natural catastrophe risk management policy in...

Natural Catastrophe Risk Management Policy in Japan: Roles of government to promote public private partnerships

Hirokazu TatanoDisaster Prevention Research Institute,

Kyoto University

Disaster Prevention Research Institute Kyoto University

Hirokazu Tatano

Three ways of Government to encourage private insurance system

1. Reduce vulnerability of exposure by implementing risk control measures

Flood and Storm Insurance in Japan100% private insurance covers 30-70% for storm losses and 10-20% for flood.

Well Prepared Flood Protection InfrastructureIncentives for mitigation in Japanese Earthquake Insurance Discounting premiums based on the investigation of anti-seismic capacity of the buildingInspection system, performance certificate


Hirokazu Tatano

2. Reduce the high layer risk by holding it.E.g. French NatCat Insurance and Japanese earthquake insurance

3. Built up trust by appropriate incentive systemsNot only moral hazard in insurance industries but also in design and construction sectors.Auditing system for buildings’ design and construction

Too mach intervention may become disincentives for private insurance industrye.g. , Japanese earthquake insurance: Property and causality insurance supported and strongly regulated by the Government insured 1-14% of losses in building where a mutual insurance insured 2-25% in the past.


Hirokazu Tatano

ContentsNatural Disaster in Japan Disaster Risk Management and Insurance

Weather Related Disasters and Strom & Flood insuranceEarthquake Disaster and Earthquake Insurance

Discussion & Conclusion

Natural Disasters in Japan

A Natural disaster-prone country


Hirokazu Tatano

Japan, 95,21%

Other, 359,79%

Japan, 96,11%

Other, 743,89%

JAPAN: A Disaster-Prone Country

Number of earthquakes with magnitude of 6.0 or larger

•

Japan covers only 0.25% of the land area on the grove, the number of earthquakes and distribution of active volcanoes is quite high.

•

20% of earthquakes with magnitude of 6.0 or larger were occurred in Japan.

•

10% of active volcanoes is located in Japan.

Number of active volcanoes


Hirokazu Tatano

The Number of Deaths and Missing in Natural Disasters in JapanTonankai

quakeHanshin-Awaji

earthquakeFukui quake Typhoon

Ise-wan

Weather Related Disasters


Hirokazu Tatano

Natural Hazard →DisasterConsequences ofHuman Behavior

Hazard: Flood, Earthquakes,,etc

Population & AssetExposure：population and asset

exposed to the threat of natural hazards

Vulnerability: degree of resistance of the asset & population against disaster


Hirokazu Tatano

Proactive CounterProactive Counter MeasuresMeasures ofof DisasterDisaster Risk ManagementRisk Management

R isk C ontro lR isk C ontro l

R isk F inanceR isk F inance

R isk A vo idance/P revention

L and use R egulation



M itiga tionsB uilding codeH igh-T ech. Instrum ents:

(A ctuator, dum per, etc)

M itiga tionsB uild ing codeH igh-T ech. Instrum ents:


R isk T ransferInsuranceA R T , C at-B ond


R isk A cceptanceB uilding R isk R eserveSelf-Insurance, C aptiveF inite, etc

R isk A cceptanceB uild ing R isk R eserveSelf-Insurance, C aptiveF inite, etc

A ctions taken before catastrophic events as to prevent/reduce (direct) losses

A ctions taken before catastrophic events as to prepare funds for recovery process































































Benefit of Mitigation can be different. It depends on the possibility of risk transfer [ Kobayashi & Yokomastu 2000].

Combination of Risk control and financing measure is important!

Needs for integration

Disaster Risk Management Policies and Insurance


Hirokazu Tatano

Large scale flood disasters frequently happened from 1930s to 1950s.

