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Elemental Problems in Japan

The four classical elements—air, earth, fire and water—are all embroiled in the nasty aftermath of the disaster in Japan. But there’s nothing elemental about the upcoming claims.

March 22, 2011 Photo
It was an unprecedented one-two-three punch: The massive, magnitude 9.0 earthquake that struck about 80 miles off Japan's eastern coast (approximately 240 miles northeast of Tokyo)—the most powerful to hit the country since record-keeping began. The quake then triggered a 23-foot tsunami that swept away vehicles and structures, destroyed cities and ports, and affected coastal towns as far away as Northern California. The damage to the region's power plants has been significant, leading to a nuclear crisis of uncertain proportions.

Total economic losses from the earthquake and subsequent tsunami will be devastating, likely to exceed $100 billion. More than 12 million people, 10% of Japan's total population, were affected, and extensive damage runs the gamut—everything from residential and commercial buildings to critical infrastructure. The two events also hit the insurance industry hard, producing total estimated insured losses of $12 to $25 billion, encompassing the effects of earthquake shaking, the ensuing tsunami and fires, and losses to automobiles, marine, life and personal accident insurance lines.

What separates the situation in Japan from past large-scale disasters is the impact of devastation from the combined chain of events. This unique challenge is creating a complex set of circumstances which are hindering claims professionals from assessing damage and investigating liability, both integral to responding to claims in a timely manner.

The Elements of a Disaster

Geography: Despite its magnitude, the earthquake in and of itself would have been manageable from a loss estimate perspective; most properties are not expected to have damage exceeding insurance deductibles. However, claims will be generated from a broad geographic area.

Flooding: More than 2 million people live along the coastal lowlands in cities that experienced the strongest shaking and were overrun by the tsunami. Flooding from the waves extended more than six miles inland, erasing any evidence of possible damage as points of reference.

Structural Issues: Most of the approximately 2 million dwelling units that received the strongest ground motion will be relatively undamaged, but 30% of these residences are expected to have minimal to severe damage. Manufacturing facilities in the region remain closed. While their overall integrity may appear fine, buildings that withstood the earthquake's high level of shaking for such an extended duration are likely to have sustained a range of non-structural damage. Determining the extent of the damage will be time-consuming, requiring a forensic approach to uncovering hidden problems.
Restricted Access: Japan relies on nuclear power for more than one third of its energy production. Of the 55 nuclear power plants throughout the country, three were located within the area of high ground motions. The electrical power grid sustained significant damage that will persist for weeks, if not months or years, leaving claims adjusters in the dark—literally.

Loss of electricity in this region will impair restoration efforts and increase the overall economic costs of the combined earthquake-tsunami events.

What's more, the nuclear plants require significant amounts of power to run cooling systems even when not generating electricity. This is especially problematic at the Fukushima Daiichi plant, which is situated in the area of greatest destruction. Radiation spikes here have forced evacuations and delayed efforts to restore safety. In other words, the entire area is off limits to any investigations, and contaminated air may cause casualty claims farther down the road.

As the crisis in Japan continues to unfold, all these uncertainties will make it exceedingly difficult to produce informed loss estimates critical to the claims adjustment and settlement negotiation process. Now more than ever, strategic approaches to information gathering are critical. Deconstructing the earthquake and tsunami into separate, manageable parts and taking advantage of resources such as shaking maps and catastrophe model output will help build solid, rational expectations.

Tom Larsen is senior vice president, product architect, of catastrophe modeling firm EQECAT, Inc., based in Oakland, Calif.
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