. This report is a first step in quantifying catastrophe risk for life insurance and providing tools for insurers to manage it.”
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