YearYear--Mon.Mon. CauseCause DeathDeath MissingMissing CausalityCausality

1934.91934.9 MurotoMuroto TyphoonTyphoon

27022702 334334 1499414994

1945.91945.9 MakurazakiMakurazaki TyphoonTyphoon

24732473 12831283 24522452

1947.91947.9 Catharine Catharine TyphoonTyphoon

10771077 853853 15471547

1954.91954.9 ToyamaruToyamaru TyphoonTyphoon

13611361 400400 16011601

1959.91959.9 IsewanIsewan TyphoonTyphoon 46974697 401401 3892138921

http://www.ffortune.net/social/seso/nihon-mei/muroto-taihu.htm


Hirokazu Tatano

High Tide Disaster by Isewan Typhoon in 1959

http://www12.freeweb.ne.jp/photo/ajapskwn/saigai/p02.htmlhttp://www12.freeweb.ne.jp/photo/ajapskwn/saigai/p02.html


Hirokazu Tatano

Disaster Management Policy

In 1961, the Disaster Countermeasure Basic Act was legislated.

Change in the policy

from reactive to proactive approach.


Hirokazu Tatano

Change in Disaster Management Related Budget5-10% of National Gov.’s Total Budget is spend for Disaster Management


Hirokazu Tatano

Features of Flood Risk Management in Japan

Intensive investment for structural counter measuresof flood controlComprehensive flood protection plan including structural and nonstructural flood protectionWidely disseminated comprehensive property insurance which is run by private insurancecompany Weak public involvement and conflicts which highlights tradeoffs between environment and flood protectionWeak link to land-use policies

Complementarily between flood risk control and financing measures.


Hirokazu Tatano

reservoir

leveediversion

Storage Storage enlargement enlargement and diversionand diversion

dredge

Flood Control Flood Control ((StructuralStructural) Measures) Measures


Hirokazu Tatano

Land use planning(?) and Flood Protection in Tokyo

1882

1919

1954

1996

37years past

35years past

42years past

1911 1930

Construction of Edo-Gawa discharge channel


Hirokazu Tatano

Retention ponds and infiltration

Flood-proofing

Conservation of upper-stream basin

Flood insuranceForecasting and early warning

Flood fightingLand use control/management*

* Not working well in Japan

H

Radar

Flood Hazard Mapping

Non-structural flood control counter measures


Hirokazu Tatano

Result of Flood ManagementExtensive effort of governments’ flood management brought about continuous decrease in inundated area and total economic loss associated with weather related disasterstaying in the same level as in the past despite of the increase of the exposure caused by rapid urbanization.

Insurability of weather related event!


Hirokazu Tatano

Flood Risk FinancingFire Insurance covers wind, hail and snow triggered disasters like storms and avalanches.Comprehensive property insurance covers not only wind, hail and snow triggered disasters but also water related disaster like floods.These insurances provided by private insurance companies.


Hirokazu Tatano

0

20

40

60

80

100

0 20 40 60 80 100Loss ratio(%)

Payout(%)

●

Storm

0

25

50

75

100

0 25 50 75 100Loss Ratio(%)

Payout(%)

●

Flood

Comprehensive property insurance


Hirokazu Tatano

Total and insured losses of major weather-related disasters in the past

No Event Year

Total Loss*0（US Million $)

Insured Loss*1（US Million $)

P&CInsurance*2（US Million $)

JA Mutual*3（US Million$)

Coverage（％）

1 Typhoon　MIREILLE（No.19） 1991 10000 5,389 4,270 1,119 53.9%2 Typhoon　SONGDA（No.18) 2004 6000 4,607 3,604 1,004 76.8%3 Typhoon　Bart（No.18) 1999 5000 3,394 2,822 571 67.9%4 Typhoon　TOKAGE（No.23) 2004 7500 1,658 1,284 374 22.1%5 Typhoon　CHABA（No.16) 2004 6000 1,325 1,126 199 22.1%6 Flood Tokai 2000 7440 1,040 932 108 14.0%7 Flood Niigata/Fukushima/Fukui 2004 1950 293 223 70 15.0%

