Natural disasters can't be prevented, but public policy can shape the way countries cope with their aftermath, says Bradley Kading, president and executive director of the Assn. of Bermuda Insurers & Reinsurers. After Japan suffered an earthquake, tsunami and nuclear power plant emergencies in March, it became apparent that the country's lack of a global network of insurance and reinsurance has and will continue to hinder its recovery, reinforcing the need for global reinsurance, Mr. Kading says.

Beset by a triple tragedy—an earthquake, a tsunami and nuclear power plant emergencies—the people of Japan are inspiring admiration around the world.

People everywhere are in awe of the stoicism of the residents of the affected areas and the resilience of the entire society. But the aftermath of the disaster also underscores some of the shortcomings of the Japanese government's approach to the catastrophe insurance market, especially when compared with other nations that have endured their own calamities recently.

While the estimated economic cost of the disasters in Japan likely will exceed $300 billion, insured losses making their way into the international insurance market probably will be only $20 billion to $40 billion, with maybe an additional $10 billion for business interruption. In contrast, much larger shares of the damage from recent natural disasters in Australia and New Zealand will be covered by international insurance, as was damage from U.S. disasters during the past 10 years.

The differing experiences of Japan, on one hand, and Australia, New Zealand and the U.S., on the other, underscore the importance of using a global network of insurance and reinsurance—backup insurance—to protect homes, businesses and public buildings at risk from natural and man-made disasters.

International reinsurers are especially essential to balance the uncertainties of insuring one area against the likelihoods of calamities in countries far away and on a different meteorological calendar. Global reinsurance allows the hazards of hurricanes in Florida to be pooled in a larger capital base with the risks of earthquakes in Japan, typhoons in East Asia and terrorism in New York.

Because Japan's catastrophe insurance regulation restricts the role of foreign reinsurers, reinsurers probably will cover a much smaller proportion of the losses from the recent disasters than if similar events had taken place in the United States. While properties in Japan ultimately are reinsured by companies from Japan, Australia, Europe, the U.S. and Bermuda, residential earthquake reinsurance, except for mutual reinsurance pools, is retained in Japan through Japan Earthquake Reinsurance Co. Ltd.—a joint venture of the country's leading insurance companies, backstopped by the government—which does not buy international reinsurance.

With strong limits set on the amount of coverage JER can provide for specific kinds of losses, Japan's government covers half of the largest losses. Thus, at a time when Japan's economy is reeling from the March catastrophes, the nation's taxpayers will shoulder much of the burden for the losses. In this respect, JER is similar to the U.S. National Flood Insurance Program, which also doesn't buy reinsurance and now has a deficit of $18 billion.

In contrast, in floods and typhoons in Australia and earthquakes in Chile and New Zealand, more than two-thirds—and up to 90% for some individual insurance companies—of the losses were ceded to international reinsurers. In fact, New Zealand is receiving such large payments from foreign reinsurers that its balance of payments has been pushed into positive territory for the first time in years.

Similarly, in the United Sates, Hurricane Katrina in 2005 caused total losses of $125 billion, with insured losses amounting to $62.2 billion, of which foreign insurers and reinsurers paid more than 60%. In the aftermath of the 2001 terrorist attacks on New York, international insurance and reinsurance firms paid 64% of the estimated $27 billion in U.S. payouts for the claims. After Hurricane Ike in 2008, the Texas Windstorm Insurance Assn. said more than 80% of the $1.5 billion in resulting reinsurance payments were from non-U.S. reinsurers, with $1 billion coming from Bermuda-based reinsurers.

The lessons for the nation's public policymakers couldn't be clearer. In this technologically advanced and interconnected world, unpredictable and unfathomable disasters can and do happen. To cover the costs of these calamities, we need international risk-spreading and reinsurance.

Public policies should encourage international reinsurance, not discourage it through the punitive taxes that some in Congress are proposing, or restrictive policies such as those in Japan or proposed in the U.S. for managing flood, hurricane or earthquake risks.

A proposal in President Barack Obama's budget, based on legislation introduced by Rep. Richard Neal, D-Mass., would levy an unnecessary tax that threatens international reinsurance in the United States.

By creating an uneven playing field, non-U.S. insurers and reinsurers will be at a competitive disadvantage. In addition, an economic study conducted by the Brattle Group Inc. demonstrated that the tax risks a 20% reduction in the supply of reinsurance in the United States. This tax would harm insurance capacity, increase insurance costs and shut many U.S. residents out of the international reinsurance pool that protects them.

Many natural disasters can't be predicted or prevented, but there's no reason for disastrous public policies.

Bradley Kading is president and executive director of the Assn. of Bermuda Insurers & Reinsurers, which represents the policy interests of Bermuda's large insurers and reinsurers around the world. He can be reached at bradley.kading@abir.bm.