Academic journal article International Journal of Business

Observations on the Segmentation of Earthquake Insurance in Japan

Academic journal article International Journal of Business

Observations on the Segmentation of Earthquake Insurance in Japan

Article excerpt

Earthquake insurance in Japan is committed not only by private nonlife insurers But also by the Japanese government following devastating earthquakes such as the Hanshin-Awaji Earthquake in 1995 and the Great East Japan Earthquake in 2011. Recently, the debate about earthquake insurance promoted by the Japanese Government has been extensive. (1)

In Japan, because earthquake insurance is optional for consumers who purchase fire insurance, the penetration of earthquake insurance is not high (25%). (2) Earthquake insurance in Japan is based on the Act on Earthquake Insurance established in 1966. Subsequent to Article 1 therein, the purpose of this law 'is to promote the Dissemination of earthquake insurance, ... thereby helping to contribute to the stability of the lives of disaster victims of an earthquake, etc.' Consequently, earthquake insurance in Japan should not be considered as compensating for damage to houses, but for providing immediate living expenses for disaster victims. In other words, although fire insurance is basically property insurance, earthquake insurance is expense insurance. (3)

However, given this distinction, consumers may have mistaken earthquake insurance for property insurance and therefore feel some confusion and dissatisfaction with earthquake insurance in Japan. As shown in Figure 1, 40.9% of consumers in a survey responded that "The total insurance payment is limited, and there is the possibility that the amount of insurance money is not paid in full at the time of a large-scale earthquake"; 38.7% of respondents believed that "The amount of earthquake insurance has to be set between 30% and 50% of the amount of fire insurance." These responses suggest that many consumers believe the insurance money is generally insufficient to cover the rebuilding of their houses. In other words, there is a considerable discrepancy between the purpose of earthquake insurance as provided by law and that perceived by consumers. In addition, as shown in Figure 2, more than 80% of respondents listed 'Building construction/repair costs' as the main use for their insurance money. (4) The existence of such discrepancies between policies and perceptions indicates that many consumers wish to obtain additional compensation for actual losses through earthquake insurance in Japan.

Furthermore, as shown in Figure 3, it is remarkable that 24% of consumers responded that they "Would like more segmentation of payment standards (three segments are insufficient)". For earthquake insurance in Japan, there are only three segments: "total loss", "half loss", and "partial loss" with the respective limits set at 100%, 50%, and 5% of the insurance policy. (5) From that disproportional payment about insurance money, it seems natural that some consumers who are evaluated as "partial loss" complained about that segment payment standard. (6) In response, the government and the nonlife insurance industry are now considering to change the current three-segment payment standards system into a more segmented one. (7)

More segmented payment standards would certainly benefit consumers by making it possible for them to obtain an amount of insurance money closer to the actual losses. However, more segmented payment standards may complicate damage estimation, and the process needed to determine which particular segment damage is included would naturally increase assessment costs. (8) Similarly, we cannot ignore the fact that more segmented payment standards would lengthen the period of time between an earthquake and the payment of insurance money once a claim is made. This means a considerable waiting cost would be imposed on disaster victims after an earthquake.

Given this background, the purpose of this article is to investigate the advantages and disadvantages of more segmented payment standards using a simple economic model. In other words, our study is focused mainly on claim adjustment after the accident. …

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