March 2011 Tokohu earthquake results in recalibration of models, underwriting standards

The March 2011 Tohoku earthquake in Japan has resulted in re/insurers recalibrating their models and changing their underwriting standards, according to a recent post by Swiss Re.

“A large cat event such as the Tohoku earthquake always provides opportunities for calibrating loss modeling and discovering new insights,” Swiss Re says in a post on its website. “The earthquake was surprising for many scientists and the risk modelling community in view of its severity and magnitude, followed by the tsunami, liquefaction and consequential aftershocks.”

Swiss Re said it is recalibrating its catastrophe models to take some of these aspects into account. “The occurrence frequency of earthquake events has been adjusted to take the heightened aftershock events into account, and we’ve also developed and incorporated simulated tsunami models into our underwriting considerations,” the company says.

In addition, the event has triggered changes in underwriting standards, resulting in long-term impact.

“Risk awareness has increased while adequate prices are now needed to cover risk exposures,” Swiss Re says. “The industry is also heavily investigating previous non-peak risk areas to assess the true nature of their exposure.

“Adequate pricing and unbundling of risks will be important not only to fully reflect the nature of risk but also to prompt insureds to take adequate risk prevention and mitigation measures.”

Overall, the rough estimate of insured damage caused by the Magnitude 9.0 earthquake and subsequent tsunami is $5 billion, Swiss Re says. The insurance industry paid no more than 17% of the overall economic cost for the event.

“In terms of improving penetration, both insurers and industry associations have been active in promoting earthquake insurance through community-based promotional activities and other channels,” the company says. “Rising risk awareness has already resulted in a tangible increase in the take-up rate of residential earthquake insurance.”