On Monday I wrote about the possibility of 2011 being another record year for insured losses. Less than a week later nations around the globe are rushing to aide Japan in their response to the catastrophic earthquake that occurred off of Honshu island today. While the earthquake alone was responsible for significant damage across Japan, the quake also triggered a Tsunami that traveled half way around the world causing insured losses from Hawaii to coastal areas of Chile. As the sun rises on Japan this Saturday morning we also learn of an unfolding nuclear disaster at the Fukushima Daiichi nuclear plant closest to the earthquake’s epicenter. Each of these incidents alone represents an incremental step forward to another record year of insured losses. Together, however, these could represent stunning losses for reinsurers globally.
While it is too early for loss estimates from the quake and tsunami the Wall Street Journal reports investors in catastrophe bonds leveraged to Japanese earthquake losses may be at risk. These catastrophe bonds used by reinsurers, like SwissRe, to transfer financial risks from catastrophic disasters to investors and are called only when certain triggers are reached – such as the value of insured losses or the severity of the earthquake. The fact that sources within the reInsurance industry are already suggesting bonds may be called suggests that reinsurers expect significant losses.
Just as the global economy is starting to gain traction recovering from the financial excesses of 2008, could this set of complex disasters have the potential to slow economic growth? Firms involved in debris removal, disaster restoration and construction will certainly benefit in the short run, but institutions like infrastructure providers (power, communications, transportation, petrochemical), chip manufacturers and real estate investment trusts with significant physical plant exposures could be in for a rough year. Similarly, Japan’s Nikkei exchange and the Yen could both take a prolonged tumble. Only time will tell how this story ends, but for now we advance closer to another record year of insured losses.