Supply chain and business interruption losses due to earthquake in Japan may end up on the low end of the range

Insured supply chain interruption (SCI) losses and contingent business interruption (CBI) losses arising out of the April 2011 earthquake in Japan seem likely to be much less than what they initially appeared.
Paul Cutbush, Canadian property treaty line manager for Swiss Re Canada, noted initial estimates of companies’ CBI losses arising from the earthquake in Japan totaled somewhere between $5 billion and $15 billion. “But after doing some research for this presentation, I am looking at the lower end,” Cutbush said.
Cutbush cited figures from Aon Benfield, which showed major companies announcing potentially large insurance claims for business interruption at the onset of the catastrophe. But analyzing the nature claims closely, some of the business interruption losses did not arise from direct or physical damage from the company’s plants or suppliers; thus, they would not be covered under traditional CBI policies, Cutbush noted.
Apple, for example, initially gave notice of a potential insurance claim on the order of $500 million, according to Aon Benfield. The earthquake happened just three weeks before the company’s much-publicized iPad 2 tablet was due on the market.
But as it turns out, the iPad 2 had five main components manufactured in Japan. Three of them were very important: flash memory, the d-ramp and a digital compass.
The flash memory was alternatively sourced from Korea, the d-ramp was alternatively sourced in the United States and the main component of their claim, the digital compass, didn’t come under their CBI policy, because there was no direct damage to the supplier’s facilities. The manufacturer of the digital compass had to close the plant because it were in the area of the earthquake and affected by power shortages and the 20-kilometre evacuation zone around the failing Fukushima nuclear reactors.
“That affected 7,000 businesses and 100,000 people, Cutbush said. “People couldn’t get to work. From an insurance perspective, Apple’s loss was not caused by direct damage to the [manufacturer’s operations], so it was not an insured loss.”
Also, any CBI and SCI losses were mitigated by the fact that Japan recovered so quickly from the earthquake, Cutbush said. The quake happened in March and by July 1, 80% of Japanese manufacturers were up to pre-earthquake production levels. Share prices were back to pre-earthquake levels by July 15.
This recovery happened quickly in part because of its previous experience in reconstructing after disasters (rebuilding after World War 2, for example), Cutbush said.
In addition, Japanese companies adapted around power blackouts as a result of nuclear facilities shutdowns. For example, industries shifted their production schedule from Mondays to Fridays to Saturdays through Wednesdays, when more power was available.