© 2003, The Tokio Marine Management, Inc. All rights reserved. Government as...

© 2003, The Tokio Marine Management, Inc. All rights reserved.

Government as Reinsurers-of-Last-Resort: The Japanese Experience

June 2003Yuichi Takeda

Tokio Marine Management, Inc

Prepared forThe World Bank Conference

“Financing the Risks of Natural Disasters”


Japanese awareness of a disaster

Source: Library of the Earthquake Research Institute, University of Tokyo


Japanese Earthquake Insurance (JEI)

• Established 1966

• For dwelling risk only– Attached with fire policy as a special contract– Covers fire, destruction, burying or washing-away following earthquak

e, volcanic eruption, or tsunami following the two perils– Commercial EQ risk and Private/Commercial Wind risks are covered by

private insurance policy

• Sponsored by Japanese government 　 and property & casualty insurers

• PML estimate with a 250-500 return-year loss– Based on scientific studies of 375 historical

major earthquakes in the last 500 years. (from late 15th century to date)


JEI - Background

• A strong political leadership created JEI, triggered by a large earthquake in Niigata-city in 1964.

• A public-private partnership form was chosen to create JEI, among other plans.

• Two strategic goals to facilitate…- Affordability of earthquake insurance- Disaster recovery process


Japanese Earthquake Insurance (JEI) - at a Glance 2002

• Total Per-Event Capacity $37.5bil (Government $31.3bil) (Private $ 6.2bil)

• Gross Premium $850mil*• Total Sum Insured $48bil**• Reserve Balance $12.1bil

(Government $ 6.6bil) (Private $ 5.5bil)

• Maximum Payout in history $653mil(Kobe earthquake in 1995)

All the numbers converted into US$ by 120\/$ * round numbers ** presenter estimate


JEI - Business Development

Development of Ownership of Household EQ Insurance

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1966

1967

1968

1969

1970

1971

1972

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

No. of Policies ('000) Household Subscription Rate

1995Kobe Earthquake


　　 Total Reinsurance Limit per Event

2.30.3

2.80.5 5.6

1.0

8.5

1.5

8.5

1.5

10.6

1.9

10.6

1.9

12.7

2.3

22.4

3.4

22.4

3.4

26.6

4.2

29.1

5.1

31.3

6.2

-

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

1966.6 1972.5 1975.4 1978.4 1980.7 1982.4 1991.4 1994.6 1995.10 1996.1 1997.4 1999.4 2002.4

Growth of Per Event Limit - Partnership between Government and Private Sectors

Private Insurers' Liability ($Bil)

Government's Liability ($Bil)


Total Liability Shared betweenGovernment and Private Insurers

90%

10%

85%

15%

85%

15%

85%

15%

85%

15%

85%

15%

85%

15%

85%

15%

87%

13%

87%

13%

86%

14%

85%

15%

83%

17%

75%

80%

85%

90%

95%

100%

1966.6 1972.5 1975.4 1978.4 1980.7 1982.4 1991.4 1994.6 1995.10 1996.1 1997.4 1999.4 2002.4

Shares of Per Event Limit - Partnership between Government and Private Insurers

Government's Share Private Share


　　 Maximum Coverage Limit per Policy

9060 150120 240

150240150

1,000

500

1,000

500

1,000

500

1,000

500

1,000

500

5,000

1,000

5,000

1,000

5,000

1,000

5,000

1,000

-

1,000

2,000

3,000

4,000

5,000

6,000

1966.6 1972.5 1975.4 1978.4 1980.7 1982.4 1991.4 1994.6 1995.10 1996.1 1997.4 1999.4 2002.4

- EQ Insurance obtained only as an endowsement of personal fire policy- EQ coverage limit is set between 30%-50% of fire limit

House ( \ 0, 000) Contents ( \ 0, 000)


Rating and Reinsurance

• Non-life Insurance Rating Organization of Japan (NLIRO) performs risk analysis and files rating plans of JEI.

