The Intelligent Quarterly from the publishers of The Insurance Insider

Winter 2011 / 2012

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To a greater degree than most previous natural catastrophes the Japan earthquake reinsurance loss has been synonymous with one loss: that of Japanese cooperative insurer Zenkyoren.

Zenkyoren is the biggest single reinsurance claim in the industry's history and only another bigger loss to the same programme has a realistic chance of overhauling it. The next biggest programmes, Chartis and Suncorp, are significantly smaller.

Zenkyoren initially notified its 80+ reinsurers in May that its ground-up losses would come to 635bn yen ($8.2bn). But in one of the most drastic examples of loss creep ever seen on a single contract, the early notification was withdrawn to be replaced by an estimate of 790bn yen ($10.5bn). It would involve around 10 examples of loss creep on a single contract exceeding $2bn to match the Zenkyoren deterioration.

The Zenkyoren programme, which has traditionally incepted at 1 April, has a limit of 935bn yen ($12.1bn) and a retention of 270bn ($3.5bn).

The Aon Benfield-brokered cover consists of multiple layers with some private participations and is supplemented by a $300mn cat bond called Muteki.

This latest claims estimate takes the loss to within touching distance of the top layer of the excess of loss (XoL) programme that attaches at 810bn yen ($10.5bn).

But the market has zero confidence in the resilience of this latest figure. According to multiple underwriting sources who write Zenkyoren, the figure is sure to continue rising in coming months, with more than one underwriter raising the prospect of a total loss.

Click to enlarge Following this revision the reinsured loss stands at 520bn yen ($6.8bn), which is likely to constitute more than half the total industry reinsured loss from the Tohoku quake.

This effect is likely to be even more marked if industry expectations are met and Zenkyoren eats into the remainder of its 145bn yen of reinsurance cover over the next year-and-a-half.

Like a number of other significant Japanese programmes that have historically renewed at 1 April, Zenkyoren decided, along with its broker, to defer the renewal until 1 July to allow both sides to gain greater clarity on the loss.

In early evidence of the scepticism within the underwriting community about the longevity of the first loss estimate, the programme renewed under largely the same structure with uniform increases of 50 percent on all the layers.

The top five
Munich Re, Berkshire Hathaway, PartnerRe, Swiss Re and Top Layer Re (RenRe) are likely to take over one third of the circa $2.2bn deterioration since May in the Zenkyoren loss estimate, according to filings from the cooperative.

Zenkyoren's documentation states that these five markets have 33.8 percent of the programme. However, anecdotal evidence from underwriters suggests that some of the big participants on Zenkyoren put out particularly large lines on the upper layers, implying that the biggest five reinsurers will take more than a third of the deterioration.

The overall loss picture is complicated by the likely scale of the retrocession recoveries, but of these five markets only RenRe is a significant buyer of retro protection. It cedes around a quarter of premium to reinsurers and retrocessionaires, with the others largely known as net writers.

All of these markets also have the potential to pick up further losses as they pay out on other carriers' retrocession contracts. RenRe has said previously that its exposure to Japan is split roughly 50:50 between primary reinsurance and retro.

It is not clear how this will play out but both the big lines on high layers and retro buying habits mean that there is potential for a significant concentration of losses within the market.

Although much is unclear, it seems certain that there will be (relative) winners and losers from the Zenkyoren deterioration. It is known that there are some top-20 property cat companies that have little to fear from adverse development.

Montpelier Re, for example, is in the clear even though it has capacity deployed above the original loss notification. The Bermudian reinsurer said in its Q1 earnings call that it had "totalled [its] contract limits for this participation", adding that it wrote right through the programme to the upper layers.

And Endurance recently told an analyst conference that its exposure to deterioration from Zenkyoren was only $5mn.

Beyond Zenkyoren
Click to enlarge Industry-wide insured loss estimates for the Great Tohoku quake tend to be in the $30bn-$40bn range and it seems likely that around $12bn of this was commercially reinsured.

Where did the rest come from? A relatively modest proportion of it comes from Zenkyoren's pint-sized cooperative peers Saikyosairen and FJCC.

According to sources Saikyosairen has notified reinsurers of a ground-up loss of 82.5bn yen ($1.07bn), with a retention of 38bn yen ($490mn). On top of this loss of almost $600mn, FJCC - which runs a retention of 20bn yen - has forecast a claim of 35bn yen ($450mn).

The Japanese big three are far more significant. Tokio Marine, NKSJ and MS&AD have all tried hard to keep their gross loss figures out of the public eye, and some markets are thought to have been compelled to sign non-disclosure agreements.

But according to sources, the big three insurers buy earthquake pro-rata cover with an aggregate cap of around $6bn. It is thought that these programmes have taken a much heavier hit than the XoL covers that they intersect. The pro ratas are understood to offer cover for between a fifth and three quarters of initial quake losses. According to sources, Tokio Marine purchases the most modest of the treaties.

XoL covers have been less heavily affected due to substantial retentions. Tokio Marine's programme has suffered a loss to its first layer, which incepts at 60bn yen ($780mn), while the final layer cuts in at 310bn yen ($4bn).

Details of the MS&AD and NKSJ programmes are not known, but their current reported loss estimates are more modest than Tokio Marine's.

Japan has not been a facultative event on the scale of previous quakes such as Chile, for example, but significant losses were incurred in this area too. Between them the JR East railway, Hitachi and 3M have added around $1.9bn to the claims total and there are likely to have been other significant claims.

Japan immediately commanded the attention of the international reinsurance market and seemed to raise the prospect of an event-driven turn in the market for the first time.

This has subsequently proved something of a false dawn, with the pricing effect only modestly felt outside the loss-affected areas and lines.

The real significance of the event for international reinsurers seems to have been Japan's pre-eminent place in the remarkable sequence of non-US cat events that have produced record aggregate major losses. A seismic analyst at the Caltech Seismological Laboratory shows the 7.0 earthquake peak from the Haiti earthquake.