Modelers Face Japanese Quake Challenges

Insurers, reinsurers and catastrophe bond managers will face delays in receiving accurate insured loss estimates as catastrophe modeling firms struggle to improve the limited amount of data coming from Japan, according to Thomas Larsen, senior vice president and product architect at EQECAT.

“This is absolutely a unique situation,” Larsen says. “Every time you peel away a layer, there is another issue. This one has got it all.”

Larsen explains the biggest immediate hurdle in putting together loss estimates is the loss of Kyoshin Net (K-NET stations), the system run by the Japanese Meteorological Agency to measure earthquake ground motion in the affected region.

Catastrophe modeling firms have been unable to pull data from the system since electricity and communication were lost after the March 10 event, Larsen says. Although K-NET may be online in time for new loss estimates to be issued in the middle of the week, Larsen adds the delay has clients waiting for important information.

The K-NET outage will further delay insurers’ and reinsurers’ understanding of accurate loss estimates since the Japanese property/casualty market is already complex. Larsen explains the Japanese insurance market is based on high deductibles with sub-limits for fire, water and nuclear that will make it difficult to measure losses, given the combination of damage types in the country.

“The huge area effected by high ground motion, exacerbated by an incredible tsunami that triggered a nuclear reactor fallout, is distracting reaction that is needed to guide a response for our clients,” Larsen says. “In a market as complex as Japan, you’re really looking how far beyond the deductibles the losses go.”

Losses for catastrophe bonds could also be delayed because modeling firms that act as calculation agents on the structures have a higher “fiduciary duty” to make sure the data is accurate and up to date, Larsen says.

A report by Standard & Poor’s issued last week pointed to the delay for calculation losses as one reason the firm was withholding a rating action on any of the six bonds with Japan quake exposure. “We are awaiting updates from the issuers and calculation agents of each issuance to determine whether the earthquake was a triggering event,” S&P said.

“The lack of access to the K-Net is especially important since it is used in the formulas in some of the Japanese catastrophe bonds,” Larsen says. “You also need to go through every bond and review their contingency. We are only in day three and there are big hurdles to overcome.”

Larsen said although the Japanese quake will act as a learning opportunity for the industry, he is not sure if they will have time to absorb the lessons.

“Hopefully we will not see it again, but that is not the nature of these events,” he adds.

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