March 14, 2011 — Japanese earthquake insurance is sold, packaged and priced in a unique regulatory environment.
The following information is from the book Landed Japan, which was published in 2010.
Despite Japan’s reputation as a seismic hotspot, earthquake insurance for residential dwellings is readily available. In fiscal 2007, Japanese households had over ¥91 trillion in earthquake coverage and 44% of fire insurance policies included an earthquake rider.
Under the Law Concerning Earthquake Insurance (Law No. 73, 1966), coverage is provided by non-life insurance companies, which are reinsured by the Japan Earthquake Reinsurance Company (JER). JER, in turn, has retrocession agreements, under which JER is reinsured by the non-life insurance companies and the Japanese government.
There is an aggregate liability limit of ¥5.5 trillion for any one earthquake with the contribution of JER, the non-life insurance companies and the government varying according to the amount of claims payable. If total losses exceed ¥5.5 trillion, insurance companies can reduce their payouts to policy holders. To put the liability cap in perspective, claims worth ¥78.3 billion were paid after the Great Hanshin Earthquake in 1995.
Buying earthquake insurance
Earthquake insurance is sold as a rider to fire insurance policies and is not available separately. Fire insurance does not cover losses from fires caused or spread by an earthquake. You can add earthquake coverage to a valid fire insurance policy, but you may not be able to do so if an earthquake warning is in effect. Earthquake insurance is available in terms of one to five years.
Earthquake insurance covers loss or damage to residential buildings and personal property through fire, destruction, burial or flooding caused directly or indirectly by an earthquake, volcanic eruption or tsunami. Loss or damage is excluded if it is caused by gross negligence, willful or illegal acts, war or insurrection, or if it occurs 10 or more days after an earthquake.
The sum insured ranges from 30% to 50% of the amount of the fire insurance policy to which the earthquake rider is attached. Coverage is limited to ¥50 million for a building and ¥10 million for personal property. Losses are categorized as total, half or partial, and the amount payable is based on the depreciated value of the insured property.
Japanese earthquake insurance premiums are standardized and based on the dwelling’s location and whether it is constructed from wood. Wooden structures cost more to insure and Tokyo, Kanagawa and Shizuoka are the most expensive locations.
Discounts are available for long-term contracts, buildings constructed after 1981 and buildings that have been assessed as earthquake-resistant or seismically isolated. Discounts are also offered for buildings that are rated as earthquake-resistant on the Housing Quality Assurance Act’s three-point scale. Earthquake insurance premiums can be deducted from income and local inhabitants taxes.
By way of illustration, ¥20 million of earthquake insurance on a wooden dwelling in Tokyo built in 2001 would cost ¥56,340 per year. Note that this amount excludes the cost of the basic fire insurance and earthquake coverage for personal property.
More English-language information about Japanese earthquake insurance is available from the General Insurance Rating Organization of Japan, the Japan Earthquake Reinsurance Company and the General Insurance Association of Japan.