According to early estimates, Japan's recent devastation could result in the most expensive hit for the global insurance industry since Hurricane Katrina.
The impact from the earthquake and tsunami could cost the worldwide insurance sector as much as $60 billion.
Global insurance stocks plunged this week as investors reacted to news stories and broadcasts of water-filled towns and destroyed businesses. However industry analysts noted some mitigating factors, including the fact that residential property damage is covered by a state-supported insurance system and that damage due to nuclear is excluded from policies.
Insurance analysts claim such factors will keep the costs of insurance from reaching levels of Hurricane Katrina's aftermath in 2005.
Damage control costs will accumulate from ongoing aftershocks from last week's earthquake off the coast of Japan and continuous shutdowns are happening at fabric factories and auto transport companies.
"Given the enormity of the earthquake that struck Japan... it is still in the very early aftermath of the event," said senior vice president of research and modeling at AIR Worldwide, Jayanta Guin. AIR has calculated insurance costs estimates to range from $15-35 billion.
"Search and rescue efforts are still underway and damage assessment has only just begun, while considerable uncertainty still remains in the seismic parameters that define the event," Guin added.
An insurance analyst at Panmure Gordon & Co. in London cautioned that the cost to the global insurance industry could exceed $60 billion dollars with the tsunami bill added in.
The analyst added "The loss will be so large that it will probably provide the trigger to ensure a re-rating of the non-life sector - a similar impact happened post 9/11."
The high end of those ranges would make deem the disaster the second most expensive hit to the global insurance industry since 1970, just behind Hurricane Katrina.
"We are most interested in the commercial repercussions of the disaster. It is clear that the market is already realizing and responding [to the disaster]", said a St. Louis corporate lawyer.
Moody's said the possible factor that influences the overall bottom line was the potential for "business-interruption losses," which are affected by destruction done to the country's power and transportation infrastructure.
"We believe that estimating claims will be a protracted process, as the size and scope of the event will place significant strain on insurers' claims adjustment resources," said Moody's in a report. "Moreover, aftershocks could last for weeks, causing additional insured losses."
Ambiguity over damage costs greatly influenced some of the world's largest reinsurers early this week.
On Monday, Munich Re shares were trading at 107.65 euro, 7.7% down from Thursday's close - the day before the disaster, while Hannover Re close at 37.68 euros, down 7.6 percent from the close on Thursday.
Christian Muschick, an analyst at Silvia Quandt & Cie. in Frankfurt said the "market has probably overreacted this morning." And while it's still early to forecast legitimate estimates, the issue could result in first quarter losses, Muschick said. "If the losses exceed what is set aside for natural disasters, then they will likely be unable to achieve their guidance for the year," he added.
Yet the affect on big reinsurance agencies will be less severe compared with the pitfalls from the global financial crisis. Analyst foresee that most insurers will be able to hike up their rates to counter the financial concerns of the disaster.
Aflac said that although it expects insurance claims to be high and large, it was well-prepared to cover them. The New York-based insurer provides health and life insurance to one out of every four individuals in Japan.
Aflac also mentioned its sales in Japan will take a small blow, with less than 5 percent of the company's new Japanese sales and in-force premiums spawning from the hard-hit Iwate, Miyagi and Fukushima regions.
In addition, Japanese households and businesses outside cities such as Tokyo or Osakathere are less likely to buy insurance compared to Western societies. "With respect to matters of insurance law, U.S. companies operate through a different approach to risk unlike some Eastern cultures. Insurance coverage as always been an investment that only some of the more metropolitan corporations take up." added a Nashville business lawyer who did not disclose his name.
The Japanese government will absorb the cost of earthquake-related damage to a nuclear power facility 240 kilometers north of Tokyo.
An analyst at London insurer Chaucer, one of the largest insurance providers of nuclear risk in the world, said the Japanese Nuclear Act of 1961 absolves nuclear power operators of liability from damage caused by major natural disasters. Together, those factors will limit the expense to insurers.