*0

*1

*2

*3

Insured losses are the sum of total payout ajusted by the exchage rate at the time preriod from the members ofthe General Insurance Association (P&C Insurance) and National Mutual Insurance Federation of Agricultural

Total losses are from EM-DATEM-DAT: The OFDA/CRED International Disaster Database www.em-dat.net -Université Catholique de Louvain - Brussels - Belgium

data from Data Pack from 2001 to 2005 by National Mutual Insurance Federation of Agricultural Cooperatives (JAMutual), http://www.ja-kyosai.or.jp/about_ren/annual/index.html

data from Fact Book 2006 by the General Insurance Association Japan, http://www.sonpo.or.jp/e/index.html

Earthquake Risk Management Policies

Focusing on earthquake risk financing


Hirokazu Tatano

Distribution of the Epicenters of Earthquakes Causing Damage (from 1885)


Hirokazu Tatano

Establishment of the earthquake insurance system

Jun. 1964 Niigata earthquakeThe Minister of Finance asked the Insurance Council to develop specific policies for earthquake insurance

Apr. 1965 Report of the Insurance CouncilDecide the outline of insurance, coverage, reinsurance method, underwriting method, etc.

Jun. 1966 Act for Earthquake Insurance

The system was carried out


Hirokazu Tatano

Earthquake Insurance in JapanEarthquake Insurance on Dwelling Risks will pay claims for losses of buildings or contents caused by fire,destruction, burying or washing-away following earthquake, volcanic eruption, or tsunami following earthquake or volcanic eruption. The insured amount of Earthquake Insurance on Dwelling Risks is set between 30% and 50% of the insured amount of fire insurance, and the upper limits are 50 million yen for dwelling houses and 10 million yen for household goods.The national government is managing the system.


Hirokazu Tatano

Organizational Scheme of the Japanese Earthquake Insurance

Incurred Insurer Re-Insurer（Japan Earthquake Re.）

JEI Pool

National Government

Special Purposeaccount

General

account

premium Reinsurance (Total volume)

retrocession

retrocession

payout

payout

payoutpayout

Insurance co. 404.2JE Re 355.8

Government 952.8Total 1,715.9

JEI Pool (2004.3)

(Bil. Yen)


Hirokazu Tatano

The present reinsurance scheme

0¥ 75 billion

$ 0.6 billion¥ 13118 billion

$ 11 billion¥ 5,000 billion

$ 41 billion

Loss of a single earthquake

50 %

5 %Liability of private insurance

companies (include JE Re.)

Liability of the government


Hirokazu Tatano

Revisions in 2001Introduction of discount system

Discount for time of construction (10%)Considering investigations of damage 1995 Great Hanshin-Awaji earthquake

Discount for earthquake resistance grade (10% -30%)

The dwelling performance indication system developed by the government have put into operation


Hirokazu Tatano

The present systemPremium rate

Discount systemDiscount for time of construction (10%)Discount for earthquake resistance grade (10-30%)

structure

location

Non- wooden structures

Wooden structures

1st ¥ 0.50 ¥ 1.20

2nd ¥ 0.70 ¥ 1.65

3rd ¥ 1.35 ¥ 2.35

4th ¥ 1.75 ¥ 3.55

Per year and ¥1,000 of insurance coverage


Hirokazu Tatano

Future of the earthquake Insurance system

ProblemsRegional divisions of premium rate

The proportion insured (30 – 50%)

Low penetration rates of the earthquake insurance

The number of Earthquake policies per the number of Fire policies are 37.4% ( 9.3million policies)( 2004)

Etc...


Hirokazu Tatano

Developments in Ownership of Earthquake Insurance on Dwelling Risks Policies


Hirokazu Tatano

Other earthquake risk financing toolsMutual Insurance

e.g., JA Mutual Insurance (13million Policies)Payout after the great Hanshin-Awaji earthquake (billion Yen)

ARTCat-Bond (parametric bond)Contingent Dept FacilityEtc.

