Earthquake insurance put to the test

April 5th, 2011 by Philip Brasor & Masako Tsubuku

Though property insurance for damage caused by earthquakes is available in earthquake-prone Japan, there is, technically speaking, no such thing as earthquake insurance. Thanks to a deal struck by the national government and private insurers in the 1960s, individual homeowners who take out fire insurance policies can add a rider for earthquakes (which also includes tsunami and volcanos). Claims are paid out of a large fund that is maintained by the two partners, and according to the Nihon Keizai Shimbun this fund currently contains ¥2.3 trillion. The insurance industry projects that there will be about 500,000 claims filed for property damage, amounting to ¥1 trillion in payouts.

Damage assessed; next step, compensation (Yoshiaki Miura photo/The Japan Times)

So there’s enough money in the fund to cover at least private individual claims. However, when you look at the policies in detail these payouts will not be enough to recoup much of what was lost in the disaster. Available fire insurance policies(kasai hoken) for private homes cover up to ¥50 million if the entire home is destroyed (zenkai), and people can insure other property, such as furniture, for up to ¥10 million. However, earthquake insurance only covers 30 to 50 percent of what fire insurance covers. So if the coverage of your fire insurance policy is ¥10 million, you only receive from ¥3 million to ¥5 million when the home is destroyed in an earthquake. Moreover, damage insurance only covers the value of the home at the time of the accident or disaster, so if the value has decreased over time, you will only receive payments based on that lesser value. And fire insurance by itself usually does not cover a fire caused by an earthquake. You need coverage for both.

It’s assumed that the average payout in the Great Eastern Japan Earthquake for homes with coverage will be between ¥2 million and ¥3 million. The average damage insurance payout for the Great Hanshin Earthquake was a bit over ¥1 million per home. Altogether 65,000 claims were made for a total of ¥78 billion. At that time, only 9 percent of homes nationwide carried earthquake insurance, and only 3 percent of homes in Kobe did. Since then, the national portion has increased to 23 percent. In 2009 alone, 46.5 percent of homeowners who took out fire insurance added earthquake coverage. Not surprisingly, sales vary widely from one region to another based on frequency of temblors. In geologically active Aichi, Tokyo and Miyagi, as much as 30 percent of homeowners have earthquake insurance. The portion drops down to 15 percent in Gunma and Nagano prefectures.

One bright spot is that the utter destruction of the disaster may actually speed up the claims process. After the Hanshin earthquake the process took a long time because insurance companies had to assess the damage to properties in order to decide if they were “totally destroyed” (zenkai), “half destroyed” (hankai), or “partially damaged” (ichibuson). These are the only three categories for payouts and determine the amount of the payout. Because of the utter destructive power of the tsunami that destroyed much of the coastline of the affected area, the General Insurance Association of Japan, which represents all damage insurance companies, is assessing properties in a joint manner from the air, where it becomes apparent that all homes in a given area are zenkai. There is no need to check each property on the ground. In addition, policy-holders will not be required to bring in their policies to make claims, since so many lost documents in the tsunami. All they need to provide is identification. Even if a claimant forgets which company his policy is with, the association will find out.

Still, some policy holders could be in for a shock when they read the fine print. For instance, homeowners in Urayasu, Chiba Prefecture and other localities where houses were damaged by liquefaction may discover that their earthquake policies don’t cover that particular eventuality. But the Life Insurance Association of Japan has risen to the occasion. Most general life insurance policies don’t cover deaths from earthquake, but the association has said that its member companies will make an exception for the current disaster.

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