How-tos | HOME TRUTHS

Temblors in the home insurance business

by Philip Brasor and Masako Tsubuku

Special To The Japan Times

When we were looking around for a financial institution for a housing loan, we found that the major ones didn’t really want to talk to us, but there were plenty of other places that would.

In the end, we went with JA Bank, the financial services arm of the association of Japanese agricultural cooperatives. Their conditions for extending a loan were easy to fulfill but the loan itself cost more. For one thing, we were required to take out JA’s own fire insurance, which is more expensive than most other fire insurance plans. Lenders usually mandate fire insurance so that the loan is still paid off even if the house is destroyed.

Our policy only covers damage from fire, but we could have paid extra for riders — options such as coverage for damage due to flooding, lightning and, of course, earthquakes. It’s important to remember that in quake-prone Japan homeowners cannot take out stand-alone earthquake insurance. They can only take out quake insurance as part of a standard fire insurance policy, and earthquake coverage is not as complete as fire coverage.

For instance, fire insurance policies for private homes compensate for up to ¥50 million if the entire house is destroyed, and homeowners can also insure other property, such as furniture, for up to ¥10 million. But quake insurance only compensates for between 30 and 50 percent of whatever the fire insurance covers, so if your fire insurance policy pays out a maximum of ¥10 million, the quake policy will only pay between ¥3 million and ¥5 million. Compensation also depends on the post-incident assessment, which determines if the property was “totally destroyed” (zenkai), “half destroyed” (hankai) or “partially damaged” (ichibuson).

That said, the earthquake rider also covers associated phenomenon, such as damage from volcanic eruptions and tsunami or fires that are directly caused by earthquakes, an important distinction since regular fire insurance does not cover fires caused by quakes. At the same time, however, policyholders should read the fine print. Many homeowners in Urayasu, Chiba Prefecture, were shocked to learn that their quake policies did not include coverage for the liquefaction that was responsible for most of the structural damage in the city following the 2011 Great East Japan Earthquake. That’s because insurance coverage is adjusted in accordance with risk, and insurance companies knew that Urayasu was susceptible to liquefaction, so it wasn’t included in coverage for quake policies sold in that area.

The amount you pay in premiums for insurance related to property damage depends, of course, on the amount of coverage, but also on the place where you live and the type of structure being insured — wooden houses are more expensive to insure than other kinds. That’s why potential homeowners may be confused by last week’s news that premiums for earthquake insurance would be rising by an average of 19 percent starting in 2017. The level of increase depends on where you live. Right now, people who reside along the Pacific coast from Ibaraki Prefecture down to Shikoku pay as much as ¥32,600 a year for ¥10 million worth of quake coverage, while homeowners in other prefectures can pay as little as ¥10,000 a year.

The increases are being implemented by the government and insurance companies because a panel of experts has recalculated the probability of a major earthquake hitting Tokyo in the next 30 years, increasing it from 26 to 46 percent. The probability of a major quake hitting Saitama went up from 30 to 51 percent, and the new premiums will reflect these higher risk factors by as much as 30 percent. It should be noted that an increase in premiums was implemented just a year ago averaging almost 16 percent in the wake of the 2011 disaster.

Economist Hiroko Ogiwara, writing in the Asahi Shimbun, pointed out that the upcoming increase only affects new policies. Since the maximum length of a policy contract is five years, she advises homeowners to cancel theirs right before the new premiums go into effect and sign new contracts to lock in current, lower rates for at least another five years. Cancellation fees for quake insurance are low. Also, if you pay for five full years of coverage at one time, you pay about 10 percent less than if you pay on a yearly basis. The same goes for fire insurance, but the revision will cut the maximum contract term from the current 36 years to 10 years.

The reason quake insurance is limited in terms of coverage and why it is going up so much has to do with the way the system is set up. Insurance companies calculate premiums for quake insurance based on the government’s risk probability and report those amounts to the Financial Services Agency, which then approves them. However, it’s assumed that insurance companies cannot possibly cover all the claims resulting from a massive earthquake, and the government is expected to contribute.

In the 1960s, the central government established a fund in cooperation with the insurance industry. In 2011, the Nihon Keizai Shimbun reported that this fund contained ¥2.3 trillion, of which about ¥1 trillion was or is being paid out to people who made claims after the March 2011 disaster. The average payout per policyholder has been between ¥2 million and ¥3 million, and for the 1995 Great Hanshin Earthquake it was about ¥1 million. In 1995, only 3 percent of the homes in Kobe had quake insurance, and 9 percent of homes nationwide. In 2011, 23 percent of homes nationwide had quake insurance. In 2013, 58 percent of people who took out fire insurance opted to also take out quake insurance, a new record.

Right now about 28 percent of Japanese homes are insured for earthquakes, with 34 percent of Tokyo’s homes insured. If there is a major temblor, the amount of compensation owed to homeowners could be enormous.

Philip Brasor and Masako Tsubuku blog about Japanese housing at www.catforehead.wordpress.com.

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