Japan's Losses: Who Pays?

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It was only natural that shortly after the disaster in Japan, peoples' thoughts turned to global insurance markets.  Insurers and reinsurers took a beating after events like Hurricane Andrew, 9/11, and Katrina, so why not this?

But it turned out to be more complicated than that.  Japan's government is extraordinarily protective of their domestic markets, including the market for insurance.  While there are some foreign insurers operating there, the exposure was not nearly as large as you might have thought.

That left the question:  who pays?  According to the New York Times, the answer is that while the global reinsurance industry will bear some substantial losses, in many cases, the losses will be borne by the government--or by people and companies whose insurance does not cover the damage that was done.  The nuclear industry was required to buy insurance through a special industry insurer with liability limits that now seem laughably small--about $2 billion.  And many of the damages simply aren't insured at all:

The company's estimates will never include a multitude of losses that are not insured: cars swept away, damaged property, buckled roads and weakened bridges, and something called "demand surge" -- the spike in materials prices and labor costs that often comes with large-scale rebuilding after a catastrophe.

The uninsured losses may turn out to be the greatest losses of all.

Given the Japanese government's debt burden, there are limits to how much of all this they'll be able to backstop.  Meanwhile, the reinsurers aren't getting off too easy, either; as Robert Hartwig told the Times, "What makes today's natural disaster so extraordinary is that four of the five costliest earthquakes and tsunamis in the past 30 years have occurred within the past 13 months". 

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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