Tickers in this Article: BRK.A, RNR, SWCEY, ACGL, ACE, XL, RE
Although it is still far too early to fully assess the scale and impact of the severe earthquake that struck northeastern Japan, and all of us at Investopedia wish our friends and readers in Japan the best, the fact remains that markets have to digest this information and move forward. To that end, it seems quite likely that major reinsurance companies are going to face large claims in the wake of this disaster.


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The Scale of the Disaster
As of this writing, which is only hours after the quake struck, it is all but impossible to get a firm sense of the damage in the Tohoku region of Japan. While the reported magnitude of this quake is considerably higher than that of Great Hanshin quake that struck Kobe in 1995, it does not automatically follow that this quake will surpass the fatality (over 6,000 dead) or economic damage (roughly $100 billion) of that prior disaster. Let us all hope it does not.

Nevertheless, there are many major manufacturing facilities in this region owned by companies like Sony (NYSE:SNE), Toyota (NYSE:TM),and Nissan (Nasdaq:NSANY) to name a few. What's more, given the reports of infrastructure damage that have already come in (roads, bridges, and the like), it seems probable that there has been significant economic damage.

Focus on the Reinsurers
When disasters strike, reinsurance companies step forward. To offer a simple explanation, reinsurance companies are the insurance sector for the insurance sector. Property and casualty (P&C) insurance companies will contract with reinsurance companies to secure protection in case of truly rare disasters, lest those events completely wipe out the P&C company's ability to pay. Likewise, reinsurance companies will often directly write "cat" (short for catastrophe) or "super cat" policies for some clients, taking on risks of massive potential losses that small insurance companies simply cannot handle. (For more, see When Things Go Awry, Insurers Get Reinsured.)

As some of the largest reinsurance companies in the world, European companies including Swiss Re (Nasdaq: SWECY), Hannover Re (Nasdaq:HVRRY), Munich Re (Nasdaq: MURGY) and Scor have already sold off in European trading Friday morning. Not only is Japan a major market for companies like Swiss Re and Hannover Re, but these companies also just happened to be the first ones that were trading on equity markets after the disaster.

Accordingly, it seems likely that Friday's open in the U.S. will see American insurance companies selling off as well. Major American reinsurance companies like ACE (NYSE:ACE), XL (NYSE:XL), Partner Re (NYSE:PRE), Everest Re (NYSE:RE), RenaissanceRe (NYSE:RNR) and Arch Capital (Nasdaq:ACGL) may all see a "sell first, ask questions later" reaction. These companies do not generally talk about their exposures on such a detailed basis that investors can immediately assess the likely impact, but it seems reasonable to assume that there will be significant losses.

Not Just Reinsurance
While reinsurance companies are often the ultimate backstop when disasters strike, there are other insurance companies at risk as well. Companies like Aviva (NYSE:AV), Allianz and AXA (Nasdaq:AXAHY) all have sizable Asian operations as well that could see losses and or disruptions from this earthquake. While such losses would normally not be a cause for serious concern, companies like AXA have been struggling to get back on their feet after the credit crunch and looking to growth in Asia to help right their ships.

The Bottom Line
Though it may seem callous, investors should keep an eye on the insurance sector and the reports out of Japan. While Berkshire Hathaway (NYSE:BRK.A) likely will not get meaningfully cheaper (despite its large reinsurance operations), a quality company like Arch Capital or RenRe might. Moreover, with significant losses likely to hit across the sector, this could be the sort of external shock that ultimately tightens the market and leads to a better premium environment for the insurance companies with the capital to take advantage. (For related reading, see The Real Cost Of Natural Disasters.)

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