• Japan EQ Reinsurance Company (JER), established by private insurers, manages the reinsurance process sitting in between Japanese government and private insurers


Role of JER

PolicyholderPrimary Insurers

JER

Reinsurance Contract (B)

Japanese Government

JEQR

Reinsurance Contract (A)

Reinsurance Contract (B)

Reinsurance Contract (C)

Source: Japan Earthquake Reinsurance


Current Risk Tower (per Event)

Japanese Government

Primary Insurers

JER

$37.5bil

$23.2bil

$ 9.0bil

$ 5.3bil

$ 0.6bil

50% 50%

95%

Numbers are originally determined in yen, converted by $=\120 for presentation purpose

A PML Scenario: A recurrence of Great Kanto EQ (1923) or similar around Tokyo Bay region in a windy winter evening…


How much capacity is enough?

• A quick guessestimate of Japan’s top risk (Tokyo-Chiba-Kanagawa known as Zone #5)

– Total regional GPP*: about $1,100bil* GPP: Gross Prefectural Product

– Kobe experience: assume a 3% of regional GPP likely to be lost as an EQI claim payment

– Claim estimate: $1,100bil x 3% = $33bil < $37.5bil of total JEI per event capacity


Does current risk sharing make sense?

• A quick comparison between JEI’s reserve balance and its per event limit suggests the system still has many years to go…

• Private insurers have accumulated their reserve much faster preparing for more frequent events, while Japanese government takes more extreme risks…

Public Private

Per Event Limit $31.3bil $6.2bil

Reserve Balance $6.6bil $5.5bil


What if “unexpected” happens?

• EQI law stipulates “Pro rata claim payment reduction”

• In case of liquidity crunch of the reinsurance system, EQI special accounts law allows contingent financings from– Government’s general accounts

– Government borrowing


Rating plans – continuous improvement

Base Rates(Basis Points)

Non-WoodenHouses

WoodenHouses

Area 1 5.0 bps 12.0

Area 2 7.0 16.5

Area 3 13.5 23.5

Area 4 17.5 35.5

Rating Zones

Area 1

Area 2

Area 3

Area 4

Discounts (Choice of A or B)

A. Building Year - 10% discount of build on and after 6/1981

B. EQ Resistance Quality Class - 10% to 30% discount for the three classes inspected and certified according to residential building performance evaluation system (effective 2000)

Revisions of Building Standard Law (1998) and Introduction of Housing Quality Assurance Law (1999) enabled new rating plan effective 2001.


Claim Payment

Three levels of claim payments are stipulated…

Damage Levels Claim Payments(% of Insured Amount)

Building and/or Contents

Total Loss 100%

Half Loss 50%

Partial Loss 5%

Main Building Structure

Floor Area Contents

Total Loss ≥50% of Building MV ≥70% of total floor ≥80% of Building MV

Half Loss ≥20% or <50% of Building MV

≥20% or <70% of total floor

≥30% or <80% of contents MV

Partial Loss ≥3% or <20% of Building MV

N.A. ≥10% or <30% of contents MV

Level of loss is defined as clear as possible…


Making the pool working…

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

0 50 100 150 200 250 300 350 400 450

Gross Prefectual Income (1999): $bil (120yen/$)

Household EQ Ins.Subsciption Rate (2002)

Tokyo

Osaka

Kanagaw a(Yokohama)

Aichi(Nagoya)

Chiba

Shizuoka

Saitama

Hyogo(Kobe)

KyotoTokushima

Hokkaido

Fukuoka(Hakata)

Hiroshima

Subscription Rates Risenfrom mere 3% to 12.4% AfterKobe EQ

Observed Relationship between Household Income and EQI Subscription

Higher subscription

Higher income levels

Risk awareness & motivation to

subscribe


The Japanese Experience

What are the key lessons learned?

What are the challenges?


Start early so that you can prepare



Leadership makes a difference



Public-private partnership



Simple product provides comfort



Reality and management of risk sharing



Continuous improvement required

Source: Museum of Institute for Fire Safety and Disaster Preparedness

© 2003, The Tokio Marine Management, Inc. All rights reserved. Government as...

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