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Manufacturers feeling aftershocks in supply chain

Posted On: Apr. 24, 2016 12:00 AM CST

Deadly earthquakes in Japan and Ecuador in recent weeks have resulted in hundreds of deaths, extensive destruction and business disruption, with insured loss estimates nearing $4 billion.

In Japan, quakes that struck in mid-April hit the Kumamoto Prefecture on Japan's island of Kyushu particularly hard. The quakes also affected the Fukuoka, Oita, and Miyazaki prefectures, Boston-based catastrophe modeler AIR Worldwide said.

The quakes, which reportedly killed nearly 50 people, damaged highways, rail lines, bridges and other infrastructure, AIR Worldwide said. There also were short-term disruptions of airline and train service, as well as “significant” supply chain and production interruptions among regional industries.

AIR Worldwide estimated insured losses at $1.7 billion to $2.9 billion in the Japan quakes.

Modeler Risk Management Solutions Inc. estimated the Japan economic damage losses at $2.5 billion to $3.5 billion, including residential, commercial and industrial buildings.

The quakes and aftershocks hit the supply chains of automakers such Toyota Motor Corp. and Honda Motor Co. Sony Corp. production also was affected, as were several silicon chip factories in Kumamoto.

The effects spread to North America, where General Motors Co. said Friday that it plans to temporarily close four U.S. assembly plants while it assesses the Japan quakes' potential impact on its supply chain. The automaker said two-week closures begin this week for its plants at Spring Hill, Tennessee; Lordstown, Ohio; Fairfax, Kansas; and Oshawa, Canada.

“This temporary adjustment is not expected to have any material impact on GM's” full-year North America production plans or results, GM said in a statement.

On Friday, A.M. Best Co. Inc. said while the Japan quakes will lead to a “sizable loss,” there would be only a “moderate impact” on insurers' earnings “mostly mitigated” by reserve releases.

Renee Lee, senior manager at Newark, California-based RMS, said the quakes such as those in Japan could change the way insurers handle business interruption coverage, which is not extensively written, noting that “supply chain impacts are difficult to model” and are “extremely complex.”

“With these events,” she said in a follow-up email, “the industry may begin to place more importance” on writing business interruption and contingent business interruption coverage.

Despite the quakes, RMS Capital Markets said its analysis showed “no material probability of loss to the cat bond market at this stage.”

Also in mid-April, a magnitude-7.8 earthquake struck Ecuador, destroying more than 1,000 buildings in six provinces — Esmeraldas, Los Ríos, Manabí, Santa Elena, Guayas and Santo Domingo — and killing more than 570 people.

AIR Worldwide estimated insured losses in the Ecuador quake at $325 million to $850 million.