No Event Year

Estimated Housing Loss *0

（US Million $)

Insured Loss*1

（US Million $)

P&C Insurance

*2

（US Million $)

JA Mutual*3

（US Million $)

Coverage

（％）

1The Great Hanshin-Awaji quake

1995 61,141 2,045 812 1,233 3.3%

2 Geiyo

quake 2001 697 258 135 122 37.0%

3 Niigata Chuuetsu

quake 2004 2,815 843 130 713 29.9%


Hirokazu Tatano

Trust company (fund management)

Company（Oriental Land ）

SPC* Investorfinancial transaction

commission （3.1% / year）

bond issuing

commission+ interest (market rate)

$100 million interest (market rate)

*Special Purpose Company

$100 million

Trust company

Company（Oriental Land ）

SPC* Investorpayment of capital

$0~$100 million

payment of the balance after principal reduction

principal payment

Ordinary days

Earthquake

Cat-Bond for private firms


Hirokazu Tatano

Parametric Cat-Bond

Inner Grid Outer Grid

7.1 7.3 7.5 7.7

20.00

32.00

44.00

56.00

68.00

80.00 80.00

65.00

50.00

20.00

35.00

JMA Magnitude

US Dollar Losson Original NotionalAmount in Millions


Hirokazu Tatano

Contingent Debt Facility

fund managementwith safe assets

Company(Tomoegawa Paper) SPC* Lender**

loan reservation contract

commission

syndicate loan

interest

$4 billion asset management yield

Ordinary days

Earthquake

**Sizuoka Bank,Mitsui Sumitomo Insurance, etc.

guarantee commission Development Bank of Japan

debt guarantee

debt guarantee

loan draw down$0~$4 billion

interest interest

guarantee commission

Development Bank of Japan

Company(Tomoegawa Paper) SPC* Lender**

Gov. Bank

Gov. Bank


Hirokazu Tatano

IssuesHouseholds

Low penetration ratio of earthquake insurance in household

Limited coverage (30-50%)

Partial link between premium and seismic vulnerability (incentives for mitigation)

FirmsFew firms have earthquake insurance policies

GeneralBuilt up a bridge between insurance and mitigation


Hirokazu Tatano

Niigata Chuetsu EQ (Oct.23,2004)Niigata Chuetsu6.8 M (JMM, Largest )10km depth?Unknown fault?

5KmKawaguchi Town

Ojiya

Yamakoshi

Landslide

Damage of Road

Due to successive aftershocks and road network Damages, recovery speed ofInfrastructures were slow


Hirokazu Tatano

Very few firms have earthquake insurance policies.

Example: Niigata Sanyo Electronics co. suffers economic losses in their property in 50 billion yen (400 million US$ ). But, even such a big company had no earthquake risk financing counter measures.


Hirokazu Tatano

Way forward to building up the bridge for firms

Business Continuity Plan will be required for large scale companies and recommended for middle and small scale companies.Encourage good firms through market

Investors and Public relations (IR and PR)

Mitigation and Risk Financing?


Hirokazu Tatano

Three ways of the Government to encourage private insurance system

1. Reduce vulnerability of exposure by implementing risk control measures

Flood and Storm Insurance in Japan100% private insurance covers 30-70% for storm losses and 10-20% for flood.Well Prepared Flood Protection InfrastructureIncentives for mitigation in Japanese Earthquake Insurance Discounting premiums based on the investigation of anti-seismic capacity of the buildingInspection system, performance certificate


Hirokazu Tatano

2. Reduce the high layer risk by holding it.E.g. French NatCat Insurance and Japanese earthquake insurance

3. Built up trust by appropriate incentive systemsNot only moral hazard in insurance industries but also in design and construction sectors.Auditing system for buildings’ design and constructionToo mach intervention may become disincentives for private insurance industrye.g. , Japanese earthquake insurance: Property and causality insurance supported and strongly regulated by the Government insured 1-14% of losses in building where a mutual insurance insured 2-25% in the past.

natural catastrophe risk management policy in...

Documents