FIGURE 1. Japanese Earthquake Reinsurance Scheme for Residential Exposures
¥ 3. 4 trillion
¥503.8 billion ¥401.2 billion
FIGURE 2. Maximum Liability of Residential Earthquake Insurers
Insurer Maximum Liability Percent of Total
JER ¥605.60 billion 11.0
Private carriers ¥593.15 billion 10. 8
Japanese government ¥ 4,301.25 billion 78. 2
Total ¥ 5,500.00 billion 100.0
Source: Annual Report 2010, Japan Earthquake Reinsurance Co., Ltd.
to the private insurance companies and
the Japanese government based on the
total insured losses. The reinsurance
program is illustrated in Figure 1.
To maintain the financial stability
of the private carriers, the total of all
insured loss payments for each earthquake is capped at ¥ 5. 5 trillion ($67.8
billion). If the total insured losses exceed this amount, all claim payments are
prorated. This system results in delays in
preliminary loss estimates as individual
carriers’ insured losses are not known
until total insured losses are known.
Given a maximum insured earthquake loss of ¥ 5. 5 trillion ($67.8 billion),
the private carriers, the JER, and the
Japanese government can determine
their maximum liability for any occurrence. The maximum liability per
participant is shown in Figure 2.
As illustrated in Figure 1, the Japanese government retains a larger share of
the total liability as the total insured losses increase. Government participation is
central to this system, which is based on
a belief that natural disasters such as the
Tōhoku earthquake, no matter where
they occur, have a national impact.
Cooperative Insurance Carriers
The cooperative insurers are not with-
in the scope of the Law Concerning
Earthquake Insurance and do not par-
ticipate in the national earthquake
reinsurance system. This exemption pro-
vides cooperative insurers with much
greater flexibility in their reinsurance
Whether earthquake insurance is
provided by a private carrier or a cooperative insurer, the claim payments are not
intended to provide a complete recovery to the insured. In both systems, the
maximum claim payment is limited to 50
percent of the fire insurance limit, even
if the dwelling is completely destroyed.
In addition to limiting their loss potential, both the private carriers and
cooperatives effectively spread risk.
Japanese private insurers pool their
earthquake exposure and cede their liabilities to two domestic reinsurers—the
JER and the Japanese government. The
cooperative insurers spread risk through
a sophisticated reinsurance program
that cedes earthquake liabilities to international reinsurers and the capital
markets. In both systems, the effective
use of reinsurance limits the liability of
any one company.