Posted by: Tom Chappell | March 16, 2011

Keynesian Economics Forgets About the Cost of Disaster

By now everyone has seen the news reports about one of the most destructive earthquakes on record hitting the Island of Japan.  The loss of life and treasure cannot be replaced for any amount of money.  I did hear one financial news commentator make the statement that if there is one bright side to the disaster; it is that the island’s economy will improve due to the rebuilding process that will be necessary to put Japan back together again.

His comment caught me a bit “cold” and most people would agree that something about that just doesn’t sound right.  Yes, any rebuilding effort increases trade activity and temporarily adds jobs.  But, someone must pay for the rebuilding.  I think of the many uncovered insurance claims that must be paid for out of the assets of the victims.

And then there are the covered losses.  The massive destruction of  the boats and commercial fishing vessels, the huge loss of automobiles, and, of course, the devastation of the covered (insurance) buildings, factories, power plants, and infrastructure.  Who pays the bill?  The quick answer is the insurance companies.  And if that is your answer, you are partially correct.

The more correct answer would be to say “the world’s insurance consumer”.  Yes, you and I will pay for the losses through increased insurance premiums.  And it doesn’t matter what type of insurance policy you buy.  ALL losses are shared by ALL policy holders worldwide, because most insurers and reinsurers (the investors that provide the capital to pay losses) are players in multiple segments.

Although it too early to have an exact cost of the world’s natural disasters, the numbers are beginning to mount.  Reinsurance companies around the world are reeling as the losses pile up.  These companies stand behind the insurance policies that you might purchase.  Clal Insurance Enterprises Holdings Ltd., based in Israel, estimates $28M in losses from the Japanese quake on top of the $18M reserved for the February earthquake in New Zealand.  London-based Omega Insurance Holdings estimates it will reserve $43M, Catlin Group Ltd estimates $375M and Lancashire Holdings Ltd estimates its losses will exceed $255.6M.  These early estimates are just the beginning.  Before the rebuilding is complete, the reconstruction costs will be in the multi billions.   In addition to the earthquakes in Japan and New Zealand, the recent earthquake in Chile and the Cyclone and flooding in Australia also took their toll on the insurance industry.

The next time you hear someone say there is a bright spot to any disaster; explain to them that in addition to the horrible loss of life and human suffering, someone must pay the tab.

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